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Europe’s Bleak Energy Situation: Can The US Come To The Rescue? – Analysis

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By Stefania Coco Scalisi and Vicki Michelle Romo

In the 16th century, when Michel de Montaigne wrote, “A good marriage would be between a blind wife and a deaf husband,” he could not have known that his line would perfectly depict the modern day energy relations between the European Union (EU) and Russia. The EU acts as a blind wife who prefers not to see the uncaring behavior of her husband Russia, as Russia does not listen to the EU’s requests to negotiate more favorable gas prices—Europeans do not have access to cheaper, alternative gas supplies that can meet current EU energy needs.1

Unfortunately, as the EU has not developed a strategic and diversified energy portfolio, it remains dangerously reliant on Russian gas. Although Russian gas imports are prohibitively expensive for EU customers,2 the EU has not taken concrete steps to free itself from energy dependence on Russia, such as developing pipelines to neighboring energy-supplying countries. The Caspian region, for example, presented the perfect setting and prime opportunity for European energy investments to deliver Azerbaijani gas3 to the EU through the Nabucco West pipeline without any Russian involvement. However, the dismal fate of the project4 demonstrates the lack of European resolve to diversify its energy sources and reduce reliance on Russian gas.5

But recent production of natural gas from shale formations in the United States may change the picture.6 Seen as an attractive alternative to Russian supplies and more promising that Caspian gas, US shale gas can be not only the mistress of the EU-Russia energy marriage but also a radical and disruptive game-changer in the geopolitics of energy.

Strangely enough, although transatlantic cooperation on energy policies has been on the common agenda since the first oil crisis in 1973,7 Europe and the United States—longtime allies and faithful partners—barely implemented any significant joint energy security policies during the 1980s and 1990s.8 Both have pursued markedly different energy trajectories. While the United States has always regarded energy security as a strategic asset, the EU has primarily considered it a mere, basic economic need.

The Russia-Ukraine gas pricing disputes that occurred from 2005 to 2006 and again in 2009, led to Russia’s cutting off supplies to Ukraine, which indirectly caused gas shortages throughout Europe.9 These interruptions represented a watershed event for the EU public’s perception of energy, and Russia’s reputation as a reliable supplier was severely tarnished. Shocked by the abrupt volatility of Russian gas supplies, many European countries realized the consequences of relying so heavily on a partner located on the other side of Ukraine, the main transit country.

It comes as no surprise, therefore, that strengthening the EU’s external dimension of energy policies is considered one of the main priorities of Europe 2020, the EU’s 10-year economic growth strategy.10 In light of frustrating past experiences, the European Commission asserts the importance for EU member states to extend energy cooperation beyond current import partners. Collaborating politically and economically with regions in the Caspian and the Middle East, progressing the accession of Turkey into the Energy Community Treaty, and increasing gas supplies by building new liquefied natural gas (LNG)11 terminals are some of the approaches being promoted to improve EU energy security and efficiency.12

In the last few years, Europe and the United States have engaged in fruitful energy talks, culminating in various agreements on energy efficiency.13 Most recently, the EU-US High Level Working Group on Jobs and Growth endorsed the Trans-Atlantic Trade and Investment Partnership (TTIP) negotiations.14 If the TTIP talks lead to a EU-US free trade agreement that includes provisions for lowering or eliminating tariffs on raw materials and energy imported into Europe, member states will finally have access to another source of natural gas.15

In July 2013, the EU Commissioner for Energy, Mr. Günther Oettinger, visited Washington, DC, to discuss energy matters, including shale gas. His speech at the Center for Strategic International Studies highlighted the untapped potential of solidifying transatlantic relations.16 Despite the advancing growth of emerging markets, the fact that the EU and the United States together represent the largest trade and investment zone by far gives valid reason to pursue a joint energy partnership.

