A Global Gas Strategy for the United States
May 9, 2019
Natural gas, unlike oil, has never been a major strategic preoccupation for U.S. foreign policy. The country was historically a net gas importer, but self-sufficiency was relatively high, and imports came mostly from Canada, raising few geopolitical or energy security concerns. In the 2000s, the United States was worried that it might become reliant on liquefied natural gas (LNG) imports, but that moment passed quickly. If the United States ever had a grand strategy vis-à-vis global gas, it could be summarized simply. In Europe, the United States wanted diversity of supply, which meant access to non-Russian gas; and in Asia, it wanted liquidity, meaning a relaxation of rigid contract terms and a move away from oil indexation as the pricing mechanism for LNG.
But the growth in U.S. gas supply, and now exports, has created a new reality. The United States is a major global gas player—by far the largest producer in the world, and quite possibly, in the 2020s, the largest LNG exporter. Yet this change has not produced a new grand strategy. So far, the instinct is to promote U.S. LNG exports—selling gas abroad is the number one priority, especially for the Trump administration. This is a logical place to start, but it is not enough, especially since the push is mostly in the form of advocacy, rather than accompanied by a serious policy agenda or toolkit to support exports or gas consumption. More than ever, the United States needs a new global gas strategy.
Clean Up at Home
The first element of a grand strategy must be to enhance the environmental credentials of gas at home—not just in ensuring that gas is produced without social and environmental side-effects, but also in terms of methane emissions. The case for gas is based partly on its emissions footprint relative to coal or oil. But two realities have become clear recently. First, that methane emissions can seriously undercut the environmental case for gas, at least when it comes to climate change (the benefits for abating local air pollution remain). Even at modest levels of methane emissions, the benefit of gas versus coal narrows. Of course, our data on and understanding of methane emissions are still nascent—so gas might be better or worse than we think. But there is an urgent need to both understand and mitigate methane emissions.
The second is a growing awareness that not all gas is the same. Here too, the data is just now being collected. The International Energy Agency (IEA) estimated that the most greenhouse gas-intensive natural gas is four times more emissions-intensive than the least intensive gas (the top 10 percent versus the bottom 10 percent)—depending on how much energy is used in extraction; how much methane is vented or flared, or leaks along the value chain; whether gas is transported via pipeline or LNG; the efficiency of combustion, and so on. There is a recognition that the decentralized nature of U.S. gas supply, coupled with high and growing levels of gas flaring, could undercut the case for U.S. LNG. Europe has always been queasy about shale gas (due to fracking), and a few years ago, there were even proposals in France to ban U.S. LNG imports. European companies and the European Commission are grappling with the carbon intensity of their gas. For the United States to remain competitive, it cannot focus on gas combustion alone—it needs a life-cycle approach to maintain and demonstrate its environmental bona fides.
Build Gas Institutions
The gas market is becoming more global, liquid, transparent, and secure, even though we are far from a truly global market. There are two big gaps, however. The first is information. Data on global gas is scattered. There are two annual reports on the LNG industry—one by the International Gas Union, the other by The International Group of Liquefied Natural Gas Importers (GIIGN), and some company reports are also emerging as references (for instance, the one by Shell). But these are all annual documents. The European Commission publishes a quarterly report on gas markets, but it only covers Europe. The IEA annual report on gas sits behind a paywall (although the IEA publishes other gas-related information). There is no equivalent to the IEA monthly Oil Market Report, which sets a baseline for oil market dynamics. Answering simple questions—such as what is the price of gas in the United States, the Netherlands, Germany, and Japan—requires one to navigate four websites, in three currencies and four units. Data on LNG spot prices are even harder to find (outside a paywall). The Energy Information Administration publishes a lot on global oil markets, but little on global gas markets. Free, publicly available information on global gas is ages behind what we have for oil.
The second gap is governance. The IEA is anchored by energy security, like the commitment of its members to hold emergency oil stocks. Not only is there no equivalent in gas—where a similar pledge might not make sense—there is no mechanism for burden sharing after a shock. Gas security is a difficult topic, even in a closely integrated like the European Union. Europe has pioneered stress tests for gas supply security, and the IEA has started to publish more regularly on gas security. A uniform methodology on conducting regular stress tests would enhance transparency and boost energy security. Ensuring access to gas without commercial constraints might be another step to pursue—removing destination restrictions in an emergency, for instance, to allow LNG to flow freely. In a more globalized market, institutions must evolve—they are an essential ingredient to building trust in the market and ensuring continued use of the fuel.
Support Gas Overseas
Selling gas overseas has become a paramount objective for the Trump administration. But the push, so far, is mostly based on advocacy, with little money attached. The odd thing is that when a cargo of U.S. LNG hits the water, it often competes with projects co-financed by the United States. The Export-Import Bank of the United States lent money to the first LNG export project in Asia (Brunei); it then co-financed projects in Malaysia, Trinidad, Qatar, Oman, Nigeria, Peru, Papua New Guinea and Australia. No country, except Japan, has done more to help develop LNG export projects. Over the decades, the United States has supported projects with U.S. contractors or equipment providers; but the toolkit is less developed for companies looking to import U.S. LNG or build the infrastructure to import LNG.
