White House Chronicle

News Analysis With a Sense of Humor

Step on the Gas, Europeans Plead

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To hear Brenda Shaffer, a peripatetic academic specializing in European and Eurasian energy issues, currently on a research fellowship at Georgetown University, natural gas is the predominant fuel of the 21st century, and it will be used copiously as time goes on. It will become the fuel of transportation as well as heating, manufacturing and electric generation.

But, at this point in time, moving natural gas from supplier to user presents special problems. It is not as easily transported as oil, and it is not as fungible.

Ideally, natural gas is transported by pipeline. Less desirably, it is converted into a liquid at -260 F and shipped around the world, where it has to be regassified. The freezing and the regassification processes for liquefied natural gas (LNG) require hugely expensive plants: over $5 billion at the originating end, and half that at the receiving end. This makes the gas expensive and its shipment inflexible.

Oil is put on tankers and unloaded wherever it is needed. LNG is shipped in special cryogenic tankers to dedicated terminals on long-term, take-or-pay contracts.

The United States is in the middle of a natural gas boom of unprecedented proportions; the result of extraordinary reserves in shale and the development of sophisticated hydraulic fracturing (fracking) technology linked to horizontal drilling. The pressure to export is on, balanced by environmental concerns and the fear of manufacturers tat the price will rise.

In the current crisis over Ukraine, a question has arisen as to whether we can help our European allies by shipping them LNG. The answer is “yes and no.”

We do not have any terminals ready to begin exports; the first LNG exports will be loaded from the Sabine Pass terminal in Louisiana late next year and will be shipped to Asia. Nor does Europe have enough receiving terminals.

But the Europeans argue strongly that the mere presence of the United States as a player in the natural gas export business will have a huge impact on the world market, signaling that we are on the way and, hopefully, warning Russia that its captive gas customers in eastern and central Europe are looking at alternatives, and want to lift the yoke of dependence on Russia.

With the invasion of parts of Ukraine by Russian troops or their surrogates, gas has become a weapon of war. Russia's giant, state-owned gas monopoly, Gazprom, has been an arbitrary supplier to Europe for years. Most troublesome is that the bulk of Europe's gas supplies transit Ukraine, and that Gazprom has never behaved like anything but an arm of the Kremlin, dangerous and capricious.

In 2009, Gazprom cut off supplies over alleged contract and payment issues; in the cold of winter, the Russian bear was merciless. Also, it posts a different gas price for each customer, regardless the distance from Russia's border or cost of delivery.

Desperately, Europe is looking for a defense against Russia freezing supply to Ukraine this winter and cutting off some countries, particularly those wholly dependent on Russian gas, like the Baltic states and Slovakia.

That is why the Visegrad Group, consisting of Poland, the Czech Republic and Slovakia, under the chairmanship of Hungary, has been intensively lobbying Congress to pass a bill that would simplify and speed up the licensing of export terminals in the United States. At present, seven terminals have provisional licenses from the Department of Energy, and Sabine Pass is fully licensed.

Visegrad members swarmed Capitol Hill this week, lobbying for the legislation. They were accompanied by officials from Bulgaria, Croatia, Latvia, Romania and Ukraine.

Their message was simple: the legislation would convince the Russians that they had to play by market rules because the entry of the United States as a player in the world of LNG — even if the gas cannot be offloaded in Europe in the near future — will send a strong market-stabilizing message.

Where possible, eastern and central European countries are improving their interconnections and adjusting their systems so they can reverse the flow of gas to help Ukraine in a dire emergency. But no one believes that it will make enough of a difference; besides, as most of that gas will have originated in Russia, some Russian contracts specify the use of the gas.

Almost all of the gas in the region is used for heating rather than electric generation or manufacturing. Central and eastern Europe is dreading winter and imploring the United States to send strong signals, even if it will be a long time before Pennsylvania or Ohio gas warms the people of Ukraine and its neighbors. — For the Hearst-New York Times Syndicate

 

Europe and Its Slippery Energy Slope

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BRATISLAVA, Slovakia — Europe, at present the world's largest market and largest economic bloc, is decline and living standards are in danger. That was the sober message at an energy conference here, delivered by a battery of speakers from across eastern Europe.
 
The narrative is that energy is what is dragging Europe down – not low birthrates and pervasive social-safety networks, but increasing dependence on expensive energy imports and hopelessly tangled markets.
 
Although delegates gathered to discuss the particular problems of eastern Europe, many had comments about the energy dependence across Europe; its labyrinthine regulations in nearly all 28 countries, its inability to form capital for large projects like nuclear, and governments intruding into the market.
 
The result is a patchwork of contradictions, counterproductive regulations, political fiats and multiple objectives that leave Europeans paying more for energy than they need to and failing to develop indigenous sources, such as their own shale gas deposits in Ukraine and Poland. It also leaves countries dependent on capricious and expensive gas from Russia, unsure of whether they can build needed electric generating plant in the future and poorly interconnected, sometimes by both gas pipelines and electric lines.
 
Good intentions have also had their impact. The European Commission has pushed renewable energy and subsidized these at the cost of others. The result is imperfect markets and, more important, imperfectly engineered systems.
 
Germany and other countries are dealing with what is called “loop flow” – when the renewables aren't performing, either because the wind has dropped or the sun has set, fossil fuels plant has to be activated. This means that renewable systems are often shadowed by old-fashioned gas and coal generation that has to be built, but which isn't counted toward the cost of the renewable generation.
 
