What's The Argument for Exporting Gas?
This is actually a fairly easy question to answer. Unlike oil, gas is not easily transported. This is why there are significant differences in the regional price of gas. The World Bank's Pink Sheet lays this out clearly.
American natural gas is available for between 20-30% of the price in Europe and Japan. Note also that the price paid in Japan is significantly higher than that paid in Europe. The takeaway is that given a choice, US gas exports will head to Asia, not Europe. Which means that any serious effort to replace Russian gas with imports from North America is going to require either a 30%+ increase in EU gas prices, or massive subsidies.
But, really, it's more than this. It's not just that "fighting" Putin with gas is economically unfeasible. Basic facts suggest that, even in the long term, it's not even technically possible to do this.
How Much Gas Does Russia Export to the EU?
We could look at aggregate statistics here, but I really want to lay out the facts on the ground. The International Energy Agency operates a great interactive site about the gas trade in Europe. There are 13 border crossing at which Russian gas enters the EU, of these 5 pass through Ukraine.
The northern, non-Ukraine, pipeline crossings into the European Union exported 71.5 Billion Cubic Meters (BCM) of gas in 2013. If we exclude the Nord Stream pipeline which runs under the Baltic directly from Russia to Germany, this falls to 48.1 BCM. No capacity data is available for Nord Stream, but the other crossings have a capacity of 69.3 BCM. Yielding a capacity factor of 69.4%. This is concentrated in the crossings into the Baltic Republics, while the capacity factor at the other crossings climbs to 83%. Again, notice that a good third of the gas entering these northern crossings comes directly to Germany via Nord Stream, which only came online in late 2011. One way to read this is that the Germans have no stomach for the games that occur when you depend upon gas transiting Ukraine. With Nord Stream, the gas factor doesn't really have the same urgency for them.
Just over half of Russian gas exports to the EU transit Ukraine. In 2013, 82.3 BCM passed through the country. Capacity to move 100 BCM more through the country existed, but was left unused such that the capacity factor on these Ukraine transiting pipelines was only 45%. A picture should be emerging here. Ukraine is vital not only because a lot of natural gas moves through the country, but also because that is where the slack capacity is at. There's only 20 BCM of slack capacity in those northern pipelines, which means that if the pipelines transiting the Ukraine shut down, the EU only has access to 60% of the gas it's been importing. Maybe more can be moved through Nord Stream, but that's no real help for the Eastern European countries.
There has been enormous growth in the use of natural gas as a fuel for electricity production in last 20 years. In 2011, about a fifth of EU electricity was generated using gas. Back in 1990, just 7% was. The proportion of EU electricity production coming from gas has tripled in the last 20 years. For much of Northwest Europe, the gas required for this expansion has come from the North Sea. Southern European countries, including Italy and Spain, have developed extensive energy link to North Africa. But in Eastern Europe, there is an overwhelming dependence upon Russia's Gazprom.
153.8 BCM annually is the magic number. If the US is going to replace gas imported to the EU from Russia, that's what has to be replaced. This brings us to another important question.
Does the EU Have the Infrastructure Place?
Europe does have a fairly highly developed system of LNG import terminals and gas storage facilities. But, as you can see from the map below, these tend to be concentrated in Western Europe.
In 2013, IEA data shows that the EU imported 80.1 BCM of gas via LNG, and had the capacity in place to import 235.9 BCM annually. This means that the EU is only using about a third of its LNG capacity annually. Monthly, there is the ability to move about 19.7 BCM of gas, of which about 6.7 BCM were actually imported. Replacing Russian gas would require that a further 12.8 BCM a month, boosting total imports to 19.5 BCM, or 99% of LNG capacity. And, again, the pipelines are all configured to run west, not east.
In the present crisis, the EU has assessed its capacity to redirect gas flows to east to the Ukraine.
Ukraine last year imported around 28 billion cubic metres (bcm) of natural gas from Russia, which wants to maintain its influence over the former Soviet republic and fend off EU efforts to limit Moscow's sway. ...
"The country (Ukraine) has sufficient gas storage to hold it through a few months, and could also turn to neighbours for additional gas supplies via reverse flows on pipelines that could bring up to 10 bcm (per year) of gas from Germany and Hungary through Poland and Slovakia," political risk consultancy Eurasia Group said in a report this week.
Many other analysts say the available capacity to pump gas from the EU to Ukraine is well below 10 bcm, and Eurasia Group also warned that Ukraine would be likely to receive less.
"If gas supplies to Europe are already compromised by an ongoing conflict, Ukraine may find its neighbours increasingly unwilling to provide this stopgap supply," it added.
Well that just blew up the magic number. If rescuing Ukraine is part of the agenda, import replacements rise to 181.8 BCM, well above the current capacity of LNG terminals. Moreover, all those terminals are located in Western Europe, and there is very little capacity move gas from these facilities to Eastern Europe. And, we haven't even talked about the American end of the deal.
Does the US Have the Infrastructure Place?
The first step to understanding whether the US has the capacity to meet EU LNG needs is to convert units. The magic numbers we have mentioned thus far have been 181.8 BCM including Ukraine, 153.8 BCM excluding it. In the US, gas is measured in billion cubic feet (BCF). 1 cubic meter equals 35.3 cubic feet. Which translates our magic numbers to 6417.5 BCF annually including Ukraine, and 5429.1 BCF without Ukraine. For import/export terminals, FERC gives daily capacity (BCF/D), so 17.6 BCF/D including Ukraine, and 14.8 BCF/D excluding it. At present, the only operational US LNG export terminal is in Alaska, however it has been shut down in recent months due to technical and legal issues.