Another benefit for Europe from the American shale gas bonanza is its impact on the global market. Gas that was once intended for American consumers is now available for new customers at a lower price, and this supply increase has raised European bargaining power on energy deals, leading to subsequent re-negotiations of select bilateral agreements between European energy companies17 and the Russian state-corporate giant Gazprom. The company largely operates on unfavorable, long-term contracts with inflexible price adaptation mechanisms and highly problematic third-party clauses.18

If introduced to the European market, American shale gas could become a viable alternative to gas imported from unstable or politically risky suppliers. Enhanced European energy security built on US gas would save member states from facing similar gas shortages they experienced during the disputes between Russia and Ukraine. The recent feud by Putin’s government is the “trade war” intended to hamper the free trade agreement negotiations between the EU and Ukraine.19 Constant tension and icy relations between the two nations can easily result in renewed disruptions of the flow of Russian gas to the EU.

US Natural Gas Outlook

The International Energy Agency (IEA) has predicted that by 2035 the United States will surpass Russia in gas production, becoming the world’s largest gas producer.20 Recent technological advancements in horizontal drilling and hydraulic fracturing technology have allowed US companies to exploit high volumes of once inaccessible shale gas. US natural gas reserves have grown by 72% since 2000 and 49% since 2005.21 As of 2011, total proven and unproven US natural gas resources22 were estimated at 2,327 trillion cubic feet.23 Due to these recent developments in shale gas production, domestic natural gas prices have fallen, and more countries are interested in importing US shale gas.

The 2013 US Energy Information Administration (EIA) Annual Energy Outlook 2013 reference case24 projects that the United States will become a net LNG exporter by 2016 and a net exporter of natural gas by 2020. These trends continue through 2040, and although most of the natural gas is anticipated to travel by pipeline to Mexico, the future of LNG exports is unknown due to a number of factors that are difficult to predict.25 Exporting LNG could mean substantial economic profits for the country, and if these exports are destined for the EU, then there will be additional geopolitical benefits for both parties.

The Promising Economic Implications of Exporting LNG

The Federal Energy Regulatory Commission (FERC), the US government agency responsible for permitting export terminals, has authorized LNG exports from only four US facilities to non-free-trade countries in the past two years. More than a dozen projects remain to be reviewed,26 but delay in the approval process27 continues to hamper increased US exports of LNG. This interruption threatens to mar America’s reputation as a promoter of free trade and also depress US economic activity. Moreover, the World Trade Organization could also take legal action against a US decision to not export due to the general agreement on the prohibition against quantitative restraints.28

Analysts estimate that 6.3 billion cubic feet a day could be exported from the United States by 2020 once several approved projects are operating.29 Accounting for the effects of exports, FERC has forecasted a moderate increase in domestic prices. The EIA and three consulting firms have found that under normal conditions, natural gas prices in 2035 will only be 2-11% higher in the United States than if it did not export LNG.30 However, the economic benefits should not be understated. Exports could boost domestic employment, as there will need to be investment in liquefaction plant infrastructure.31 The American management firm McKinsey Global Institute, found that by 2020, new oil and gas production could increase the country’s economic output by 2-4% beyond what it otherwise would be, add as many as 1.7 million jobs, and perhaps reduce energy imports to zero.32 Furthermore, NERA Economic Consulting’s modeling of the implications of LNG exports in 63 different scenarios found that the United States would experience macroeconomic benefits, especially a net increase in GDP.33 This could mean a contribution of US$10-47 billion to GDP by 2020.34

Geopolitical Impacts of Exporting LNG to Europe

The European Commission recently commented on the EU’s grave energy situation and outlook:

Europe’s import dependence has increased in the last two decades and is set to grow to more than 80% in the case of oil and gas by 2035. Some member states rely on one single Russian supplier and often on one single supply route for 80-100% of their gas consumption. This [practice] expose[s] them to the market power of their sole supplier whose price setting may not always follow a market rationale. In 2012, industry gas prices were more than four times lower in the US than in Europe.35

Europe has been able to cut its dependence on Russia for natural gas from 75% in 1990 to only 34% in 2013.36 The Eurasia Group, a renowned political risk consulting company, believes that the US gas boom gives Washington a critical, geostrategic opportunity to reposition itself and help key allies like the EU.37 The United States and the European Union are currently negotiating on the TTIP to remove trade barriers between the two regions, meaning potential EU access to US LNG. The high costs of transporting LNG from the United States38 could be reduced if this agreement is finalized. Moreover, EU member states have several related policy objectives, such as reducing energy costs for households and businesses and ensuring a reliable energy supply. The IEA reported that from 2005 to 2012, industry electricity prices in OECD European countries increased by 37%, while those in the US fell by 4%.39 Access to cheap natural gas would decrease the high energy prices Europeans pay and would benefit EU industries, like petrochemical companies that use expensive oil-based products as feedstock.40

