The stakes of U.S. prosperity, LNG trade

By: Neil Brown and Marik String / Politico

It is a rare opportunity that isolates Iran, undermines Russian energy dominance and broadly benefits the U.S. economy. But those are the stakes for Americannei prosperity as the Obama administration contemplates whether to allow the trade of natural gas with our closest allies.

Whereas oil is freely traded on global markets, natural gas has traditionally been a regional commodity locked in pipelines, creating wide price disparities among global markets and making diplomatic relations with (and proximity to) suppliers fundamental. In Europe, for example, certain allies of Russia pay as little as half as much as other neighbors, which actually lie closer. Still a relatively small part of global trade, liquefied natural gas , on the other hand, affords gas-importing nations access to diverse and flexible global supplies. 

Not long ago, the U.S. was expected to become a major LNG importer, but the success of unconventional gas production has allowed the U.S. to overtake Russia as the world’s largest producer, creating vast export opportunities. However, antiquated laws written at a time of gas scarcity — not today’s abundance — require the Department of Energy to make a “public interest” determination to grant an export license, leaving nearly 20 license applications in limbo. Last week’s approval of a Texas facility to export gas mostly to Japan was the first of its kind in two years, following a cumbersome assessment of nearly 200,000 public comments and reports. Yet current law also provides an exception, allowing automatic licensing for exports to U.S. free-trade partners. It is time for Congress to extend that same courtesy to our closest strategic partners.

A December 2012 Senate Foreign Relations Committee report that we authored found that NATO allies in Central Europe and Turkey would experience particularly potent national security gains from U.S. LNG trade as they seek to reorient their supplies away from Russia and Iran, respectively.

Still lacking integrated energy markets, several Central European NATO allies depend on Russia for up to 100 percent of their natural gas. But instead of quietly reaping this financial bounty, Russia has undermined its position through energy coercion over the past decade. Nearly every nation in Central and Eastern Europe has experienced Russian energy disruptions (sometimes in the deep of winter) in retaliation for perceived sleights: from Baltic nations’ refusal to sell energy assets to Russian entities, the Czech Republic’s agreement (now defunct) to host a U.S. missile defense radar, to price disputes with Belarus, Georgia, Moldova, Ukraine and others. Heavy reliance on Russian gas also weakens bargaining power in pricing, forcing Central Europeans to pay a steep premium (up to 60 percent) compared with Western Europe.

U.S. LNG trade with Turkey would also further isolate Iran. To meet 20 percent of its natural gas demand, Turkey is locked in long-term contracts to import Iranian gas, which is costly, unreliable and brings significant strategic costs to Turkey. Although Iran’s natural gas exports are minimal compared with oil exports now under U.S. sanctions, they bring more than $300 million per month to Iran’s coffers — an economic lifeline that Congress and the European Union are expected to target with enhanced sanctions. Yet Turkish imports are not easily replaced. U.S. advocacy that Turkey reduce its Iranian gas intake would be more persuasive if U.S. gas trade were available as a substitute.

To be sure, domestic U.S. natural gas production, even absent significant exports, is already affecting the geopolitics of energy. North African and Middle Eastern LNG once scheduled for export to the U.S. has been diverted to European and other markets, providing alternatives to Russian gas and increasing consumer leverage on pricing.

However, the real geopolitical potential lies in liberalizing the U.S. export regime for natural gas trade. With U.S. natural gas prices now one-third to one-fifth of those in Europe and Asia, market incentives clearly align with U.S. strategic priorities. Although initial volumes of U.S. natural gas sent overseas are likely to be small, they will go far to empower allies to stand up to energy coercion. Some capitals have even indicated a willingness to pay a premium for the reliability of U.S. LNG.

Momentum is building in favor of opening gas trade. Last December, former Indiana Sen. Dick Lugar introduced strategic considerations into the export debate with the LNG for NATO Act, which would place gas exports to NATO allies on the same automatic-approval footing as other free-trade partners. That bill has been reintroduced by a bipartisan group led by Sen. John Barrasso (R-Wyo.) and Rep. Mike Turner (R-Ohio), rightfully adding Japan to the list of strategic allies deserving of automatic licensing.

At the same time, U.S. policymakers must avoid the mistake that other nations have made in harnessing energy exports as an instrument of state policy. Unlike in Russia, U.S. natural gas will remain only in the hands of the private market and traded where profits can be made.
But U.S. regulations should not stand in the way. Instead, the United States should allow global gas markets to flourish — and reap the national security benefits for ourselves and our closest allies.

Neil Brown is a nonresident fellow at the German Marshall Fund of the United States. Marik String is a lawyer in Washington. They served as senior energy adviser and deputy chief counsel, respectively, on the Senate Foreign Relations Committee. This post originally appeared in Politico.
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