The map above shows all currently operating LNG terminals in the US. While some are approved for re-export, they all are primarily import terminals. This is because prior to the fracking boom, the established understanding was that the US would need to import natural gas to meet needs. If you look at the map below, you can see the current proposed/potential LNG export terminals, and their capacities.
Add the capacity of all US terminals up, and you get 18.24 BCF/D from proposed terminals, and a further 12.84 BCF/D in potential LNG terminals. So theoretically, once all these are built, there would be the LNG capacity to replace Russia gas exports to the EU. However, this presumes two things. First, that this capacity is going to be available in the short term, which it will not. The only facility that currently approved facility, Sabine Pass in Louisiana, will not enter operation until 2015 and cost $10 billion. The expense in terms of construction costs alone should give us all pause, but it's more than that. Second, there's not reason to believe that exporters wouldn't seek out higher prices in East Asian markets rather than export to Europe.
How Much Gas Does the US Have to Export?
It has been a hard winter in the US. One of the consequences of this is that US natural gas in storage has fallen to levels not seen since 2003, and is well below the levels seen since the start of the fracking boom.
EIA figures show that the share of US gas from shale has increased by 432% since 2007, from 1990 BCF to 10297 BCF annually. During the same period, total US gas production grew from around 24.6 Trillion Cubic Feet annually to around 29.5 Trillion Cubic Feet a year, while production from conventional sources actually fell by 15%.
Total US gas production in 2013 was 30167.2 BCF, meaning that the amount required to supply the EU+Ukraine amount to around a fifth of total US production. Over time, this percentage should fall, as shale gas is predicted to increase total production by around 40% over the present.
This of course assumes that fracking will continue to pan out. That is far from certain, and in fact an energy expert brought to Brussels to discuss the US fracking boom had this to say:
But according to David Hughes, a geoscientist and former team leader on unconventional gas for the Canadian Potential Gas Committee, the US boom on which many base their expectations is founded on shifting sands.
The cheap price bubble [in the US] will burst within two-to-four years, Hughes said. At a high enough price, the supply bubble will burst perhaps 10-to-15 years later, when drilling locations become sparse.
Supply can be maintained for many years, he added, but only at much higher prices with ever-escalating environmental impacts due to the accelerating number of wells that must be drilled.
In short, it's a fracking bubble. The irrational exuberance is such that something like 36% of the fracked gas produced in North Dakota is flared. The view from space is telling, with the Bakken field putting out about the same amount of light as metro Atlanta.
Nationally, something under 1% of gas is flared. Why is so much gas flared in the Bakken?
The majority of North Dakota gas (roughly 70 percent) is ultimately marketed; however, a significant percentage of the state's natural gas production is burned off in flares due to a lack of pipelines, processing and compression infrastructure.
According to the North Dakota Pipeline Authority flaring occurs when natural gas is burned on location due to a lack of gathering pipeline infrastructure or economic alternatives. In addition, although 55 percent of flaring occurs at wells that are unconnected to the gas gathering system where production has outpaced infrastructure investment, 45 percent occurs at wells that are already connected due to pipeline capacity and compression challenges.
Again, it's the infrastructure that's the problem. This may appear to lend credence to the exporters argument, however there's another problem. Building out the infrastructure required to bring shale gas to market (any market) efficiently will require a least several years. By the time that the infrastructure is ready, the fields themselves may well be dry. Drilling reports from the EIA show that it is only constant investment in new wells that is sustaining current production. Fracked wells tend to have a shorter lifespan, with most of the gas coming out early as compared to traditional drilling methods.
This is all fascinating, you might say, but why should I care?
First of all, rising gas prices will mean rising heating costs throughout much of the country. But it's more than that. Natural gas is a key feedstock for the production nitrogen based fertilizers. Modern American agriculture depends upon massive nitrogen inputs in order to sustain production. This is particularly true of corn, for which usage statistics are plotted below.
The Green Revolution of the 1960s saw massive increases in agricultural production, however this required massive increases in the amount of fertilizer applied per acre. Not incidentally, this all occurred in the context of increasing US fertilizer production, which leveled off at the same time as increases in fertilizer inputs.
As us natural gas production stagnated, the production of fertilizers began to shift overseas. USGS statistics show how ammonia imports began to climb, as did domestic natural gas prices, during the start of the 21st century.
Not only were fertilizer imports increasing, new suppliers began to emerge with the end of the Cold War, as USDA statistics show.
At the moment, Trinidad is our largest supplier of ammonia, however this is likely to change. Starting in the 1990s, Trinidad discovered that it could operate a profitable fertilizer industry capitalizing on its plentiful, and cheap, natural gas. This is set to change, as gas production is predicted to peak in 2021. Meaning that fertilizer production is likely to shift to where natural gas is cheapest and most plentiful: Russia/Ukraine.
In short, in seeking to cut European dependence on Russian gas, we may end up increasing out own dependence on Russian fertilizer imports. I've tried to lay out here why this whole idea that the US will become a major gas exporter is implausible. What I hope that this final section on fertilizer imports does is establish that even if possible, exporting fracked American gas is unwise, because it will help fuel other sorts of dependence. In the long term, we need to invest in efforts to economically produce hydrogen from water, not natural gas. But in the short term, this is what we've got. And efforts to ramp up natural gas exports to Europe are going to fuel increases in US fertilizer imports from the very country that we are trying to isolate economically. All so that a few companies which have been imprudent in their development of new fracked gas wells can be rescued from the bubble they've blown by raising US gas prices. Ultimately, this is the scam that's being played out here, and it's one that even a basic glance at the facts of the matter reveals.