U.S. Responses to the Global Energy Crisis
Joseph Majkut: Hello, all. Welcome to CSIS. My name is Joseph Majkut and I direct the Energy Security and Climate Change Program here. We’re pleased to be hosting today’s dialogue for both a virtual and – a first for us in this endemic era for COVID – an in-person and public audience.
For those of us – those of you, excuse me, who have joined us in person, we welcome you warmly. I’m very happy to see you all. While you’re here, please know that CSIS takes great efforts to secure the health and safety of our guests with a vaccinated staff, high cleaning standards, and upgraded ventilation. Should an alarm sound or another emergency arise, emergency exits are marked in this room and I encourage you to follow the instructions of a CSIS staff member to locate an assembly point outside behind the building. We’re grateful that you’re here and I hope we have an open and fulsome conversation.
For those joining online, good morning to you as well. As we proceed through our program, please use the text box on the event page to submit questions for our speakers or for our panel. Our CSIS colleagues will collect those questions and give them to our moderators. Comments and suggestions for improving the digital experience for these conversations are always welcome.
With that, let’s begin. Two months ago, the Russian Federation invaded Ukraine. And this unprovoked aggression reinvigorated Europe, spurred a coordinated military assistance to the – to Ukraine, and led to the imposition of severe tariffs on the Russian financial system and nearly every sector except energy. We don’t know how long this war will last or how it might affect international energy supply going forward, so I think we should be prepared and preparing for multiple outcomes.
The invasion came at a time of already tight energy markets so that fear of supply disruptions, self-sanctioning, and outright sanctions on one of the top oil and gas producers drive global oil prices upward of $120 in the first days after the conflict began. And they’ve settled now to around 100 (dollars). Self-sanctioning and voluntary measures have not cut into Russian oil income in the way that we thought they might. Meanwhile, Europe is caught in a trap of its own manufacture. Dependency on pipeline gas means that it cannot immediately abandon energy trade with Russia, or be cut off – or it may be cut off. The EU Commission has drafted a plan to accelerate its energy transition and get off Russian gas, but meeting new targets will impose costs in Europe and abroad.
The U.S. response to this energy crisis has been somewhat underwhelming, in my opinion. The administration is working hard to secure gas supplies for Europe, has announced a six-month release from the strategic petroleum reserve and invoked the Defense Production Act to secure supplies of critical minerals. But it is limited in what it can do. Congress is, as you might guess, still deliberating. While our peer countries are pivoting energy strategies in the face of this crisis, knowledgeable of the risks of climate change and the need to decarbonize as well, there’s a sense that the U.S. is sitting on its hands, which is frustrating.
The U.S. is the world’s largest oil and gas producer. We can guarantee energy security for the planet and our allies by producing more. But doing so without sacrificing climate outcomes will require careful planning, decent regulation, and a significant effort to reduce our own emissions, build a clean export energy economy – clean energy export economy. So formulating U.S. response will be a topic for discussion today. We’ll begin with a distinguished guest to hear the view from the White House. Then my colleagues will present some recommendations that we’ve generated here at CSIS. And we’ll close with a panel featuring CSIS associates, led by our senior fellow Ben Cahill. So I encourage you to strap in, think of good questions along the way.
It’s my honor to introduce our first speaker, Melanie Nakagawa. Melanie serves as special assistant to the president and sits on the National Security Council where she’s the senior director for climate and energy. She’s led important work in bringing our country back into global climate negotiations and establishing a leadership role for us in decarbonization. And I’m interested in her thoughts on how this moment creates new opportunities for American leadership. Before working in the White House, Melanie was deputy assistant secretary under John Kerry. She served as a counsel in the Senate Foreign Relations Committee and was previously an attorney at the National Resources Defense Council.
Melanie, I’m really grateful that you’ve come. Welcome to the first Energy Security and Climate Change Program in the endemic era. I look forward to our discussion. If you can start us off with your thinking of the situation over the past couple months, I think that’s a great place to begin a conversation.
Melanie Nakagawa: Well, thank you. And congratulations on your first in-person event in such a wonderful space. So thank you so much for having me. And for those tuning in on video, you know, please do – I think this is much more interesting the more we can hear from everyone through the conversation and through our discussion as well. It’s a perfect time to be having this sort of informal conversation around the state of play with our energy economy and what’s happening with these volatile energy markets and what we’re doing about it.
I really appreciated some of your opening framing remarks of, you know, the state of play and what’s happening. You know, over the last several months the U.S., working with our European allies, have been watching what was happening on the border of Ukraine and thinking through what are the options, what are the possible scenarios and outcomes. And, of course, even before the invasion, top of mind was energy – energy to Europe, the reliance and dependence on Russian energy.
And so we’ve been thinking and strategizing and working with our European partners and partners around the world for several months about how to diversify supply going into Europe, especially ahead of the last – this past winter. You saw some of the fruits of that effort in terms of – you saw some cargos being swapped by Asian partners, redirecting their supply over to Europe ahead of this past winter as their storage levels were quite low, and Japan was coming out of their winter and their storage levels were relatively stable and secure and they can manage the remaining of the winter.
But now we are very much in a state of war. It’s a wartime footing happening in Ukraine and Russia in particular. And there’s a real challenge ahead of us, according – basically a challenge in advance of this coming winter and next winter. You stated it correctly, which is we do have an increased supply challenge between now and next year. We’re not seeing increased volume of gas in particular out of the United States or into Europe. This is merely a physical-infrastructure limitation. We don’t have more export terminals that can be turned online overnight. There are permitted ones. There’s ones that are construction. But in terms of – everything is running at max capacity.
Import capacity in Europe is also constrained, and they’re beginning to build out more import terminals, as indicated by the German announcement just a few weeks ago that they’re looking to build out two new import terminals as well as a floating storage, a gasification unit.
So really, as we look at sort of the state of the world today, particularly in Europe, we’re looking at a twofold challenge. One is, how do we help them diversify energy and diversify LNG and gas in particular, but also how do we help them reduce the demand for gas overall? And really that sort of fundamental thinking is what led to the creation and the announcement on March 25th by President Biden and President von der Leyen of the European Commission to announce the U.S.-EU Energy Security Task Force.
This task force has those two prongs as a fundamental underpinning to its work. It really is about, in the near term, the acute scenario that we’re facing in Europe. How do they help diversity that supply? The task force announced a target of 15 billion cubic meters biannually to move into Europe by the end of this year to help them with their storage levels. And then they also talked about a 50-billion-cubic-meter goal by – you know, let’s call it middle of this decade – you know, 2025-2026 – to move into Europe, and ideally from U.S. LNG players.
And this is, you know, completely possible. If you look at what we’ve already permitted and what’s under construction today, where there’s uncontracted volumes, there’s a real potential here for Europe to signal the demand for U.S. LNG and for our U.S. LNG providers to provide that gas to them in the form of long-term contracts.
So through the task force, we’re engaging with key industry players that have the ability to move their volume to Europe of that volume of 50 (billion cubic meters). We’re talking to European member states that have, you know, indicated a willingness and an interest to building the import capacity to absorb this additional gas by 2025-2026. And we’ve done that with the overarching framework of making this climate-aligned.
