Jamie Horgan & Agnia Grigas
Thanks to the American shale boom and a newly globalized market, natural gas is changing geopolitics around the globe.
Jamie Horgan: I’m here with Agnia Grigas, a senior fellow at the Atlantic Council and author of the new book, The New Geopolitics of Natural Gas. Agnia, thanks for taking the time to talk with me today.
Agnia Grigas: Thank you, Jamie. It’s a pleasure to be here.
JH: In your book, you look at the transition to a new era of gas that you characterize as “a golden age.” What were the characteristics of the old era of gas, and what’s changed?
AG: Throughout the 20th century, natural gas was a much more localized commodity than oil, due to the difficulties of transporting it over long distances and across seas and oceans. It was also a much more politicized commodity, precisely because it was so difficult to transport. Oftentimes, gas-exporting and gas-importing countries had to forge long-lasting trade relationships with each other, co-investing in land-based infrastructure.
But within the past decade, things have changed. First, trade in LNG (liquefied natural gas) has grown, because it is easy to transport across the sea—and it’s now at its highest level in history. Second, the market has become much more liquid, largely due to the U.S. shale revolution flooding it with supplies. In addition, American exporters support flexible gas trade, which means more spot and short-term trading rather than the traditional long-term, oil-linked contracts.
Meanwhile, countries around the world have built up their gas infrastructure—and in Europe especially. Of course, we can’t forget the greater appetite for natural gas, now perceived as a cleaner commodity, due to climate-change goals.
JH: Natural gas being a cleaner option than coal, both in terms of local air pollutants and greenhouse gas emissions.
AG: Yes, and in comparison to oil.
JH: To go back to the United States, we are now exporting LNG, but only a decade ago we were still building import terminals. The shale boom has completely remade our domestic natural gas landscape, but how is it affecting the global market?
AG: U.S. LNG exports, which began just this past year, have traveled pretty much across the globe. Before 2016, experts debated furiously over what would happen if such exports were legalized—would they go only to Asia, where at the time there was a significant gas price differential, or perhaps also to Latin America due to its proximity? But in fact they even went to Europe—and this past June, to Poland. It was a wakeup call for the global gas markets and traditional gas exporters like Russia.
The overall implications are very significant, especially for Europe, where natural gas exports have long been dominated by Russia. Europe has spent the past twenty years trying to come up with strategies to diversify its gas imports, and with U.S. LNG making it to the Continent, and the greater supply in the global gas market overall, European importers have many more options to choose from. The same goes for China. Beijing is hungry to meet its vast energy needs, and is particularly concerned with obtaining cleaner sources like natural gas due to its significant pollution problem. The Chinese had been eyeing Russia, but now they also have the option of importing U.S. LNG.
JH: We’ll come back to Europe and Asia soon, but sticking with the United States, where do we stand in the global ranking of LNG exporters? Alongside Qatar and Australia? And what does our growth outlook look like?
AG: As U.S. LNG exports increase, America’s rank is changing fast. In 2016, the United States was 16th in the world in terms of LNG export volumes and accounted for just over 1 percent of the total market. However, it is expected to become one of the leading LNG exporters in the coming decade alongside Qatar and Australia, which currently account for nearly 30 percent and 17 percent of the market respectively. By 2020, the United States is expected to add about 20 percent of the total LNG volumes traded globally in 2014 to the international gas market.
JH: You talk in the book about the potential strategic use of U.S. LNG to support our allies overseas, and also to win over new allies. But if private companies are selling these cargoes, how much control can Washington actually exert over them?
AG: That’s a very good point. U.S. energy markets, and indeed our energy industries, are quite different from those in many other parts of the energy-producing world. The United States has private energy companies, as you say, not state companies like Gazprom or those in the Middle East. But there is still room for strategic vision and diplomacy on Washington’s part—and even legislative decisions. For example, the United States lifted its decades-long ban on oil exports at the end of 2015. Another example: The U.S. government is actually quite supportive of U.S. LNG exports and readily grants various licensing rights to domestic LNG-exporting terminals.
JH: For the time being, however, Louisiana’s Cheniere terminal is our only LNG export facility. How many more are slated to come online and how could the Trump Administration do more to support U.S. LNG?
