Hot Air About American Gas Will Not Scare Putin

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Author: Michael A. Levi, David M. Rubenstein Senior Fellow for Energy and the Environment and Director of the Program on Energy Security and Climate Change
March 25, 2014
Financial Times

Calls are mounting for the US to export shale gas to Europe to help free the continent from Russian influence. Observers are right to focus on Moscow's energy leverage but they are prescribing the wrong response. The most useful thing that Europe could import is not American gas itself but the open economic model that has enabled the US natural gas industry to thrive.

Europe buys nearly 30 per cent of its natural gas from Russia. This has led to concern that President Vladimir Putin might turn off a few taps to gain leverage in the confrontation with Ukraine. For now, these fears are overblown – among other things, Europe has a lot of natural gas in storage – but the fundamental worry is well founded.

Yet US natural gas exports would do little to reduce Russian leverage. They cannot replace Russian gas in the current crisis since it will be more than a year until any US export terminals are built. Even once these facilities are up and running, the economics of sending shale gas to Europe are unlikely to make much sense. Once the cost of shipping is included, Russian gas is far cheaper; Moscow's share of the European market is not likely to change much. Instead, American gas will flow mainly to Asia.

This is not to say that US exports would not hurt Mr Putin. They would push down the price of gas in Europe, which is one of the many reasons why they should be allowed. But it is fanciful to suppose that they could provide a decisive edge against Moscow in a future crisis.

Europe's politicians should instead put their energy into copying the successful US policies that laid the groundwork for a spectacular boom in natural gas production. This might allow Europeans to produce more gas at home instead of buying it from Russia. The US Energy Information Administration estimates that Europe has 598tn cubic feet of technically recoverable shale gas, roughly half as much as the US. Yet almost none of this is being exploited. In part, that is because the continent is playing catch-up with a boom that started elsewhere. But there are deeper reasons, too. Many European countries have banned shale gas production. Those that allow development have slapped on taxes and government royalties that do much to deter it.

The US has lessons to offer on both fronts. Most gas-rich US states have rejected calls to prohibit shale gas production; instead, they have allowed development subject to robust environmental safeguards. The specifics vary from state to state. In Texas, a longtime energy producer, the industry has won public acceptance with less oversight than elsewhere. In Ohio or Illinois, which are new to the natural gas game, regulation is more stringent. Europeans would be wise to draw lessons from US states that have struck a balance between development and the environment.

The American shale gas industry has flourished on private land, where property owners are susceptible to commercial incentives. In Europe, mineral rights are generally publicly owned and unlikely to be privatised. Still, the more basic lessons – that government policy should be careful not to undermine the economics of gas development, and that care should be taken to ensure that local communities benefit from development – should be listened to carefully.

The US can also export lessons about gas markets. The US market responds efficiently to disruptions because regulators insist on open access to infrastructure such as pipelines, and enforce standards of transparency that ensure market participants are adequately informed. Europe has moved in this direction. Unlike the US, it needs to protect itself against foreign producers that might manipulate liberalised markets. Still, it has room to improve.

Focusing on steps such as these may be less attractive than talking up US natural gas exports: it denies America a chance to brag about its strategic influence and forces Europeans to grapple with their own political problems. The biggest opportunity to improve European security, though, comes from exporting the US model, not selling American gas.

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