Europe has very ambitious climate targets – Fit for 55, net-zero commitments. So do we. And we believe it’s completely aligned to be able to do both. We can provide this gas in a way that we call, you know, climate-aligned, this gas that you understand the carbon intensity of it. We hear constantly from many companies talking about what they’re doing to reduce the greenhouse-gas intensity of their gas. And we’re also talking, in the statement with the presidents, about hydrogen-ready infrastructure on the European side. So on both sides of the Atlantic, you’re looking at infrastructure that will be climate-aligned to our overall objectives.
So really, as I step back and I think about what we’re doing in the short run to address the immediate crisis that’s been created by Putin’s invasion of Ukraine, we also take a look at what are we doing in the medium term and longer term. And I do believe a fundamental theme that we continue to see is a rapid acceleration to a decarbonized economy, a rapid acceleration to an economy that isn’t reliant on a single source of fossil fuels, and it’s incredibly volatile and leaves us at the whims of that dictator in some cases.
And so what we’re trying to do is, really, think through what does that look like. How do we manage this transition? How do we smooth the transition in a way that allows us to accelerate deployment of clean-energy technologies, deployment of smart technologies that help reduce gas demand, as well as thinking through how are we looking at alternative sources of energy as well to supply Europe and, really, kind of getting quite creative about the innovative approaches one can take to this challenge?
And all of this is, again, frameworked within the – both the U.S. targets on climate, the European targets on climate. And I do, fundamentally, you know, to show my own bias, believe that it is possible to do both and we are doing both and, frankly, this only underscores the need to go faster.
Dr. Majkut: That’s all my questions.
Ms. Nakagawa: Great.
Dr. Majkut: For our audience, I think we have a microphone. We’ll, definitely, open the floor here in a couple of minutes. But if you’ll permit me to take moderator’s privilege, some of the stuff we see out of Ukraine is, truly, horrifying. To date, the importance of Russia as an energy exporter has kept energy sanctions sort of on the table.
In a world where this conflict lasts a long time, are we in a tenable place? Like, when you talk to colleagues from Europe or when you talk to your colleagues in the White House, is a world where Russian energy is unsanctioned something that you think we can live with for a long time?
Ms. Nakagawa: Well, you were talking about, you know, the self-sanctioning that’s happening in the market to date, looking at where the current energy is being absorbed in other countries or other regions. We’ve been really clear about when we took the action of banning imports of Russian oil crude and gas – really, we don’t take gas, but it was Russian oil and crude and coal. That’s what it was.
When we took that action, we recognized that we have the ability to take that action. We’re an energy superpower. We can do that. I mean, we’re not asking other countries to come with us. But we were talking to other countries that were already thinking about what they can do themselves to restrict that supply of energy from Russia.
You see already in the press, you know, over the last several weeks what Europe is thinking about in terms of how they’re thinking about addressing this. You have the U.K. moving out with their own import restriction on Russia. And, again, across kind of the European Union side, they’ve been thinking through their own ways of addressing this issue because as this continues the question becomes what do we do.
And I think Germany and the European Commission have been very clear. They see a future where they are out of the game of investing or supporting Russian energy supply and they have a goal of, last I saw, it was, like, 2027 to be completely phased out. But they also talk about as soon as possible, and the way to do that is by working closely with the U.S. and other partners to rapidly accelerate that transition away from Russian supply.
So I do think that, again, through the Europeans’ own stated commitments, they’re going to be out of the business of investing or supporting Russia. You see companies around the world – multinationals – already pulling out of the energy sector in Russia.
So I think it’s – it’d be sort of inconsistent or incorrect to say that we’re still in the game on energy because we are very much, especially for the United States, looking at what U.S. businesses have been doing, multinational businesses have been doing, and the fact that there is a transition afoot to get us out of that business.
That being said, this is a volatile energy market. This is a transition we’ve got to manage, and we’re not about trying to affect security of supply. You know, first and foremost, as we recover from the global pandemic, we’ve got to ensure security of supply and that was a key part of the way we designed our sanctions to go at where it would hit Russia the most. We looked at the banks. We looked at some of the key export markets, sort of critical technologies.
So these are some key areas where we really focused our sanctions regimes, and they’re working and we can see them working today.
Dr. Majkut: I think – you know, I think credit to the administration, I think, putting out the fires of the immediate energy challenges that our European allies faces has been a real achievement. But you talked about this sort of intermediate timescale, right – 2027 getting off Russian energy supply. U.S. LNG can play a huge role there.
I also heard the term long-term contracts, and this is where it does get, I think, tough for our European allies where building out additional infrastructure, which is the limiting step, the rate limiter at the moment – does imply some – perhaps, some challenge to long-term climate goals in Europe or just globally.
How are you thinking through what are the right ways to measure the impact of additional capacity that comes on over the next few years so that we don’t end up sacrificing our climate goals?
Ms. Nakagawa: It’s a great question. Well, first and foremost, it comes down to we are very much emissions focused – carbon-emissions focused, so technologies like carbon capture, utilization, and storage; things such as methane regulations on flaring. There are technologies and there are policies and there are incentives that can be put in place that actually strip the emissions, right, the carbon – the carbon intensity and the emissions from some of our actions when it comes to natural gas. You know, we talk to companies in the United States that are looking at – frankly, supporting methane regulations and methane rules to reduce their methane intensity. We’re looking at companies that are trying to track every molecule, and looking at the emissions intensity, and also looking and trying to lean forward into carbon capture utilization and storage, as well as on-site, you know, solar power, renewable power, kind of clean energy powered on their facility itself, to really kind of create the lowest carbon molecule of a fossil gas, right? To be clear, this is still a fossil fuel that’s being moved.
And then on the European side, again, you’re looking at the role of renewables in degasification. You’re looking at the role of pipeline infrastructure that could be hydrogen ready to fuel a clean – a green hydrogen or a clean hydrogen economy. And so at the end of the day when you think about these 2030 targets, 2050 targets, and the role that gas plays, it’s also tied to the carbon intensity of that gas. Is it today’s gas? Is it a future gas? And it’s also tied to the fact that some of these contracts, while long-term in nature, you know, questions come up as to can you resell those contracts? Can those contracts go elsewhere? Are you locked into that contract in perpetuity, right, for that life?
And so there’s questions around what kind of flexibility is there in that? And we see that in the United States. We all have destination flexible contracts as well. So you have these contracts but, as you saw – you saw volumes moving, cargos moving from one destination to another destination over the past several months. So I think there’s this conversation that’s happening right now around how to make this aligned with these carbon goals and these climate goals as well because, again, it’s about not the fuel itself but the carbon intensity and the carbons attached to it.
In the case of Europe, you’re looking at if you can reduce the demand for gas, that can be very much in line. I think about the REPower EU plan which, again, in the U.S.-EU joint statement or even if you just take a look at what Europe today gets from Russia, which is anywhere between 150 to 155 bcm, if that’s what Russia supplies Europe today if you look at the REPowerEU package and Fit for 55, I think – and James is here – is that you see – I think it’s about 170 billion cubic meters is what the REPowerEU package, Fit for 55’s measures would save in gas.