AG: In addition to Cheniere, the United States has the long-standing Kenai plant in Alaska. But soon half a dozen new terminals could start operations, including the Freeport in Texas, the Cameron in Louisiana, and the Dominion Cove Point in Maryland.
In terms of the Trump Administration, it should keep a steady course and support the great work going on right now rather than make any great shifts. Both American exporters and our gas-importing allies welcome Trump’s political backing of U.S. LNG exports. One note of caution, however: Analysts and experts worry that if, for example, natural gas prices were to rise, American industries that have been enjoying cheap gas might push to stop LNG exports. While that would certainly provide some temporary benefits to these industries, over the long term it wouldn’t be a wise course for U.S. policy.
Right now, the United States has a first-mover advantage, due to its shale boom, which has not been replicated anywhere else in the world. Thus, it can rapidly expand into natural gas markets almost everywhere—Europe, Asia, and so forth. Other countries don’t want to stand on the sidelines for too long, however, and a number of them are pursuing their own shale gas development programs—China in particular.
JH: China has the world’s largest reserves of shale gas, according to the U.S. Energy Information Administration.
AG: Yes, and China has already fracked successfully and produced natural gas from shale. Yet its program is still in its infancy and as of now not producing significant commercial volumes. But like other countries, it is gearing up, and it’s only a matter of time before it starts replicating America’s shale success. The United States should make the most of its first-mover advantage while it has the chance.
JH: Your book is about the intersection of this new natural gas market and geopolitics, and we can’t discuss natural gas and geopolitics without mentioning Russia and Europe. European countries have long hoped to reduce their dependence on Gazprom gas supplies, given the strings attached to them. Is LNG going to be their savior?
AG: I wouldn’t say that LNG is going to be Europe’s savior, but it will be one important element of their overall strategy. The European countries have pursued a fairly comprehensive energy program over the past 10-15 years and the pieces of that program are starting to come together. This strategy involves reducing overall consumption of fossil fuels, increasing the use of renewables, and improving energy efficiency. It also includes the regulation of energy monopolies, such as through its “Third Energy Package” for gas and electricity markets and the “unbundling” of Gazprom’s gas assets in Europe.
Another crucial element of this strategy is the search for new sources of gas imports, including LNG, for which Europe intends to build additional infrastructure. They also aim to build new pipelines to bring Caspian gas into Europe, and to increase the gas transport infrastructure that connects European countries to each other, in hopes of producing a vibrant and viable European domestic gas market.
The current developments in the natural gas markets are very favorable to Europe’s energy strategy. The greater liquidity, the rise of LNG trade, and the increase in American LNG exports all further Europe’s goals.
JH: You mentioned that Poland just received its first cargo of U.S. LNG—possibly a historic moment. Back in April, Gazprom CEO Alexey Miller was gloating about his company’s comfortable position in Europe, saying that pipeline gas is winning against LNG and will continue to do so in the future. Do you agree that Gazprom is on the ascent in Europe, and that it will continue to be one of the most important exporters into the region?
AG: First, I would say that Miller is putting on a brave face. If you look at Russia’s official energy strategy, it explicitly says that demand for their gas is declining in the European market, and it is not expected to grow again. Indeed, in order to compensate for its anticipated losses in Europe, Russia’s leaders decided to turn to Asia, because that’s where they see a future. Furthermore, if they were so confident in pipeline gas trade, they wouldn’t be as worried about boosting their own LNG exports. Russia is quite behind in that area, especially given its historical position in natural gas markets.
At the same time, Russian gas will continue to play an important role in Europe’s energy mix, simply due to geography. Russia is a significant gas exporter; the European Union is the largest natural gas importer. Plus, the gas pipeline infrastructure is already in place. However, Gazprom won’t have the same kind of monopolistic position that it used to have in many European countries, which will have many more choices in the current market.
JH: That does seem to be the defining characteristic of this new era of gas—that there are a lot more choices for importers.
AG: Absolutely—choices, liquidity, and flexibility. It’s a buyers’ market.
JH: In Europe, Gazprom is trying to increase its own options for pipeline routes. You have the TurkStream pipeline that’s been on and off, and now there’s increasing interest in NordStream II, which recently secured financing from a consortium of European countries. Will Gazprom’s pursuit of these two entryways into Europe slow the transition to a more global market? Or is this simply more evidence of Europe gaining more choices?
