Can the U.S. Provide Europe with Energy Security in the Face of Russian Aggression?

It appears conditions are right for the U.S. to export oil and gas in significant amounts to Europe. This would be not only economically favorable to the U.S. but politically very favorable to Europe, since it could largely replace in the medium term an unreliable source of energy supply from Russia by a much more reliable and friendly source, the United States. 

By Gustavo Coronel | October 21, 2014

On September 26, a trilateral meeting on natural gas was held among Ukraine, Russia and the European Union to discuss the situation of Russian natural gas deliveries to Ukraine, which had been interrupted due to a debt to Russia of $5.3 billion. Ukraine stopped payments about six months ago due to a dispute over pricing and the intensified conflict threatening the supply of natural gas to Europe. The meeting resulted in an interim agreement to renew gas supplies and the parties agreed to further talks. Ukraine agreed to pay $2 billion to Russia by late October and $1.1 billion by year’s end.

This crisis, not yet truly resolved, illustrates once more the unreliability of Russia’s gas supplies to Europe, often endangered in the past by the political conflicts with former members of the Soviet Union. Europe’s energy security cannot be so dependent on quarrels among the members of the old Soviet Union.

The difficulties of the European-Russian natural gas issues have also been illustrated by the long and complex negotiations related to the routing of pipelines and to the potential alternatives sources to fill those pipelines. These negotiations have not been as successful as Europe would have desired. Significant dependence still exists.

The various degrees of European dependence on Russian natural gas supplies, range from some of the bigger European countries such as Poland, the Czech Republic, Germany and Italy among the most dependent on this supply, while the countries nearer to the gas deposits of the North Sea show much less dependence. Still, the European Union as a whole would be in serious trouble if the Russian gas supply suffered major disruptions. This sense of dependence influences greatly the political posture of Europe towards Russia, as has been the case during the on-going Russia-Ukraine crisis.

Although Europe is making great efforts to become less dependent on Russian gas by promoting non-renewable energy sources while diversifying sources of supply, such efforts are still insufficient. Major, perhaps decisive, help could come from the U.S., the longtime ally that has helped Europe to overcome major crises in the past.

The U.S is poised to become a hydrocarbons exporter

Last July, an event that went largely unnoticed signaled a historic change in the profile of the U.S. oil industry.  In Galveston, Texas the oil vessel BW Zambesi transported some 400,000 barrels of U.S. condensate, the most valuable liquid fraction of petroleum, for transport to South Korea. The report states this was the first time in 40 years that the U.S. had exported its own crude oil and went on to add, “Thanks to our current booming domestic energy production, the United States at last has an oil weapon in the arsenal of “soft power” that it can use to advance both its own and the world’s interests.

Such a dramatic change in the U.S. energy picture offers the country new political and economic strategic opportunities.

David Pursell, managing director and chief of securities at Tudor, Pickering, Hold & Co., an energy investment banking firm in Houston asks, “What are we going to do with all this crude?…Pursell argued that “too much” light sweet crude oil is entering the domestic market. He added, “We’re not going to have the ability to refine it, and that’s going to create more pricing pressure on light sweet crude.” The obvious response to this happy dilemma is to export it.

In fact, some analysts see exporting crude oil as a “no-brainer.” Joseph Keefe says, “As I watch the back and forth in Washington – and beyond – on the issue of whether to allow the export of crude oil and LNG, I can only shake my head and wonder why it is even a topic for discussion anymore. I honestly cannot think of a single reason why we shouldn’t. Our European and Asian readers are probably laughing as I discuss the merits of changing a domestic policy that is clearly a remnant from a bygone era.”

Voices in the U.S are increasingly demanding the end of the 40 year old ban on exports of domestic crude that was imposed as a response to the 1973 Arab oil embargo, which lasted for five months. As a result of that embargo, oil prices quadrupled and rationing generated long lines at gas stations. The panorama has drastically changed since then. The report also mentions a study by the Bookings Institute, which predicts that oil exports would promote more drilling and would tend to lower domestic gasoline prices. Oil exports, they said, would increase U.S. income and help to reduce the trade deficit.

A report of the Council of Foreign Relations states, “Federal lawmakers should overturn the ban on exporting crude oil produced in the United States. As recently as half a decade ago, oil companies had no interest in exporting U.S. crude oil, but that has changed. Oil production has grown more in the United States over the past five years than anywhere else in the world, even as domestic oil consumption has declined….”  Actually, U.S. oil exports have amounted to some 100,000 barrels per day since 2013, although these volumes go to neighboring Canada.  The report further states, “Restrictions on crude oil exports are already beginning to undermine the efficiency of the U.S. oil economy. Much of the country’s rapidly growing production of light crude oil, including lease condensates (i.e., ultra-light oil), comes from either areas where refiners are not interested in or able to process it, given that many U.S. refineries are configured to run lower-quality crude oil, or in parts of the country with inadequate transportation infrastructure…”

The increasing imbalance between the volumes of hydrocarbons being produced and the existing domestic processing facilities clearly points to exports as a solution.

In addition to this boom in the production of liquid hydrocarbons, the U.S. shale gas boom continues to the point that Republican Senators John Hoven (R-ND), John McCain (R-AZ) and John Barraso (R-WY) introduced legislation in late July, the North Atlantic Energy Security Act, that would allow the export of natural gas to Europe. Hoeven said efforts to do this had been hampered by the Obama administration.  According to McCain, “Americans understand that we need to do what we can to help our European friends to become independent of Vladimir Putin’s energy.”

On their side, oil companies are vigorously promoting exports. “End the oil exports ban!” says ConocoPhillips CEO Ryan Lance who believes that the increasing production of shale oil in Texas will have to go to the open markets since U.S. demand is decreasing and domestic refineries are geared to process heavier crude oil.

A win-win situation of significant geopolitical impact

It appears conditions are right for the U.S. to export oil and gas in significant amounts to Europe. This would be not only economically favorable to the U.S. but politically very favorable to Europe, since it could largely replace in the medium term an unreliable source of energy supply from Russia by a much more reliable and friendly source, the United States.

Gustavo Coronel, who served on the board of directors of Petróleos de Venezuela (PdVSA), has had a long and distinguished career in the international petroleum industry, including in the USA, Europe, Venezuela and Indonesia. He is an author, public policy expert and contributor to SFPPR News & Analysis.