So you have 170 of savings that’s possible if you implement the forward movement of clean energy, the smart technology deployment, and then you have the Russian gas volume, which is 150. So again, that’s an ambitious package, but if we go all-in on that you can see how the numbers net out in terms of how you can lean forward into the transition that actually helps decarbonize and keep us on line with our climate goals.
Dr. Majkut: Editorial question. A lot of the conversation thus far in the U.S. has been around how do we open up more supply and how do we guarantee international energy security. Do we need to focus more on what we’re doing on demand and how we can help our allies reduce demand as well for, like, oil and gas?
Ms. Nakagawa: I mean, definitely. I mean, this is – as you’ve seen in all of the president’s announcements over the last several months, it is a two-part announcement. I always like to focus on the two-part notion to that. So for example, on the U.S.-EU Energy Security Task Force, two parts. First, diversifying supply and then, secondly, reducing demand for gas. When the president announced the largest-ever release of the Strategic Petroleum Reserve – a million barrels a day – you mentioned it earlier in your opening remarks, a million barrels a day for six months – two parts to that statement.
How do we provide supply to the market in the next six months while U.S. production comes online? We’re seeing that already today through rig counts going up. The U.S. industry CEOs in the oil and gas sector have already said and energy experts have all stated they expect about a million barrels a day of new oil production coming online from the U.S. by the end of the year. So our SPR release is a nice bridge between those two – you know, a quick release over six months to bridge to the increased production that we expect by the end of the year.
But that statement had a second part. It had what you mentioned, the DPA for critical minerals, the clean energy EV supply chain for batteries for EVs, which gets us off of oil, right? It reduces demand for oil. And so again, I think you continue to see this two-part approach, which is always about we might have to deal with an immediate supply issue while also reducing the demand across the board. And that’s why we’re, you know, working with the Europeans on their means to reduce demand as well, and that’s, again, across oil and it’s – and it relies on gas as well.
Dr. Majkut: Yeah. Colleagues, if you want to start queuing for questions I’m going to invite you to do so now. I’ve got two more for Melanie, if you’ll permit me.
Ms. Nakagawa: Of course.
Dr. Majkut: I know you’re not an engineer. Do you have any idea what – how we make LNG infrastructure hydrogen-ready? (Laughs.)
Ms. Nakagawa: I’m not an engineer. I have other degrees; I’m not an engineer.
Well, for example, one of them is the pipeline infrastructure itself, so the type of steel and the reinforced steel within the pipeline infrastructure is one way to do that. We can blend today, you know, I’m told, 20 to 30 percent hydrogen in a pipeline. There are other experts out there that many of you have heard of that will say that we can go higher than that, but part of that is the infrastructure question of can the steel, the pipeline infrastructure itself, handle a higher volume of hydrogen, and I’m being told that you could invest in tech infrastructure today that is ready for that kind of technology. So that’s the kind of infrastructure we’re thinking about is the ones where – if you’re going to build new, which in the case of Europe they’re looking to build new, let’s build it new so that it is usable for this next – the next transition of this gas infrastructure.
Dr. Majkut: And final question before we open the floor. The president has an ambition climate agenda, whole-of-government approach. The congressional piece of that agenda had stalled in advance of this crisis. What – how do you, you know – to what percentage is this new energy – this new set of – concerns around energy security aligned with the congressional package we had before? And if there are changes that you feel need to be made to emphasize certain aspects of that agenda, what are they?
Ms. Nakagawa: Well, we have – what’s really interesting is, you take a look at what’s already passed, right, the bipartisan infrastructure law, and some of the investments it’s making in domestic infrastructure already to date, and then you couple that with what’s pending before Congress today. In there you’ve got – you know, things such as CCUS credits, right, which is critical in this moment we’re in. I think it only further underscores the importance of the current package that’s pending because, as I mentioned, we are looking to – we are under construction with increased export terminal capacity; they’ve already been permitted. But if Europe’s going to be the off-taker and the buyer of that, Europe is going to be wanting and wanting to make sure that we’re doing everything we can on our side to make that the lowest carbon intensity possible, and to do that, things like tax credits for CCUS matter on really important – to being utilized by these key industry players. And so the current package today is one where I think it just underscores some of those key elements like the tax credits, which will help ensure that Europe is going to be able to contract for the kind of fossil infrastructure that they want to see, that would align with that Fit for 55 and REPower EU climate commitments.
So I would say that’s sort of where the key piece I see is happening right now in Congress, and I do think, as we continue these negotiations going forward, again, it continues to remind us about the importance of really leaning into this transition as fast as possible, and these different types of incentives that are job-creating and economic-growing are really critical for that.
Dr. Majkut: Great. If anyone cares to stand, I only remind you that a question has a prepositional statement at the start and then it’s followed by a short statement that goes up at the end. (Laughter.) Go ahead, sir.
Q: So I just – question. I’ve heard that they want to close – remove all the dams on the Snake River in Washington state to preserve the salmon there. I guess with this energy situation we have now, were they rethinking and reconsidering that? Thank you.
Ms. Nakagawa: Terrific question, and unfortunately completely – (laughs) – outside of my remit as I don’t follow closely the domestic Snake River-related issues, so I would be remiss to try to answer that and then say the wrong thing, so apologies; I’m not going to take on that question.
Dr. Majkut: Thank you for the question, sir.
Q: Hi, I’m Emily Meredith at Energy Intelligence.
And I was wondering if you could talk about – I mean, you spoke about the SPR release is to be a bridge, right? To get towards the end of the year, there are already projections of increased oil output towards the end of the year. But Russia obviously makes up about 10 percent of the global oil supplies, so, you know, to what extent do you think the administration needs to still be encouraging increased oil and gas output beyond what was already expected, and what tools might you be exploring for that? And then also, are you looking at, like, what tools you can use to encourage additional FID for LNG facilities beyond what’s already planned?
Ms. Nakagawa: Thank you so much for that question. So in terms of anything that we can be doing to encourage more, we very much believe that the current market and the energy signals in the market today, from price alone, should be sending the strong market signals to these industries and these companies to continue to do what they are doing, which is – which has been increasing production in response to that. We continue to hear from industry a need for more conservative measures, and so we’ve been having active conversations with them about trying to understand what is – their future projections look like? Are they bringing those forward in any way? And really highlighting the moment that we’re in, this wartime footing that we’re in. Secretary Granholm conveyed this in her remarks in Houston a few months ago regarding where she’s been with the industry as well. And that’s where I would say on the – on the oil side.
Regarding FID, on that piece of it, again, part of what we did with the Europeans – European Union, the European Commission just a few – last month, I guess it was, the statement, was to talk about where the demand is coming from and the type of demand that is coming for U.S. LNG specifically. And we don’t want to get involved in the nitty gritty of those aspects, but what we want to do is be able to show where the market demand is growing, the kind of demand that’s out there, and ensuring that U.S. LNG, as they reach contractual close or as they reach final construction, that they’re finding partners and they’re helping to support Europe in their stated goals of getting off of Russian gas and moving to more diversified sources, to which the U.S. can play an important role.
