Over the weekend, the crisis in Ukraine took a more ominous turn with the referendum in Crimea rejoining the peninsula with Russia while Russian troops amassed on the country’s eastern border. In addition, the United States and European Union’s imposition of what is forecasted to be the first salvo of economic sanctions was launched. On Wednesday, Ukraine’s defense minister announced that he would go to Crimea to seek a diplomatic solution, an offer immediately rebuffed by Crimea’s Prime Minister, thus setting back prospects for a reasoned solution – e.g., a more autonomous Crimea within an independent Ukraine.
At the same time, the focus of meaningful economic sanctions has increasingly honed in on energy – and for good reason. More than 90 percent of Russian gas exports and 80 percent of its oil sales go to Europe. (Overall, energy sales generate more than half of the revenues needed to meet the Kremlin’s budget.) Further, fully half of the natural gas sold to Europe is transported through Ukraine. While European gas demand in total is projected to remain flat for the rest of the decade and perhaps longer, supplies from other sources (Norway, Algeria, Netherlands) are in decline. Consequently, Russia expects European and especially eastern and central European dependency to increase even as Russia looks east to Asia for additional markets in China, Korea and Japan as well as into the Pacific Liquefied Natural Gas (LNG) market.
Ironically the seeds of Europe’s current dependency grew out of an effort to diversify energy imports in the wake of the energy crises of the 1970s. Construction of pipeline infrastructure linking Soviet supplies to European markets seemed like a win-win for both parties. The breakup of the Soviet Union a decade later, however, produced noticeable tensions with former Soviet states, now situated in key transit areas.
To some, the stark reversal in America’s energy fortunes – spawned by the dramatic resurgence in U.S. production as a consequence of the shale gas and tight oil revolutions provides the perfect foil for limiting Russian ambitions. The crisis in Ukraine has reinvigorated the debate in Washington over the Keystone XL pipeline, the accelerated permitting of LNG export facilities, and spurred calls for lifting the ban on crude oil exports to a beleaguered Europe. While the rhetorical flourish associated with the linkage is politically intoxicating, the underlying facts bear scrutiny.
For starters, while the acceleration of U.S. energy exports would add incremental barrels and gas volumes to the international market (a good thing for consumers everywhere), the volume and timing of their availability – outside of supplies from the Strategic Petroleum Reserve (SPR) – would not be available in time to have an immediate impact on the current crisis. The first available LNG export shipment from the United States will not be ready until late 2015 or the spring of 2016 at the earliest and these volumes are already contractually committed.
On the oil side of the ledger, since Russia is one of the largest oil producers in the world – with exports averaging 7 million barrels a day, incremental U.S. production or even a sizeable Strategic Petroleum Reserve (SPR) release (the current maximum drawdown rate is about 4 million barrels per day for the first 90 days and declining thereafter) would not be adequate to replace or offset Russian barrels lost as the result of potential sanctions. Consequently, in the absence of Russian barrels, world oil prices would undoubtedly spike – causing economic pain for the United States and its sanctions partners.
More importantly, however, is the impact more onerous sanctions will have on the relationship between the United States, the EU and Russia going forward. We can certainly opt to boycott this summer’s Group of Eight meeting in Sochi and limit Russia’s participation in other global fora, but to what end? Russia will remain a permanent member of the U.N. Security Council and an uneasy partner in multilateral efforts to promote constructive resolutions to at least two other important international crises – the ongoing strife in Syria and resolution of the nuclear standoff with Iran. And further to that point, the removal of Russian oil from global markets could actually work to undermine the sanctions on Iranian oil sales.
As for Europe – east and west – there are a variety of actions that can be taken over time to enhance their collective and individual member nation’s energy security, including:
- Increasing domestic production of indigenous resources of coal, shale gas and oil;
- Promoting efficiency and revamping price structures;
- Developing alternative energy and integrating renewable supplies into the energy mix;
- Revisiting bans on nuclear development and the planned shut downs/retirements of existing reactors;
- Developing fully integrated gas and electricity networks throughout Europe including pipeline interconnects, reversing or redirecting lines where feasible, and increasing storage of natural gas and oil;
- Building out LNG receiver facilities especially in places like Croatia to accept cargoes from a variety of suppliers;
- Reforming the highly inefficient and corrupt energy sector in Ukraine to reduce the vulnerability to Russian gas cutoffs to Europe and Ukraine;
- Removing the regulatory and physical bottlenecks to integrate fully Pan-European gas and electricity networks; and
- Conducting a crash assessment on how quickly rooftop solar and other distributed generation could reduce Ukraine’s vulnerability to natural gas curtailments.
For its part, the United States can provide regulatory, technical and financial assistance as well as encourage American companies (drawing on their experience in North American basins) to work with their European counterparts to develop unconventional energy resources.
Most importantly, we would be well advised to tamp down the public rhetoric and posturing and de-escalate the tensions currently surrounding the crisis unfolding in Ukraine before we either reach an impasse with only suboptimal outcomes or expand the crisis into a truly global one.