The challenge with funding LNG import infrastructure is not a uniquely U.S. problem. But in recent years, there has been a shift with more financing options for LNG import terminals. Europe now has several tools to support strategic projects—new pipelines and regasification projects have been enabled by public funds (although the approach might contravene the rules of the World Trade Organization). The Japan Bank of International Cooperation (JBIC) recently lent money to a gas-to-power project in Indonesia, which included a floating storage and regasification unit, while the Koreans supported an import terminal in Bahrain. The International Finance Corporation has also upped its engagement in LNG imports recently—financing import projects in Brazil, Panama, Pakistan, Bangladesh, often with a power component attached as well. The Overseas Private Investment Corporation, which will soon morph into the International Development Finance Corporation, has supported private-development of gas-fired power projects, especially in Africa under the aegis of the Power Africa initiative, although without financing LNG (one project, in El Salvador, has an LNG component, but the financing seems limited to the power plant).
In short, the market for financing LNG import projects seems to be maturing, albeit without the United States taking part (yet). Ensuring that there are adequate financing or insurance products to meet the need for LNG imports should be a chief priority for the United States, especially allowing for equity participation as well as the financing of projects without major U.S. participation (both of which are allowed under the Better Utilization of Investment Leading to Development Act or the BUILD Act). Another possibility is to insure the sale of U.S. LNG. Earlier in 2019, OPIC provided insurance for a cross-border pipeline and gas sales from Israel to Egypt. The amounts are still small relative to what a long-term LNG contract might entail—but they show the growing ability to tailor products that respond to market needs. Often, when U.S. officials go overseas to promote U.S. LNG, the first question they encounter is: “where is the money?” The United States needs a better answer to that question to what it has offered so far (which is: “there is no money”).
Don’t Politicize, Don’t Overreach
The Trump administration has put U.S. LNG front and center not just in energy conversations with other countries, but in broader geopolitical discussions as well—whether with China, the European Union or the North Atlantic Treaty Organization. Other countries understand that buying or investing in U.S. LNG will earn praise from Washington and that the dividends will reverberate throughout the relationship with the United States—a reality understood in Qatar, Poland, and elsewhere.
Of course, governments routinely act as ambassadors for domestic industry. U.S. LNG is getting a push because it is a prime commodity that the United States is selling these days, just as demand for that commodity is rising. So far, the United States is only using carrots, not sticks—encouraging countries to buy U.S. LNG, not forcing them to. Everything else being equal, a few more contracts will be signed with U.S. suppliers; perhaps a few more projects will move ahead, delivering a bit more growth and a few more well-paying jobs in the United States. That is a good scenario.
But there are slightly worse scenarios that have non-trivial probabilities of being realized. For one, the United States could start using whether a country buys LNG from the United States as a proxy for gas security. This would be unfortunate. Bilateral flows are a poor indicator—whether U.S. LNG is sent to a few countries (three countries took more than half of U.S. LNG in 2018), or whether more countries receive equal volumes is less important than how much U.S. LNG is exported to begin with. Similarly, whether a spot cargo comes from Louisiana or Ras Raffan is unlikely to convey much about the state of the market. An unhelpful indicator can distract policymakers from what matters.
Buying U.S. LNG could also become a substitute for more meaningful reforms that boost energy security. Poland exemplifies this danger. From a U.S. perspective, Poland is ticking all the right boxes, especially having signed multiple long-term contracts to buy U.S. LNG. But its grand strategy is also a rebuke to completing the internal market; it is driven by a desire to own physical infrastructure and be an arbiter of gas molecules, rather than integrating more closely with its neighbors to the West and participating in the growing interconnectedness taking place in Europe. How one perceives Poland’s grand strategy depends on whether one cares about the internal market or just selling U.S. LNG—the two perspectives lead to different conclusions. A bad scenario, therefore, is one where U.S. policy is satisfied by purchases of U.S. LNG rather than measures which deliver energy security in a deeper and more holistic sense.
Finally, supporting a global and well-functioning market means avoiding some of the temptations that U.S. policy has succumbed to when it comes to oil—increasingly using sanctions against rival oil producers after feeling empowered by the growth in U.S. oil supply. One can see traces of this danger vis-à-vis Nord Stream 2—dangling U.S. LNG as an excuse to pressure Russia. As Russia pursues its LNG ambitions, the U.S. reaction might escalate—the Arctic 2 LNG project might prove a test case here. Over time, this strategy might take on a life of its own—which would be unfortunate.
The United States can play a constructive role in delivering gas to the world, underpinning the transformation of the global gas market, and making gas a solution rather than a problem. To do this, it needs to resist the temptation to flex is gas muscles; it should focus, instead, on solving the challenges that limit a significant and positive role for gas in the future.
Nikos Tsafos is a senior fellow with the Energy and National Security Program at the Center for Strategic and International Studies in Washington, D.C.
Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).
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