Dr. Majkut: I think we’ve got one more person in the queue and then I’m taking – I’m accepting questions digitally as well. But, sir.
Q: Thank you. Good morning. I’m Aaron Padilla, the director for climate and ESG policy at the American Petroleum Institute, API. Thank you very much, Melanie, for your time this morning and for your framing remarks.
I wonder if the administration has in mind a particular target for carbon intensity for U.S. natural gas. Let’s pick a point along the value chain such as at the moment that it’s loaded into an LNG tanker and then would go on to global markets. I think it could be helpful for everyone to know what the performance target is because then we could all unify around it. If you think about the value chain of natural gas, there’s a value chain on the industry side from producers, to pipeline companies and transporters, to liquefaction companies, and then onward to global markets, and so they need to work in concert toward a particular carbon-intensity target. And then, on the government side, there is a value chain of regulators as well, starting with the EPA for the exploration and production of natural gas; the FERC for pipeline, transport, and liquefaction terminals; and then the Department of Transportation and PHMSA along that part of the value chain as well. If they could all be oriented to a carbon-intensity target as well, it seems like it would help us all to be working together towards something that would then unleash U.S. volumes of LNG that would be climate aligned in a way that we can all recognize as the performance target that we’re shooting for.
Ms. Nakagawa: It’s a great question, and it’s one where we’re in constant conversation about one step before you actually get to the target, which is the methodology, right? How are we measuring – what are we measuring and how are we measuring those molecules of carbon through the supply chain, through the lifecycle of gas? And there’s lots of different – you know, each company has perhaps their own way of doing it. There are third-party providers that we’ve met with that talked about their methodology and their technique. Consultants are doing this as well. And so we’re actually in active conversations right now really trying to understand how industry themselves are all looking at their lifecycle, how they’re thinking about measuring each of these emission streams that come into – that come through to that point of export before we can even get to a specific number of intensity. We’re still doing that first step of homework on our side and really understanding how to do this. And it’s really – frankly, it’s a global conversation that’s happening around this methodology piece, because we don’t have a number in mind specifically right now but we’re in active conversations to really understand the methodologies that different companies have put forward because we want to make sure it’s apples to apples and not apples, oranges, limes, and a turkey. (Laughter.)
Q: Joe, if I may, just as a quick follow up I – we as an industry agree and are at the leading edge of increasing deployment of direct detection and measurement of emissions. So I would submit that the performance target, though, is still important and not a conversation to wait to have until later, because I think we can all agree that we want to deploy the most accurate methodologies. Whether it’s the continued use of emission and activity factors to estimate GHGs and the increased deployment of direct measurement, we all want accuracy. And we’re moving toward increasing ways of deploying technology to enhance that accuracy. But if we accept that as a premise, that we’re going to accurately measure GHGs, the performance target needs to be considered now so that we can orient ourselves toward achieving that while we’re going to be enhancing our ways to accurately measure it the best way.
Ms. Nakagawa: And that’s part of what – as I said, we’ve been having these initial conversations of the taskforce where we’re looking at, you know, transatlantic, U.S.-EU, you know, workstreams for the taskforce. And one of them has been actually thinking through methane in particular because that’s a key input into this, as there are different ways to measure and regulate and monitor methane, which will be key for exactly what you’re pointing to.
But we don’t want a proliferation of different types of standards and regulations out there, because, again, you won’t have consistency there. So as the task force is under way, it’s complemented by the U.S.-EU Energy Council, a longstanding partnership between the U.S. and EU, where, again, through the Energy Council, you’ve seen similar workstreams around energy, and particularly around the oil-and-gas sector. And so we’ve got a really strong connective tissue with the European Commission, European Union.
And again, this has been really, frankly, a horrible sort of unfolding in the Ukraine, as you mentioned these horrific images. But I think if there was one thing that has been a positive development in terms of how we’re handling this is the strength of the U.S.-EU relationship. Truly, you know, having served in the government before under – a few years ago, it’s been really fascinating and wonderful to see the strong connection between the U.S. and the EU, whether it’s on sanctions or it’s on this energy-security work.
But there really has been a strong alignment of recognizing we’re in this together in many ways, whether we’re the supplier of the energy security to Europe and being part of the solution, or if Europe’s part of the solution for our energy-supply response as well. So it’s been, I think, a real testament to President Biden and President von der Leyen’s partnership throughout this and their lockstep nature, which is only indicated by what we’re doing together on energy issues.
Dr. Majkut: I would – I mean, we can’t control what happened in Ukraine. We’re working well together to bust as many tanks as the – help the Ukrainians bust as many tanks as they can. But I think the next few years are going to create a lot of opportunities for figuring out how do we articulate the methane agenda well. How do we make choices around the spectrum of emissions that governs hydrogen and the hydrogen trade? And how do we, as I think the administration has taken pretty clear steps – we’d love to see more – create a more diverse supply chain for clean energy so that, as this accelerates the transition, we don’t create the same problems that have led us to this moment today?
Melanie, if I may, I want to – you’ve been so generous with your time, but, you know, the immediate crisis that we face is not the only challenge that you’ve – that you have under your portfolio. So maybe we can close just by soliciting your forecast and your thoughts on COP next fall. Amidst an energy crisis, amidst the war in Ukraine, how has this changed your outlook for that event and you think the political dynamics that will lead to it? And any final words for us as we close are also welcome.
Ms. Nakagawa: Well, this year, after Glasgow, was really focused on being the implementation year. We had ambitious nationally determined contributions put on the table by many countries. Going into Glasgow, you had IAEA come out with an analysis that we were, based on the commitments coming into Glasgow and out of it, were just shy maybe two degrees, that they added up to – maybe it was like 2.2, I think, is what it was, of where we are.
So we could do more, and there’s more countries that need to come to the table. But we were trending in the right direction of getting really ambitious targets on the table. And this year was really focused around the implementation, making sure the policies are matching the commitments and the targets that finance is moving. And given the current state of COP-27, it’s sort of the adaptation-resilience COP. It’s going to be focused a lot around those commitments and what we can do to help the most vulnerable communities and populations.
And for better or worse, that theme persists. I think it’s – you know, and probably even more so, given what we haven’t talked about, which is somewhat related to this conversation, is the food-security crisis that is looming, you know, in terms of where our food supplies are and a real need and desire, as we get into crop-planting season, crop-reaping season, which requires diesel and energy and fuels to do that.
I think there’s a lot of challenges and concerns about what the future food supply is going to look like for the most vulnerable affected communities around the world. And this upcoming COP needs to really continue to focus around building adaptation, building resilience into the economy.
Last year’s COP was really about ambition and mitigation targets and finance coming into that one. This year’s COP has to be about what are we doing about it. How are we mobilizing finance? How are we mobilizing resilience and adaptation in these key communities? And that hasn’t shifted, and, again, I think has only been accelerated in how much more we need to do on that front, especially with this – an unforeseen factor, which was this food security. We’ve always known that we’re food-vulnerable. We know that climate change is going to exacerbate our food insecurities and water insecurities. But definitely this war has further moved that closer to our front of mind than it has ever been before, and so that would be a key part of – as we think about COP-27 this year.