Another leading issue is that the present natural gas market is not globally integrated like the oil market. Gas prices in European markets, which reflect a mix of spot contract pricing with some indexation to oil, fall between US and Asian prices.41 The European Commission estimates that about one-half of the natural gas imported into Europe is indexed to oil while the pricing of 80% of Russian-sourced gas exported to the EU is tied to oil.42 As of now, the shale gas revolution in the United States has freed up LNG supplies once destined for American ports to be rerouted elsewhere, much of it to Europe. This higher availability of gas has forced Gazprom to occasionally accept spot prices for natural gas exports to the EU, making it cheaper for consumers there. If the United States exports LNG to Europe, it will provide more liquidity to the global market and accelerate the trend of de-linking gas and oil prices.43


To summarize, shale gas has the potential to become a strategic asset in the development of a transatlantic energy alliance. Preliminary talks held in Washington this past July on the Trans-Atlantic Trade and Investment Partnership (TTIP) and the subsequent prospect of lowering or eliminating tariffs and boosting energy trade between two of the world’s largest economies has generated optimism on both sides of the Atlantic.44

Exporting US LNG to European allies can improve EU energy security, reduce Russia’s use of energy as a political weapon, and end oil-indexation of natural gas. LNG has already played an essential role in allowing Europe to find new suppliers for its energy needs and has led to a diversification of its natural gas imports. An alliance could result in substantive economic and political gains for the United States, as exports would boost domestic employment, increase net GDP, and strengthen its position as a global leader.

In conjunction with the economic and geopolitical gains for both the European Union and United States, a shale gas agreement can facilitate the exchange of best practices and knowledge and technology transfers necessary for the further exploration of European shale gas deposits.45 Furthermore, the Europe 2020 strategy has stressed the EU’s commitment in promoting sustainable practices. Domestically produced shale gas is, from an environmental standpoint, less risky than importing from long-distance pipelines or drilling in ecologically sensitive areas like the Arctic and Antarctic regions. Moreover, in the long term, an enduring EU-US energy partnership can pave the way for further collaboration on other pressing transatlantic and global issues such as economic stabilization, security and counterterrorism, and climate change mitigation.