AG: I see the NordStream II and TurkStream pipelines as Gazprom’s last stand, a desperate attempt to hold onto the European market. Turkey is a very important market for the Russians; it’s their second-largest import market in Europe. The pursuit of TurkStream is also key to their effort to hold onto southeast Europe, where Russia still has a monopolist position in a number of countries. Meanwhile, NordStream II is about maintaining Russia’s relationship with Germany, its number one gas import market, and about eliminating Ukraine from the transit corridor. Of course, as you note, both pipelines would also provide Russia with greater flexibility and more buyers for their exports.
Germany would like to see NordStream II come online so it can establish itself as a gas hub in Europe. In my opinion, given the current gas markets, Germany has so many more choices today that it shouldn’t be so fixated on the pipeline. Whether or not these two pipelines are built, Europe is still going to be in a much better position in the current natural gas markets than before.
JH: As you point out in the book, the increase of interconnectivity within the European gas market dilutes Gazprom’s power over the Continent.
AG: Yes, and we’ve already seen that with Ukraine. During the ongoing conflict between Moscow and Kyiv, Gazprom tried to shut off the gas in Ukraine and hike prices to exorbitant levels. But today Ukraine gets the same Russian gas it always did, only from European countries via alterative pipeline routes rather than directly from Russia.
JH: Again, that takes us right back to the choices. Speaking of which, those two potential Russian routes aren’t the only ones in the cards. Israel inked a preliminary deal earlier this year to construct one of the world’s longest and deepest underwater pipelines, which would transport its offshore findings in the Leviathan field via Cyprus and Greece to Italy and the rest of the European market. Do you see this as another opportunity for Europe to diversify away from Russian gas?
AG: Yes, the east Mediterranean gas reserves are another option for Europe. It’s more of a long-term option, however. There are a number of issues regarding security, Israel’s own energy needs, and the natural gas needs of its neighbors that must first be resolved. Furthermore, the infrastructure will be extremely costly and complex.
Meanwhile, depending on how things unfold, Iran’s natural gas resources could be another alternative for Europe in the future, most likely in the form of LNG.
JH: Let’s switch to Asia. For decades, Asian countries paid a premium for liquefied natural gas and natural gas. How is that changing with the advent of the global gas market, and what does it mean for Asian countries, especially for those like Japan that are so energy-resource poor?
AG: As for Europe, the changes mean good news for Asian importers. We’ve certainly seen the price differential contract. This is again because of the increase in liquidity and flexibility in the natural gas markets. The various Asian countries are in different positions, however. Japan and South Korea historically have been LNG importers, and they don’t have any natural gas pipelines enabling imports. (Interestingly, Russia has been trying to pitch a gas pipeline project to Japan.)
China and India are two up-and-coming juggernauts with vast appetites. While recently their demand hasn’t increased as fast as anticipated, they will still be the most energy-hungry countries in the world going forward. By contrast, in Europe gas demand and overall energy demand is decreasing, or at least plateauing.
In this new era of gas, China has a very smart strategy. It is focusing on full diversification—not only diversification of its source countries, but also diversification of means. It is pursuing pipeline construction and LNG imports at the same time, as well as its own domestic natural gas program, including, as noted, a shale program.
JH: A few years back, Russia and China inked a landmark $400 billion-dollar pipeline deal, which has since failed to materialize. What is the current status of that relationship?
AG: Initially, there were plans for two pipelines to deliver Russia gas to China, the Power of Altai and the Power of Siberia. As of now, it seems that only the Power of Altai—China’s preferred route—will go forward, albeit after a delay.
When examining this emerging commercial relationship, it becomes immediately apparent that China has the upper hand. It has a vast market and understands well the power of its demand, putting it in a strong negotiating position. It can also access many alternative sources—pipeline gas from Central Asia, Myanmar, and soon Russia, as well as LNG from a variety of countries. For China, Russia will be just one of many options. For Russia, because of the pushback it has faced in Europe, China and Asia are much more important for maintaining its robust position in the global gas markets.
JH: As we mentioned before, China has a lot of shale gas—the world’s largest reserves, according to the EIA. What are the chances that China can start commercially producing it in sufficient quantities to put a dent in their own demand for foreign natural gas supplies?