Another key part will be around finance commitments. How are we showing and demonstrating that we are investing in these communities, we’re investing around the world? We have – this will be the year that the U.S. is starting to move the bipartisan infrastructure law dollars. So, you see the Department of Energy standing up new programs, new teams, new, you know – the Loans Program Office has made already two investments out of their shop in critical mineral-related technologies.
So, this is really about a year kind of – last year was a whirlwind year because I had the privilege of being part of a year one. I had never been in a year one of an administration before. I’d usually turn off the lights last time. This time turning on the lights. And I’ve had –
Dr. Majkut: I believe you’ve earned the privilege of year one.
Ms. Nakagawa: – I’ve had the full experience, and it was a really exciting year. We had an incredibly aggressive climate agenda that we were implementing. So, now this is the year that – now that we’ve set all that foundational steps – you know, we’ve launched our, you know, executive orders. We have, you know, initials – a first tranche of investments already made. We have the President who launched a global structure initiative called Build Back Better World. We really have the foundational pieces.
We’ve come back to the global stage, humbly of course, but we have returned from a position of strength, frankly, of a lot of the successes we’ve had at home in terms of some of the EV charging efforts, our transportation transition, all amid coming out of a global pandemic, right? So, there’s also that piece to the equation.
So, this year – again, I think this war has shifted our focus in terms of looking at how the energy transition is not something that can be a light turned on or off over a night, but rather, how do you leverage this to just rapidly accelerate these other pieces that, frankly, were unheard of. I mean, the fact that you have a European Union looking at a thermostat play, a heat pump acceleration, a weatherization program, far faster than they had two years ago really is a sign of the times, of where we are, and I do think that, you know, this year is going to underscore how we take this transition and how we transition it into – and how we help to smooth it out through some of these tools.
Dr. Majkut: Let me just say thank you for your service. Thank you for coming to CSIS this morning. We’re really excited for this conversation, and we look forward to seeing how it develops.
Ms. Nakagawa: Well, thank you so much for having me.
Dr. Majkut: If you can join me exiting stage right?
Ms. Nakagawa: Of course.
Dr. Majkut: My colleague Nikos Tsafos is going to come up and take over the program. Colleagues from the Web, thank you kindly for your questions, and onward. (Applause.)
Nikos Tsafos: Thank you. Hello, everyone. My name is Nikos Tsafos. I’m the Schlesinger Chair for Energy and Geopolitics at CSIS, and I caught the short straw and have to present the group project. (Laughter.)
So, Joseph Majkut, Ben Cahill and I published a commentary yesterday sharing some ideas about how we might respond to the moment. And so, I’m going to try to spare you the effort of reading it and try to summarize and give some context about why we wrote this, and then I’ll be joined by Ben and John Larsen to talk about these things.
So, as Joseph said, you know, we’re at an odd moment in this crisis because if I were to show you the price of oil and the price of gas and you weren’t reading the news, you would think something weird happened in February and then it was over, right? The price kind of like spiked and then it’s kind of come down again. It’s a little bit higher in oil. Gas has mostly reverted back to where it was.
At the same time, it doesn’t feel that way. It doesn’t feel like this is something that came and went. And so, as Joseph said, you know, we made a decision at the beginning to not sanction Russian energy, and low and behold we haven’t sanctioned Russian energy – that Russian energy flows seem to be continuing at roughly the same rate as they were before the war. And every week we have new estimates about how horrible the oil numbers are going to be out of Russia, and then a week later we realize that, actually, no, Russian oil exports seem to be tracking more or less what they were the month before.
And so, we put these ideas on paper – some of them are from previous commentary; some of them are ideas that we’ve talked about in presentations – to try to articulate essentially what we think the U.S., in particular, should be doing. And our guiding principle was to say there is no tension between providing energy security now and accelerating decarbonization later. This isn’t a free for all to just go back to the good old days – if you can call them the good old days.
This is about recognizing that Russia is the largest exporter of oil in the world, and the largest exporter of gas in the world. And we’re trying to win a war against them, and we’d like to sanction those exports. And to sanction those exports, it would be really helpful if the U.S. could make up for some of the slack. And it would be even better if we could do that in a way that doesn’t increase cumulative emissions over time, right?
That’s our starting point, right? Our starting point is that in our view the way that market forces are working, market forces are not well-engineered for sanctioning the world’s largest oil exporter, right? That’s not what markets are designed to do. Markets are not designed to accommodate the European Union deciding we no longer want to import Russian gas overnight, right? And so we need public policy to supplement that.
So we have grouped our ideas around three main themes – oil, gas, clean energy. And so I wanted to start, before I go to the recommendations, with a diagnosis of why we sort of tried to put the things that we’ve put on the table. On the oil side, you know, we have, I think, fundamentally in our view, a problem of scale and market mechanics, right? So the scale problem is that Russia was exporting about 8 million barrels a day of oil, right? So if we’re talking about market forces producing an extra one, or two, or two and a half, you know, that is a long way out before you can say: I can significantly sanction Russian energy, right? So there’s a question of scale.
The other thing that has very much guided our recommendations is that the U.S. production system, which is probably the one that could be most responsive, is clogged up right now, right? People have different views about why it’s clogged up. Our, I would say, collective assessment is it’s largely because of market forces, for lack of a kinder description. The industry lost a lot of money, or investors thought they lost a lot of money the last decade and they’re not keen to invest and jump into increased production. And because if they jump into increased production, they’re going to crash the price again. And so that is holding back sort of U.S. industry from being able to produce the kind of volumes that you would need if you wanted to sanction Russian oil.
And so our recommendations for the oil side, one, is we think that there should be some clear political messaging. As Melanie said, you know, Secretary Granholm has said this, that this is a wartime footing. I think this kind of language is important. I think bringing people to the White House and understanding that it’s not just the oil industry. It’s the service sector. It’s also the investors who are telling the oil industry not to invest. It’s really trying to bring people together and try to figure out how do you articulate a response. Again, at the moment, we’re not sanctioning Russian oil. And we’re not sanctioning Russian oil, because we can’t afford to sanction Russian oil, right? So this is really about how do you develop a response that allows you to sanction Russian oil more significantly?
The two specific things that we would say, one is to try to essentially provide some price support in the medium to long term for the – for the industry. The cleanest way to do this would be through the SPR, the strategic petroleum reserve. The recommendation that we have in our document says that the administration could commit to refill the SPR if prices go below 70 (dollars). Essentially, what we’re trying to solve or, again – remember, what we’re trying to solve for is industry isn’t investing because they’re scared that if they ever produce, they’re going to crash the price and lose money. So trying to offer some kind of visibility on demand support and price support could be incredibly helpful in unlocking these volumes.
And, by the way, as you all know, U.S. shale is ideally suited for this purpose because it declines very quickly, and so the commitments we make right now don’t lock us in in a 20 year sort of emissions – we don’t lock in, like, 20 years of emissions because within three to four years, you know, 70 to 80 percent of the production from these wells will have gone away, right? So it’s a great tool for responding to this moment.
