LNG Is The American Aid Ukraine Really Needs

The delay of U.S. military aid to Ukraine is a central pillar of the impeachment inquiry underway against President Donald Trump. The president is being investigated for the alleged withholding of nearly $400 million in Congressionally approved support to Ukraine in an implied quid pro quo for investigating political rival Joe Biden. The $250 million in Pentagon funds and $141.5 million in State Department security assistance include Javelin anti-tank missiles, sniper rifles, Humvees, and other equipment earmarked for Ukraine’s defense against Russian-backed separatists occupying Donbas, the eastern-most portion of the country.

But there is another, often overlooked form of U.S. assistance just as important to Ukraine’s fight against Russian irredentism: liquified natural gas (LNG).

Trump is aggressively pushing LNG exports around the world — and to Europe in particular — as part of his American Energy Dominance policy. As I’ve written before Ukraine finds itself in a precarious energy position vis-à-vis its bellicose neighbor. While millions of Europe’s homes, factories, and businesses run on Russian gas – Gazprom controls 37% of the continent’s market share – few countries are more reliant on Russian energy exports than Ukraine.

Despite not directly importing any Russian gas since November 2015, Ukraine depends on Gazprom for nearly 3% of its GDP. This is because much of Europe’s gas from Russia must transit Ukraine, earning the country some $2.8 billion in annual transit revenues. What’s more, Ukraine only produces 20 bcm of the 32 bcm it consumes, meaning that it must rely on imports to meet the final third of domestic gas demand. Most of it comes from its Central European neighbors via reverse flow pipeline, who ironically send back imported Russian gas molecules.

Russia is threatening this critical financial lifeline for Ukraine through its Nord Stream 2 and Turkstream projects, which allows Gazprom to circumvent Ukraine and enter Europe directly.  Nordstream 2 – due to be completed by early 2020 – will pump 55 bcm of gas directly to Germany via pipelines at the bottom of the Baltic Sea, while the latter – due to finish in 2021 – will send a net 15.75 bcm to Southern Europe and the Mediterranean via Turkey and the Black Sea.

Once fully operational, these two Gazprom projects will nearly replace the 87 bcm of gas that flows from Russia through Ukraine, thereby drastically reducing the need for Ukrainian gas transit and crippling the country’s economy.

This is where the United States comes in.

Thanks to the Shale Revolution, the U.S. is now the world’s most prolific gas producer. The country’s major gas companies including Cheniere, Tellurian, BP, and are quickly developing the infrastructure to liquefy and transport the commodity overseas to customers in the form of liquified natural gas. This year, the United States became the world’s third-largest LNG exporter, averaging 4.2 billion cubic feet per day (42.9 bcm/yr) in the first five months of the year, and is expected to remain the third-largest LNG exporter in the world behind Australia and Qatar through 2020. Some 40% of these exports are destined for Europe – surpassing volumes to Asia in January 2019.

It’s true that cooling, transporting, and regassifying liquid natural gas is a costly endeavor, which means that the United States would be hard-pressed to undercut Gazprom in European markets. But U.S. LNG is still valuable to gas-importers like Ukraine for three reasons.

First is basic economics. Increased supplies from the United States add to global volumes of traded LNG, putting downward pressure on prices.

Second, U.S. LNG offers Ukraine and other European nations ‘supply diversity’ and thus improved energy security. Countries that were once solely reliant on Russian gas now have increased leverage in future contract negotiations with Gazprom and other providers. Lithuania is a good example – it received a discount from Gazprom when it contracted a floating storage and regasification unit (FSRU) to supply LNG in 2014. It has been importing American gas since 2017.

Lastly, American LNG may command a premium price, but its presence alone has the power to break Russia’s monopoly on (Eastern) European Markets. U.S. LNG contracts are more flexible than their Russian counterparts, favoring more buyer-friendly, short-term spot-market contracts over Gazprom’s preferred longer-term agreements.

But for Ukraine to truly benefit from increasing volumes of U.S. LNG, Eastern and Central Europe need more LNG import terminals closer in. There are currently 28 large scale LNG import facilities which altogether have the capacity to meet 40% of Europe’s needs – 227bcm. However, the ones in the west of the continent suffer from overcapacity, whereas the east and southeast still lack infrastructure.

Increased investments in pipeline interconnectors and reverse flow pipeline technology will create a more integrated European gas grid that can maximize the utility of operational LNG facilities to benefit countries overdependent on Russia.

With Assistance From James Grant