With increasing use of wind, which is the most advanced renewable, the problem of loop flow is increased, pushing up the price of electricity. Germany is badly affected and the problem is getting worse because it heavily committed to wind after abandoning nuclear, following the Fukusima-Daiichi accident in Japan.
 
Frank Umbach, associate director of the European Center for Energy and Resource Security at King's College, London, said energy costs in Germany are now driving manufacturing out of the country and to the United States.
 
Umbach said that as Britain de-industrialized 15 years ago, Germany was beginning to go the same way. He said Britain had been able to sustain itself through financial services and other service sector jobs, but that was not a prospect for Germany, the industrial mainstay of the European Union. Now Britain, with its new nuclear policy, is trying to re-industrialize, he said.
 
Umbach urged that Europe get serious about shale gas and even burning coal. His argument was that there are environment safeguards available and that more are being developed, such as the new less environmentally assaulting techniques in hydraulic fracturing (fracking) used to extract tightly bound natural gas from shale formations.
 
Several speakers said the region has to face the reality that it is no longer able to generate the capital it needs for liquefied natural gas terminals, nuclear power plants and unconventional gas recovery in Ukraine, Poland and in the Black Sea offshore Romania and Bulgaria.
 
Many countries, particularly in eastern Europe, still balk at foreign ownership of their energy infrastructure and have actively driven away investment. Poland, for example, has frightened off shale gas developers from the United States by insisting that as the resource is developed, 50 percent of the developing company must be ceded to the state. The companies left.
 
In other places, the Czech Republic, for example, landowners have no claim to the resource under their land; that remains the property of the government and, therefore, they are hostile to any development on their property, whether it is for oil, gas or minerals.
The United Kingdom, by contrast, declared a spokesman for its energy ministry, Hergen Haye, is open for business. That means if the Americans, the Chinese of the Middle Easterners want to “buy into” Britain's new nuclear undertaking, “they are welcome.”
 
Europe's sad energy situation was summed up by Iana Dreyer of the EU Institute for Security Studies. She said Europe is still the largest trading bloc in the world, the largest economic machine and the largest market, but that it is slipping. By 2030, she calculated, Europe will have slipped to No. 3, behind the China and the United States, unless it can untangle its energy Gordian knot.
 
Europeans here cite the United States as the way to go in energy. It makes a body feel good. — For the Hearst-New York Times Syndicate

Euro Shows One Size Doesn’t Fit All

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When do two diametrically opposed economists, one from the left and one from the right, agree?

Answer: When the subject of the euro comes up.

So it is that Paul Krugman of Princeton and The New York Times and Irwin Stelzer of the Hudson Institute and News Corp. both attacked the euro in the past week. They blamed the euro for the difficulty in bringing meaningful help to the troubled euro zone economies of Europe. And they were right.

Stelzer and other conservative economists had warned of the weakness of the one-size-fits-all nature of the common European currency at the time of its launch in 1999. Liberal economists, more sympathetic to the political dimension of the euro, were prepared to be satisfied with the assurances of fiscal probity from the aspirants to the new currency and endorsed it.

If everyone played by the rules and kept an orderly financial house, the euro would survive its structural weakness, reasoned the fathers of European monetary union. And for 11 years, it appeared that they were right.

The new currency found a lot of favor and hardened against the dollar early on. In some ways the euro was thought to be on its way to being a new reserve currency, supplanting the dollar. Iran and other oil producers with no love for the United States talked about designating the world oil trade in the euro rather than the dollar.

Now disaster, or near disaster. The weakness of a multi-country currency is revealed for all to see.

If Greece, Ireland, Spain, etc. still had their own currencies—the drachma, the punt and the peso—they would be able to deal with their financial crisis by devaluing their currencies, or by letting the markets do it for them. That would make their exports cheaper and their imports more expensive and leave the holders of their bonds intact, if a little poorer.

Likewise when the Irish currency was overheating during the property boom, interest rates could have been raised to cool things off. With a single currency there is no such flexibility, and each country must struggle with draconian internal economic measures that may take years to have an effect.

Why then did most countries of Europe, including this one, jump into a single currency when the potential for problems was known? Call it “The European Dream.”

I am writing this from Bratislava, capital of Slovakia. Here on the Great Hungarian Plain, where armies have crossed and recrossed for thousands of years, from the Romans to Napoleon, to Hitler to Russians, who put down the Hungarian uprising of 1956 and the Prague Spring of 1968, it is easy to understand the evocation, “Never again.”

The first and definitive purpose of integration was to end internecine war in Europe, its curse for more than 2,000 years.

Yet from its inception as a customs union in the 1950s to the 27-nation behemoth it is today, integration has come slowly. People have different cultures, speak different languages and still have not found a common European persona.

Aspiring young politicians still head to their national assemblies rather than the European Parliament, and most people still have difficulty in accepting the dictates of the bureaucrats in Brussels.

So, to the European idealists, a common currency seemed something that would further bind Europe together. Now it appears to be something to be hated rather than embraced.

Yet no country in the common currency can afford to pull out in the current crisis. Krugman rightly points out that this would lead to a run on the banks, ahead of the devaluation that would certainly occur if any troubled country sought to revert to its old currency.

What is missing in the halls of economic philosophy is a way to make a single currency work equally for the weak and the strong. In the present crisis—and it is a severe one—that would be for strong Germany, France and Italy and for weak Greece, Ireland, Spain and Portugal to weather the current storm.

One size has yet to fit all. But one size is what the euro zone has to work with.