If we are in a more wartime footing, you can imagine more direct ways to support the industry, akin to what we do for agriculture and other industries, right? Again, we’re trying to take out 8 million barrels, or as close to that as we can. We probably can’t get out all of it because some of it is going to China. But we’re trying to get out as much as we can, right? So we need a step change in our support system. The other recommendation is on the oil field services side, where we understand there’s a lot of bottlenecks in terms of the ability of the industry to respond, to hire crews, to get access to components, to trying to figure out other specific sort of lending systems that we can do for this industry to try to increase capacity to respond to the increased drilling that may come from the oil sector. So that’s the oil side. Again, I’m trying to summarize it relatively quickly.
On the gas side, you have two different problems. One is there’s – there’s a short-term problem and a long-term problem. The short-term problem is that if Europe decides to go buy an additional 50 billion cubic meters of gas, as it wants to do, form the liquified natural gas market, well, we didn’t have 50 million cubic meters sitting around waiting for Europe to come buy it. And so they have to sort of bid that gas from somewhere else. And I like to say that, you know, the combined consumption of Pakistan, Bangladesh, Malaysia, Indonesia, Singapore, and Thailand last year was 40 billion cubic meters. So if you want to import 50 billion cubic meters, that’s a lot of gas.
And, by the way, if you want to do it through 2030, you know, this year actually we have a lot of new supply coming online. That’s not the case in 2023, ’24, ’25. And, moreover, by the way, European gas production itself is declining at roughly 8 billion cubic meters a year. So within four or five years, you actually haven’t done anything if you import 50 billion cubic meters of LNG, right?
But the broad diagnosis here is, one, you’re adding a lot of consumption to a market that was already tight and so how do you manage that. Number two, you can’t really cut out Russia without doing anything that increases supply, right. So that’s the problem that we’re trying to solve.
So, in the short term, as Melanie said, there’s been a lot of effort from the U.S. government on the diplomatic front to try to sort of figure out a way to reallocate supplies so that more goes to Europe. We think that this is something that should be expanded and try to be more inclusive, try to bring in the major players and talk about how we’re going to manage the market.
You can’t really manage this market purely through price because price(s) have gone through the roof, right. So that kind of effort where you bring the EU, bring the U.S., you bring Australia, you bring Qatar, you bring Japan, Korea – if you can get China, even better, right – you try to bring people together and say, OK, how can we manage the system over the next few years where there’s enormous stress.
In the medium to long term, you know, we’re hearing a lot about additional U.S. LNG production. Here’s the problem. The market signal is a mess, right, because you look at the price today and no one believes this price is going to last. The EU is talking about LNG demand until 2030. Well, if it takes you four years to build the thing, like, no one is going to make money between 2027 and 2030. So the 2030 goal for the EU means nothing, right. And there is no clear sort of support system to enable something that wasn’t happening already, right. There’s no real public money, in part, because Western countries have decided not to support these kind of projects.
And so these are the constraints that we’re dealing with, right. So one of our suggestions is to say let’s try to come up with different, more creative structures where if you do give public support from the EU, you do this and you put in the financing terms, some very strict methane reporting and verification rules, you can have this gas go to Europe for a 10-year period while Europe diversifies away from Russian gas and then you can sign back-to-back contracts to sell this gas to Asia to displace coal in the sort of 2030s, 2040s so that Europe can see how its investment in LNG, actually, is part of a positive sort of climate story.
You can, again, depending on – again, this is war time, right so increasing levels of, like, intervention, right. We’re trying to solve for a big war. You know, you can come up with more aggressive structures where, essentially, you do public financing and a project has a 20-year operating life and then they have to shut down unless they can show that they can be consistent with a net-zero world, right? We do these kind of contracting structures for bridges, for airports, for all type of public-private partnerships. We can do it for LNG, right, where the assets revert back to the state or they lose the license to operate after a while if they’re not consistent with a net-zero world.
Again, these are all not simple but, relatively, straightforward concepts for trying to figure out how do you boost supply now without locking in emissions for the long term.
A final thing – the final idea on clean energy exports, this isn’t just about hydrocarbons. This isn’t just about oil and gas, although, obviously, being the largest oil and gas producer that’s where a lot of the focus is. This can encompass other technologies as well. We have, at the Department of Energy, a – and coming out of the infrastructure law a major initiative on hydrogen – hydrogen hubs. Everyone wants to be a hub. You know, welcome to the world of European energy where everyone wanted to be a hub. Now we can see the same party happening in the U.S.
Well, our question is, well, we’re in the process of designing hubs and conceptualizing hubs. How can we insert an export component to those hub concepts, right? How can we think about supplying hydrogen to Europe as it tries to lessen its demand for natural gas, right?
So we have an initiative that is, largely, now sort of domestically focused. Well, how can we put export into the concept from the beginning and try to figure out how can we deliver clean hydrogen to Europe over the next decade?
And, finally, this idea, again, can expand to other technologies as well. We had in discussion the 48(c) credit on manufacturing, right? So try to support clean-energy manufacturing. Europe is going to be scaling up its intake of a number of technologies. How can we be the ones to supply those technologies?
We even have more tailored initiatives, say, around solar – the Solar Energy Manufacturing Act – where we can be – again, if Europe is going to be accelerating its transition, the U.S. could be one of the suppliers so it’s not just China, China, China in terms of diversifying away from Russian gas by relying largely on Chinese manufacturers. How do you also diversify those supply chains?
So that’s the list, right? Our overarching goal again is respond to the moment, allow for greater sanctions, and doing so that when we look back in 10, 15 years at what we did, we can say, you know what, net emissions were roughly the same as what they were going to be, or even better, maybe a little bit less, but we also responded to the moment in an aggressive way that allowed us to make a material contribution to the war by enabling a much greater sanctioning of Russian energy exports.
So with that I’ll stop and I’ll invite my colleagues to come up here. (Applause.)
Ben Cahill: While we shift everything around, I just want to share that Sarah Ladislaw, who was supposed to be here for this panel, unfortunately couldn’t be here today. She’s not feeling well. So we wish her well. And I’m sure she’ll be back with us again at CSIS soon.
So my job is to run the panel discussion. My name is Ben Cahill. I’m a senior fellow here in the Energy Program.
And we’re very fortunate to have John Larsen with us. John Larsen is a partner at Rhodium Group. He’s also an affiliate of our program. Rhodium Group, many of you are familiar with them. They do a fantastic job modeling different climate policies. So it’s a real privilege to have John with us to talk about what some of these policy initiatives, especially around U.S. LNG, might do to climate outcomes and emissions.
And we also have Nikos with us to maybe expand on some of the ideas that we just talked about. Nikos did a fantastic job presenting those ideas; tour de force.
So we don’t have that much time. We’re running a little bit behind schedule. So I’m going to turn the floor over to John. And I know that John wants to talk about the U.S. LNG industry and exports and the idea of squaring more export capacity with the idea of reducing emissions over the medium to long term.
So John, over to you for a couple of minutes.
John Larsen: Thanks, Ben. And it’s great to be back at CSIS. This is my first in-person event in a couple of years, so sorry if I’m a little shaky. (Laughter.) But it’s really great to have that first opportunity to be here.
