Energy, Petrochemical & Natural Resources March 2014 (No. 4)

U.S. LNG Exports Can Alleviate Geopolitical Concerns BY: MICHAEL L. KRANCER, MARGARET ANNE HILL, AND FRANK L. TAMULONIS III

Vladimir Putin is up to his old tricks. Prompted by in- In addition to dominating upstream development, stability in neighboring , pro-Russian forces have Gazprom also controls the midstream by owning Russia’s mobilized and occupied the Crimean Peninsula since late natural gas pipeline system. There are currently 10 major February. Putin, for his part, continues to deny Russian in- pipelines in Russia, eight of which are export pipelines. Of volvement. Regardless, Russia’s current conflict with Ukraine the westbound pipelines leaving Russia, nearly half transect and Russia’s longstanding tensions with Europe and the West Ukraine. No wonder Russia is parading its military along are due, in no small part, to energy-related issues. This fact Ukraine’s borders and using as leverage to rebuild becomes readily apparent by observing recent relations be- its old empire. Putin’s hubris in Crimea has now extended to tween Moscow, Kiev and their European counterparts. the seizure of the gas terminal in Strilkove, which is located Europe lives in the shadow of a Russia that has un- in Ukraine and outside Crimea. As of Tuesday, Putin has ap- dergone an energy revolution. Gazprom, Russia’s state-run proved a draft bill for the annexation of Crimea, making natural gas monopoly, is the largest producer of natural gas its absorption into Russia all but inevitable, notwithstanding in the world, and will, if current production continues, ac- defiance from Ukraine, and sanctions from the United States count for approximately 17 percent of global gas production and European Union. in 2017. To say that Europe is reliant on Russian oil and gas Russia’s energy dominance translates into political le- is not an overstatement. Presently, Russia satisfies between verage, and Russia is not afraid to use it. Russia has used 50 and 75 percent of Ukraine’s natural gas needs, and natural gas as a political weapon against Ukraine three times Europe, as a whole, imports approximately 30 percent of its in recent history. In 2006, Russia reduced, and ultimately cut natural gas from Russia. Seventy-six percent of Russia’s natu- off, supplies to Ukraine as a result of a disagreement over ral gas exports are sent to customers in Western Europe, with gas prices. In 2008, Russia reduced its shipments to Ukraine the bulk of these volumes going to Great Britain, France, by as much as 50 percent for several days as a result of Germany, Italy and Turkey. unpaid Ukrainian debt. In 2009, exports to Ukraine were

