In the past five years, new techniques of oil and natural gas extraction in the United States have untapped large volumes of oil and natural gas and transformed the U.S. from an energy importer to a self-sufficient economy with an oil and gas surplus.
Some of this gas will be consumed domestically, some will be exported to Mexico by pipeline and some will be exported to other countries by sea.
This year, exceptionally low gas prices have forced energy companies to reduce their profit expectations and scale down their projects. Only a small number of planned liquefaction plants are expected to be completed.
Project completion will depend on a variety of commercial and political factors:
LNG producers will need considerable financial strength to pay for the regulatory process required to obtain the licenses to export LNG.
The Natural Gas Act of 1938 requires federal authorization for gas exports, which is granted by the Federal Energy Regulatory Commission (FERC) and the Department of Energy (DOE).
While approvals for gas exports to countries with which the U.S. has a free trade agreement are easy to obtain, licenses for exports to countries that do not have a free-trade agreement with the U.S. (non-FTA) require a public interest determination, which has been a prolonged approval process with high legal costs (up to $200 million per project).
However, if the new free trade agreement with the European Union (the Transatlantic Trade and Investment Partnership) is ratified, most U.S. LNG producers will be able to export to Europe without going through the complex process to obtain licenses required for non-FTA countries. TTIP has so far received bipartisan support.
Most LNG producers that have already received export approval have pre-sold their future production to Asian buyers. Japan was the principal buyer after the Fukushima nuclear power plant disaster halted nuclear energy production. Demand was so high that spot LNG prices to Japan reached $18/MMBTU (Million Metric British Thermal Units). However, recently Japan restarted nuclear energy generation, reducing its natural gas demand. Today, Japan's LNG market is saturated and China's economy is slowing.
Like East Asia, Europe is a major gas importer. One-third of European gas is supplied by Russia through 12 pipelines, five of which pass through Ukraine. The crisis in Russia-Ukraine relations has caused disruptions in the supply of gas to European countries, inducing them to look elsewhere to find reliable gas suppliers.
The European Union enacted rules to reduce carbon emissions, inducing the economies of its member nations to shift from coal to renewable energy and natural gas. Member countries that do not implement the carbon emission scheme face fines. Therefore, natural gas consumption is destined to increase in Europe.
Many European countries are building new regasification terminals to import LNG. European gas imports from the United States will increase, both for political and commercial reasons.
Eastern European countries such as Poland, Estonia, Lithuania and Latvia are seeking to diversify their gas supply and will likely import LNG from the United States for political reasons to safeguard their energy security.
Western European countries such as France, Italy, Spain and the United Kingdom, which do not have direct pipeline access to Russian gas, will find American LNG their least expensive choice. American gas producers offer highly competitive prices because they use the most advanced unconventional gas extraction techniques. Currently, the cost of gas extraction in America is as low as $0.5/MMBTU. In comparison, Yamal LNG, a new liquefaction plant under construction in Siberia, Russia, is expected to break even at $8/MMBTU.
Furthermore, there is significant pressure in Congress to lift the oil export ban that was introduced in 1975 after OPEC imposed an embargo on U.S. oil. The export ban was justified in the '70s by the reduction of reserves and the excessive price of oil, but today, such factors no longer exist. This month, the West Texas Intermediate (WTI) benchmark plunged to $40 per barrel and reserves reached a record high. If the oil export ban is lifted, Europe will likely become a major importer of American oil. New oil and gas projects will look at Europe as the new frontier for U.S. energy exports.
Stipo is an American author and expert in international affairs. He is a member of the Bretton Woods Committee and was formerly the president of the U.S. Association of the Club of Rome, a global think tank.