And, you know, I’m going to speak a little bit maybe in a bit more detail to some of the comments that we heard from Melanie and from others around the LNG situation here in the United States vis-à-vis Europe.
You know, depending on how you count it, U.S. LNG is as much as 50 percent better, on a lifecycle perspective, than Russian pipeline gas. So already this pivot away from Russian pipeline gas to U.S. LNG or other LNG now is a net incremental gain for the climate. But that has way more to do with leaky Soviet steel infrastructure going across multiple continents than it does with any superior environmental performance of the U.S. oil-and-gas industry.
And what that means is there’s lots of room for improvement. And we heard it from the questioners, we heard it from Melanie, that that certainly is the case. But the industry is not going to do it without a policy framework that it can work with that’s predictable, that’s long term, that allows that environmental performance to get enhanced and to make U.S. LNG more attractive and marketable, not just in Europe today, but in any decarbonizing energy system across the globe over the long run.
And so really it’s playing on what Melanie said. There’s a few different opportunities here to set up that framework. One, first and foremost, is the executive branch has authorities that it can use to reduce oil-and-gas methane from exploration, production, and transmission. The Department of Transportation also has authorities. There’s lots of different space there.
The U.S. EPA’s proposed rules on oil-and-gas methane on the table right now could cut methane emission from natural-gas systems by roughly two thirds over the next few years. Methane is probably the most important near-term opportunity for emission reductions from the supply chain. It is worth noting that it’s not the only gas associated with lifecycle emissions of LNG.
Carbon dioxide is a real issue, both in produced CO2 that comes out from the wells, but then also all along the transportation chain, you combust fossil fuels to move fossil fuels. And so emissions at the lease sites, at natural-gas processing plants, at LNG liquefaction plants, are all major sources of CO2 associated with lifecycle emissions of gas. And that’s where I think a lot of the additional policy measures could be focused.
So, for example, Melanie mentioned the carbon-capture tax credit, 45Q. The version that passed in the House Build Back Better Act would extend the deadlines and enhance the value of the credit to a degree that we at Rhodium feel could be quite attractive, not just for gas processing plants but for LNG facilities and would dramatically cut the CO2 footprint of the supply chain for LNG cargos. And then on top of that, the Methane Reduction Program that was also part of that act, which had, like, a carrot/stick approach to reducing methane, could definitely complement the EPA regulations and maybe get at some emissions that the regulations can’t. And all of that is going to send expanded and predictable signals.
And again, I’ll say, long term like, this is – the tax credits contemplated in what was Build Back Better and potentially in any new package that might emerge – one of the huge benefits of that is not just that the tax credits exist, it’s that they’re available for the full decade through the 2020s. And that allows a lot more deployment of all these technologies over time, in particular when we’re talking about the timeframes that Nikos is talking about, with LNG terminals. We’re really talking about the new capacity coming online in the later part of the decade is what – is a big part of this. And all of those things together could make U.S. LNG not just better than Russian pipeline gas, but perhaps the best, cleanest LNG production in the world should the industry have a framework to work with and it takes full advantage of that framework.
And so we – you know, we need EPA to follow through on its regulations, but we also need Congress to act to set up that framework so that people can start really putting the multibillion dollar investments on the table to make this stuff work. That is probably – gets U.S. LNG performance to a level that, you know, could be impactful through the 2030s. It is not the same as net zero. And so the last thing I’ll say on this is, you know, the industry and the U.S. should be really thinking about, and Europe is already thinking about, how LNG can work in a net zero world.
And that could mean hydrogen blending. It could mean using more bio-based sources of methane instead of fossil. It could also mean offsetting those emissions with rigorous direct-air capture or carbon removal of which there are substantial incentives also in what was Build Back Better that could be expanded and taken advantage of here and could leverage all these existing CO2 infrastructure – or the new CO2 infrastructure you’d be building around those LNG terminals anyway. So there’s a lot in the long run to contemplate, but so much to do in the short term, should that framework get put in place.
And so, you know, I think it’s time for folks to really get serious. We’re going to have any kind of action this year on this, to really kind of push this stuff into the next level and really accelerate clean energy deployment in the LNG sector.
Mr. Cahill: Thanks, John. That’s great.
Let me start with a question specific to U.S. LNG, and then I’d like to get your views on some broader climate policies that might be possible at this time, with this changed environment. So there are a lot of critics of funding any fossil fuel projects at this point. You know, many people make the argument that if you fund fossil fuel infrastructure, you’re locking in carbon use and, you know, fossil fuel dependence. How do you respond to that? Do you think it’s the best use of public funds and public energy, government efforts, to support more U.S. LNG capacity? How do you square that with the idea of, you know, achieving longer-term climate goals?
Mr. Larsen: Well, I think the framework that you folks have put together in your commentary around, you know, making sure cumulative emissions aren’t compromised is the right one here. And, you know, that can mean a lot of things. That can mean over time any increase in emissions from oil and gas and LNG exports because of the current activity is reduced through some of the measures I just talked about, right? That wouldn’t have happened otherwise. It could also mean if emissions go up in one sector you do more in a different sector to make up that difference.
And I think, you know, should you have additional policy investments beyond just the LNG package I talked about, say in the electric power sector or in the transportation sector, you could easily, I think, get into a space where the U.S. is making much bigger gains on net greenhouse gas emissions across the energy system without compromising long-term fossil lock in. I also would just say that, you know, any one infrastructure project is not going to make or break climate change. And that – you know, the cumulative effect of, like, lots and lots of projects? Sure. But, like, we’re talking about the margin and we’re talking about a wartime situation. And being able to steadily shift to the clean side over this decade, again with a policy framework to do so, I think should be able to mitigate any of those downside risks.
Mr. Cahill: Maybe a slightly broader question. So Rhodium Group, as I mentioned, does a lot of great work modeling, you know, the impact of various climate policies. We’re in a changed environment. A lot of things may be possible now. There’s a new sense of urgency to try to get something done in the coming months on climate. Maybe share some thoughts on what you see as, you know, the biggest potential wins that are feasible in this kind of policy climate, right? When you think about the kind of Venn diagram of, you know, impact and feasibility, where can we get the biggest bang for the buck? What do you think is achievable that would really, you know, maximize in emissions impact? We’ve talked about U.S. LNG and reducing emissions from the industry, but what other things is Rhodium thinking about?
Mr. Larsen: Yeah. We’ve been looking at this now for a year and a half, you know, as there was an – you know, a new opportunity on the table to move legislation. And I’d say, if I had to pick one area just to highlight, it’s the electric power, clean-energy tax credits. And not just from a clean-energy deployment and emission-reduction perspective, but also from an energy-security perspective. Again, the long-term nature of the credits gives the industry the kind of running room to scale that it’s never had before. It’s always been up and down – will they/won’t they extend these credits? And instead, having 10 years of full value and flexible tax credits where solar or any technology can take either the investment or production tax credits we found is – really, really enhances the overall value of those tax credits. Coupling that with the nuclear retention tax credit, you can – our estimates are, first of all, you could probably get U.S. electric power CO2 emissions down to about 70 percent before ’05 levels by 2030 just with the tax credits. That’s before you talk about any new public-health or GHG regulations in the sector. And you free up a volume of natural gas that would have otherwise been burned in the electric-power sector equal to the amount of total U.S. LNG exports today.