© 2014, Blank Rome LLP. Notice: The purpose of this newsletter is to review the latest developments which are of interest to clients of Blank Rome LLP. The information contained herein is abridged from legislation, court decisions, and administrative rulings and should not be construed as legal advice or opinion, and is not a substitute for the advice of counsel. One Logan Square • 130 North 18th Street • Philadelphia, PA 19103-6998 • 215.569.5500. Energy, Petrochemical & Natural Resources again halted completely as a result of unpaid debt. Although the world’s largest producer of natural gas. Moreover, by Russia only cut off supplies to Ukraine, the domino effect was actively entering into the LNG export market (as well as sup- felt across Europe, with decreased pipeline pressures report- porting Ukraine in its efforts to remain a sovereign state), the ed in Hungary, Romania and Poland, which in turn affected United States signals the willingness to avoid isolationism shipments to Turkey, Greece and Macedonia. At the time, and to use its economic power to deter Russian aggressions. Great Britain announced plans to tap into its gas reserves It seems clear that the United States is well-positioned to as a result of the supply shortage. Last year, in an attempt alleviate trans-European tensions without firing a shot, all to avert another crisis, Ukraine and Russia signed an agree- the while strengthening our global bargaining position and ment whereby Russia agreed to a 33 percent discount for the simultaneously weakening Russia’s positioning in light of the price of natural gas. That deal has now been canceled amid Russian economy’s heavy dependence on energy exports in- the recent military and economic tensions between those cluding oil and gas. two nations, with Russia demanding immediate payment of Unfortunately, it’s not that simple. In order to transport $1.55 billion, a debt the nearly bankrupt interim Ukrainian natural gas that cannot be transported via pipeline, the gas government will be hard-pressed to satisfy. must be liquefied. To export LNG, an LNG export terminal Ukraine is not alone. Other nations are also held hos- must be built. This is expensive. Existing terminals can be ret- tage to Russia’s demands, and any attempts to break free rofitted to export LNG at a cost of about $4 billion, and new from the Russian sphere of influence are met with threats terminals can take 10 years to build and cost as much as of cutoffs. The Lithuanian ambassador to the United States $10 billion. Further complicating matters is the slow, bureau- has noted that overdependence leads to less competition cratic process by which such facilities obtain the required and higher prices, observing that his country pays the highest approvals. The U.S. Department of Energy has jurisdiction price for gas in the world. He further stated that Lithuania’s over LNG export applications, whereas the Federal Energy attempts to align itself more closely with the European Union Regulatory Commission has jurisdiction over the actual LNG and the United States have been met with Russian threats to facility, including the environmental review process, which cut off Lithuania’s supply of natural gas. can be drawn out as a result of challenges by NGOs. In in- The point is that energy issues, and natural gas is- stances where the United States has a free-trade agreement sues in particular, are dominating European politics, and its (FTA) with the receiving country, such applications are sum- derivative effects can be felt around the world. Russia’s ace- marily granted. However, where the application involves a up-the-sleeve natural gas bargaining chip has emboldened non-FTA country, the process becomes lengthy and cumber- its foreign policies, as evidenced by recent Russian military some, resulting in a logjam. As of March 10, 31 applications excursions into Georgia and Ukraine, with little fear of seri- were pending, while only six had been approved. ous repercussions from the West. This has caused the West Although proponents of LNG exports have been call- to reevaluate its options, few of which are attractive. It is ing for an expedited approval process for some time, the clear that no one wants a military engagement with Russia, crisis in Ukraine has reinvigorated this issue in recent weeks. and economic sanctions will only have a limited effect on The Expedited LNG for American Allies Act of 2013 (S 192) Russia, and could result in counter-sanctions (i.e., cutting allows for the exportation of LNG not only to nations with off gas). which there is an FTA, but also with any other foreign country A far simpler and much more productive solution is to where the secretary of state determines that the exportation increase U.S. exports of liquefied natural gas (LNG) to pro- promotes U.S. national security interests. This legislation, vide an alternative to Russian natural gas. The timing could as well as an identical bill in the House (HR 580), was re- not be better. The United States is in the midst of a natural ferred to committee more than a year ago, and no action gas boom, spear-headed by dramatically increased produc- has yet been taken. Recent calls for expedited LNG appli- tion in recent years as a result of improved (and improving) cation approvals from Sens. John Barrasso, R-Wyo., and hydraulic fracturing methodology. In fact, in 2013, the James Inhofe, R-Okla., have not been answered. Efforts United States surpassed Russia and Saudi Arabia to become to attach LNG exports to a Ukrainian aid package have

Blank Rome • 2 Energy, Petrochemical & Natural Resources also been unsuccessful. Despite one of the conclusions of greenhouse gas emissions. This is especially important to the a February report issued by the House of Representatives’ growing economies of Asia, where coal is in abundance. Committee on Energy and Commerce (“Prosperity at Home More locally, Pennsylvania and other natural-gas-producing and Strengthened Allies Abroad—A Global Perspective on states would benefit greatly from LNG exports. The American Natural Gas Exports”), which states that “although the eco- Petroleum Institute estimates that between 38,000 and nomic benefits of LNG exports are significant, they may well 60,000 additional jobs would be added if LNG exports are be exceeded by the geopolitical benefits,” the likelihood of approved. any relief from U.S. LNG exports does not appear imminent. In short, the United States is uniquely positioned to And yet, the United States would stand to benefit great- address many geopolitical, energy and environmental con- ly from LNG exportation. More and more, natural gas is cerns by advancing LNG exports. Although the United States becoming a global commodity. Worldwide gas markets are will likely not be in the position to take action before the growing by 3 percent a year. If current production levels are is diffused, it would be a grave miscalcula- maintained, the United States is forecasted to become a tion to adopt a disinterested and disengaged position on net exporter of natural gas by 2018. It is estimated that the global energy issues, because history, as we know, often re- United States’ energy revolution supports 1.7 million jobs, a peats itself. By exporting LNG, the United States can provide number that may double by 2020. Not only will increased our friends and allies abroad with a reliable and affordable oil and natural gas production break the United States’ de- supply of natural gas, while simultaneously decreasing glob- pendence on foreign oil, but increased LNG exports will al reliance on coal and oil, increasing domestic job creation, break European dependence on Russia’s energy exports. and strengthening our geopolitical standing in the world by Importantly, the increased availability of natural gas will taking a little iron out of Russia’s ever-growing iron fist.● also decrease global dependency on coal, which has higher

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For more information please contact:

Michael L. Krancer Partner, and Chair, Energy Industry Team 215.569.5535 • [email protected] Twitter: @MikeKrancer • Forbes.com: www.forbes.com/sites/michaelkrancer

Margaret Anne Hill Partner, and Chair, Environmental, Energy and Natural Resources Practice Group 215.569.5331 • 202.772.5811 • [email protected]

Frank L. Tamulonis III Associate • 215.569.5725 • [email protected]

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