1. European Commission, “Energy Production and Imports,” Eurostat, August 2012.
2. James Marson and Joe Parkinson, “In Reversal, Neighbors Squeeze Russia’s Gazprom Over Natural-Gas Prices,” The Wall Street Journal, May 1, 2013.
3. Frank Dohmen and Alexander Jung, “Europe’s Failed Natural Gas Strategy,” Spiegel Online International, May 18, 2012.
4. Azerbaijani President Alyev chose the Trans Adriatic Pipeline over the Nabucco West Pipeline after the EU refused to take a position o the Nagorno-Karabakh conflict. This allowed Russia’s Gazprom to continue its hold on Europe with gas as a weapon. See Nona Mikhelidze, “The Winner is TAP: The EU’s Failed Policy in the South Caucasus,” IA Working Papers, July 2013.
5. Marc Champion and Joe Parkinson, “Prospects Appear to Dim for EU-Backed Gas Pipeline,”The Wall Street Journal, November 19, 2011.
6. Shale gas refers to natural gas that is trapped within shale formations. See US Energy Information Administration, “What is Shale Gas and Why is it Important?” December 5, 2012. U.S.
7. Frank Umbach and Maximilian Kuhn, “Unconventional Gas Resources: A Transatlantic Shale Alliance,” p. 207, Transatlantic Energy Futures, 2011.
8. Bob Evans, “US and European Energy Policies: Why So Different?”New Europe, December 12, 2011.
9. Andrew E. Kramer, “Russia Cuts Off Gas Deliveries to Ukraine,” The New York Times, January 1, 2009.; See
10. See
11. To turn natural gas into LNG, it must be cooled to -256 degrees Fahrenheit, turning it into a liquid for the ease of transportation. It is then moved by ship to its destination, where it is re-gasified and distributed.
12. European Commission, “The EU Energy Policy: Engaging with Partners beyond Our Borders,” Communication from the Commission to the European Parliament, September 7, 2011.
13. An example is the 2011 Energy Star EU-US Agreement on the coordination of energy-efficient labelling programs for office equipment. See
14. See
15. European Commission, “EU-US Transatlantic Trade and Investment Partnership: Raw Materials and Energy,” July 2013.
16. Günther Oettinger, “A Transatlantic Energy Revolution: Europe’s Energy Diversification and U.S. Unconventional Oil and Gas,” Press Release, July 16, 2013.
17. For example: Italian Eni, German RWE and Lithuanian Dujos.
18. Ibid 7.
19. Andrew Rettman, “Putin Warns Ukraine Against EU Pact,”EuObserver, August 23, 2013.; Interfax-Ukraine, “Russia Sets Off Trade War to Prevent Ukraine from Signing Agreement with EU, says UDAR,” Kyiv Post, August 14, 2013.; “Trading Insults,” The Economist, August 24, 2013.
20. Jacopo Bellelli, “The Shale Gas ‘Revolution’ in the United States: Global Implications, Options for the EU,” European Parliament, 2013.
21. Michael Ratner, Paul W. Parfomak, Ian F. Fergusson, and Linda Luther, “US Natural Gas Exports: New Opportunities, Uncertain Outcomes,” Congressional Research Service, September 17, 2013.
22. Total recoverable resources
23. US Energy Information Administration. Annual Energy Outlook, 2013.
24. According to EIA, the reference case provides a basis for examination and discussion of energy production, consumption, technology, and market trends and the direction they may take in the future. This is under the assumption that current laws and regulations remain unchanged throughout the projections.
25. The EIA includes the speed and extent of price convergence in the global market and the pace of natural gas supply growth outside of the United States as some factors. See Ibid 23.
26. Under Section 3 of the Natural Gas Act (NGA) (15 U.S.C. § 717b), the Department of Energy (DOE) must evaluate applications to import and export natural gas and liquefied natural gas (LNG) to or from the United States. The NGA requires DOE to grant a permit unless it finds that such action is not consistent with the public interest. As a practical matter, the need for DOE to make a public interest judgment applies only to trade involving countries that have not entered into a free trade agreement (FTA) with the United States requiring the national treatment for trade in natural gas and LNG. The NGA provides that applications involving imports from or exports to an FTA country are deemed to be in the public interest and shall be granted without modification or delay. See Ibid 21, 28.
27. Ayesha Rascoe, “US Picks Up Steam on Natural Gas Export Projects,” Reuters, September 11, 2013.
28. Charles K. Ebinger and Govinda Avasarala, “The Case for US Liquefied Gas Exports,” Brookings, 2013.
29. Ibid 27.
30. Ibid 28.
31. Ibid 28.
32. Clifford Krauss and Nelson D. Schwartz, “Foreseeing Trouble in Exporting Natural Gas,” The New York Times, August 15, 2013.
33. Ibid 21.
34. Nick Cunningham, “The Geopolitical Implications of U.S. Natural Gas Exports,” American Security Project, March 2013.
35. European Commission, “Energy Challenges and Policy,” May 22, 2013.
36. U.S. Energy Information Administration, “Multiple Factors Push Western Europe to Use Less Natural Gas and More Coal,” September 27, 2013.
37. Benjamin Lefebvre, “Should the U.S. Export Natural Gas?” The Wall Street Journal, September 13, 2012.
38. Ibid 20.
39. Ibid 35.
40. Ibid 28.
41. U.S. Energy Information Administration, “Effect of Increased Natural Gas Exports on Domestic Energy Markets as Requested by the Office of Fossil Energy,” January 19, 2012.
42. Ibid 36.
43. Ibid 34.
44. Trevor Slack, “EU-US Free Trade Agreement Could Boost Gas Exports to Europe,” Natural Gas Europe, July 25, 2013.
45. US Energy Information Administration, “Technically Recoverable Shale Oil and Shale Gas Resources: An Assessment of 137 Shale Formations in 41 Countries Outside the United States,” June 10, 2013.

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