AG: This a big debate. Some experts say that any other country would have trouble replicating the American achievement in the shale revolution. Such success has many prerequisites—the availability of financing, an entrepreneurial culture in the country, access to the latest and best technologies, and so on. China lacks a number of those advantages—sometimes companies even lack access to water, which is crucial for fracking.
JH: Or even roads into the sites.
AG: Indeed, not to mention the infrastructure needed to move the gas efficiently throughout the country.
Yet looking at the scale of Chinese spending on its shale program, it’s clear this has become almost a political project for Beijing. Furthermore, China is one of only four countries (including the United States, Canada, and Argentina) that have successfully fracked. As I said earlier, it is only a matter of time. We shouldn’t expect it in the near or even medium term, but eventually China will start producing significant quantities of shale gas to meet its vast energy needs.
JH: What is this new era of gas going to mean for the Caucasus and Central Asia? They’re gas-rich regions that have been isolated in the past.
AG: In Caucasus, Azerbaijan is starting to break out of its isolation and access gas import markets, with an eye toward Europe. The same has happened with Turkmenistan, Kazakhstan, and Uzbekistan in Central Asia. Previously these countries were dependent on Russian infrastructure to export their natural gas resources, which would travel from Central Asia, through Russia, and then onward to Europe. Since the 2000s, however, they’ve started exporting directly to China, and they could eventually reach Europe as well through Azerbaijan, via the Southern Gas Corridor pipeline system.
However, as landlocked countries they can’t export their natural gas resources as LNG by themselves. That limits their participation in the natural gas markets. In the future, however, I expect them to work around this limitation, given their recent success in accessing new markets via pipelines. They have strong geopolitical reasons for doing so.
JH: Stepping back a little bit, what would be the wild cards to look out for in the global gas market? What might be disruptive?
AG: Technological breakthroughs are always potential wildcards. I think we can expect more, though it is difficult to predict when they will come. Indeed, the shale boom we’re seeing today is itself a wildcard. Companies were exploring fracking techniques decades before we began seeing real results in the 2000s. Going forward we can expect more trade in CNG (compressed natural gas) and in smaller volumes of LNG, for example, as well as the increasing substitution of gas for gasoline.
An environmental disaster involving the shipping of LNG or fracking would count as a negative wildcard. That could really put a damper on the current industry and lead to a reassessment of its operations. Since the United States is the current leader in shale production and a rising leader in LNG trade, we are in a way responsible for modeling best practices.
JH: Speaking of being responsible, what does this new global gas market mean for greenhouse gas emissions? Do you see it as a net positive or a negative in the international fight to mitigate climate change?
AG: The debate over this is fierce. Some argue that natural gas is indeed a positive force for climate change goals, as a cleaner fossil fuel that will help reduce overall emissions. Others counter that the process of fracking has significant environmental costs. Also, the greater use of natural gas, due to its low prices, may offset any gains from its lower emissions.
JH: Finally, who would you say are the biggest winners in this paradigm shift in the gas market? Following that, who would be the biggest losers?
AG: The biggest winner today is the United States, which has emerged as the largest natural gas producer in the world. It’s also now the world’s largest producer of oil and petroleum products and a rising LNG exporter. The United States finds itself in a rather unique position as an energy superpower, and the full implications of this new-found energy strength are not yet fully grasped. Europe is another winner, after decades of searching for ways to diversify and improve their energy security. China is going to be a big winner as well. It has vast demands for cleaner energy to maintain its economic growth, so the abundance of natural gas is really to its benefit.
The biggest losers are traditional energy producers like Russia and the countries in the Middle East. Ukraine, as one of the key gas transit countries in Europe, is an interesting case. Over time it will be find itself bypassed, in part due to Russia’s actions, and in part because Europe now has alternative routes for importing gas. In the short term this may be a negative development, but in the long run it will benefit tremendously. Once it is no longer dependent on Russian gas transit revenues and prey to the corruption that comes along with them, Ukraine will have the opportunity to rebuild itself as a modern state.
JH: It’s interesting that as the global gas market becomes more like the global oil market, it’s also producing winners and losers similar to those that the cheaper crude in today’s oil market is also producing
AG: Yes, that is a broader story of the U.S. shale boom; it is having a similar impact on both the oil and gas markets.
JH: Thank you so much for taking the time to talk with me today.
AG: Thank you so much for having me.
SOURCE