So that’s a lot of gas, to quote somebody I know next to me here. (Laughter.) And you know, I think that – you know, putting that into the context of energy security, that’s a lot of natural gas that could easily be used to help our allies get off of more volatile, insecure sources without any serious price repercussions back here at home, because you’re – what you’re doing is you’re just replacing reduced demand with exports, right, as opposed to having to find new sources of gas to fill in both spaces. So I think that – if I had to pick one category, that’s it. I mean, this expands to transmission and battery storage and all that other stuff that you need to support all that clean-energy deployment, but I would say that’s a really critical part of this.
Mr. Cahill: Thanks, John.
Nikos, let me turn to you. You were in Europe recently. You talk with European policymakers a lot. I wonder if you could just comment broadly on some of the big differences in the policy response between the U.S. and Europe to all this – Russia-Ukraine market implications. I mean, obviously, the U.S. is in a different position because we’re a huge producer of oil and natural gas, but maybe talk about how the U.S. versus Europe are kind of setting out the medium- versus long-term response to this, and how things have changed from the European policymaker’s perspective and how they’re looking at it differently compared with here in Washington.
Mr. Tsafos: Yeah. Well, you know, I think there’s a couple of things.
One, you know, I’ve been doing this for a while now, and if you were to tell me that Russian gas would be cut off to Europe but it would be the Europeans that did it – (laughter) – like, that would have been a surprise, right? So I think no one should underestimate the extent to which the European discourse on this topic has fundamentally shifted, right? And it has shifted in ways that I don’t think, like, if the war would stop tomorrow – which it won’t – it’s going to change, right? I think there’s a stickiness to it, right? So I think that’s one.
The only question is: How soon? How soon could we do it, right? So, obviously, the U.S., you know – you know, we banned oil, gas, and coal. We didn’t really import gas. I’m not quite sure on the coal, but it probably doesn’t matter. On the oil side, there were some imports. You know, Europe is just in a fundamentally different position. And I think what you’re seeing right now is sort of multiple conversations happening, right? One is, obviously, countries have very different historical experiences with Russia, and so their willingness to take strong stands differs depending on where you are on the continent. Countries have very different exposures to Russia and also responses. Are they on the water? Can they access LNG? Are their – are their oil supplies coming from pipelines or through the water? How much coal do they import from Russia? So all these things are coming together.
But I think you’re also having a sense of, you know, how much is this really going to matter, right, in the war effort, right? I mean, if we’re going to be reducing Russian gas supplies but the price of gas is going up and the Russians are making just as much money as before, are we really accomplishing anything, right?
So I think what you’re seeing now is a – is a couple of conversations. One is, you know, we did see the EU put sanctions on coal from Russia, which, you know, if I have to be analytically honest it’s like – it doesn’t really hurt them that much because they don’t make that much from coal, but it hurts you because you import a lot of coal. So it shows, I think, the public pressure sometimes overtaking sort of the strategic reasoning. And I think what you’re now getting to is on the oil and on the gas side – the oil is, you know, how can we do something that’s more phased? Is it a tax? Is it a phaseout? You know, countries are putting out their own targets about how quickly they want to get out of Russian oil. And so what you see now is trying to scramble to figure out a way that is more coordinated. Everyone can sort of agree on the 2027, because it’s far enough that you hope things are going to happen, right? (Laughter.) But frankly, the pathway from here to 2027 is not particularly compelling, in my view, right? On the oil side there’s almost nothing. On the gas side, you know, there is some of the things I talked about already, right?
So, you know, I think what you’re trying to get at is higher levels of confidence. Can we do this? How much impact is it going to be? My view is that some of the numbers coming out of Europe right now about the impact of, like, one, two, three percentage points of GDP are a gross underestimate of the damage, right? We’re talking about gas providing one-third of building energy, one-third of industrial energy. And we’re not talking about higher prices. We’re talking about just not having physical supply because you can’t get the gas into Europe, right? So this is very hard to model, because you kind of have to think about what it means to shut down a bunch of industry.
So that’s what you’re seeing. So what I expect will happen at the same time, though, is we began this war without wanting to sanction Russian energy. This is becoming politically untenable, for all the reasons that Joseph outlined at the beginning, the images that we’re seeing out of Russia. We have to do more. And so my thinking, as I speak to policymakers is, how can you do more in a way that hurts them more than they hurt you, right? And that have a plausible sort of way to fill the gap created by Russian energy.
So that’s the conversation. I expect we might see some movement on oil before gas. But again, on both oil and gas, I think it’s going to be a phase out rather than a total cut off. That’s my, at least, estimation. You know, there’s – you know, where we – at least in terms of what the EU will do. What will Russia do? We’ll see. But from the EU side, I think that’s where the discussion is right now.
And let me just say a final thing, you know, it’s not just – especially in this town we like to do this. It’s, like, all the EU versus Germany. It’s not that, right? I mean, this is – this is a very difficult topic for a lot of countries. It’s not just like everyone wants to sanction Russia and Germany is saying no. This is a far more diverse conversation, and a much more evenly split group in terms of their views about when, how quickly, oil or gas, or how. And so it’s not about, like, oh, let’s just convince the Germans, right? It’s a much broader and more difficult conversation than that.
Mr. Cahill: Yeah. Maybe just a quick one, if you could give a one-minute answer to this. Let’s talk about the commercial realities of adding U.S. LNG export capacity in the U.S. So is it possible to finance a U.S. LNG project with 10-year contracts? Or do people still need that kind of long-term security of demand, 20-year contracts? Can we get over this hump, and can we build LNG export facilities faster, with the way of – you know, the market has changed, and modular terminals, and the ability to kind of get things done faster?
Mr. Tsafos: Yeah. So in the one-minute answer, so I think what you have is in some ways the maturity of the market is such that you should, in my view, be able to finance something without a long-term contract, but then you bring net zero and that’s, like, a big headache, right? So from the maturity of the market, yes, like, the idea that you need a contract right now is kind of silly. But if you’re trying to bring something online in 2026-27, and you’re saying I’m going to make my money back until the early 2040s, you know, that starts getting a little bit tough.
So in my view, I think public money can help bridge that gap, and essentially shorten the time horizon that you need to pay back – I mean, essentially, you know, Europe is going to spend, like, 60-70 billion euros just to refill storage until October, right? I mean, you could spend that same amount of money and, like, you know, almost double our U.S. LNG capacity, right? So think about where do you want to be spending your money and for what energy security benefit.
Mr. Cahill: Got it.
Well, we are unfortunately just about at time. The time flew by. But we do want to end on schedule. I really want to thank Melanie Nakagawa, John, Nikos, all of you for joining us here in person at CSIS, and everyone who joined online as well. This conversation will continue. It’s a really challenging, but also exciting, time for energy and climate policy here. Let’s hope we can get something done in the next couple months. We look forward to collaboration and exchange of ideas and hope to see you back here soon. Thanks so much for joining us. (Applause.)