SIEW 2014: The Prospects for U.S. Natural Gas Exports are Exaggerated

An exclusive interview in China Energy News with Dr. Gal Luft, Director of the American Institute for the Analysis of Global Security and Senior Advisor to the U.S. Energy Security Council

■ Reported by Tong Xiaobo and Yu Huan

China Energy News: Global warming is accelerating the melting of Arctic ice cap, and the Northern Sea Route has appeared now. Do you think the waterway will become a new “Strait of Malacca”? What impact will it have on the selection of Asia's future energy sea trade routes?

Gal Luft: First, the Northern Sea Route will not be ready for use overnight - it will only occur many years from now. Even when it is open, it will not be open throughout the year. This may be an issue for the next generation to consider, as it will not have an impact on the energy industry in the short term. In addition, the melting of the Arctic ice cap is not taking place at a linear rate, so it is difficult to predict how it will develop. So, in my opinion, it will have little impact on current energy policy planning.

In fact, most nations cannot work in the Arctic now, because they have no icebreakers. According to a report we released in the previous week, while Russian currently has 32 icebreakers in the Arctic, the entire G7 only has 13 in total; six of Russia’s icebreakers are nuclear-powered, but none of the G7’s; in addition, there are nine icebreakers under construction in Russia, but only three for the G7. Therefore, except Russia, no country in the world has the icebreaking capability necessary for work in the Arctic.

THE U.S. WILL NOT SEE MILITARY INVOLVEMENT IN THE IRAQI TURMOIL

China Energy News: The military action of the "Islamic State of Iraq and the Levant" (ISIL) is confusing the political situation there again. What impact do you see on the international crude oil market and even the regional energy supply? Will the U.S. military intervene?

Gal Luft: The Iraqi turmoil mainly impacts the market in two aspects. Firstly, the turmoil will reduce crude oil supply by 3 million barrels/day. Secondly, if the situation deteriorates further, it may affect the future Iraqi crude oil production and impact investor sentiment. Iraq ranks first in terms of untapped oil potentials amongst the world’s oil-producing countries; so a number of multinational oil companies, Chinese ones included, persist in staying despite the turbulence. If Iraq’s oil capacity is destroyed, we will probably face very severe energy shortages in the future.

The situation has not caused an oil crisis yet, mainly because of the shale gas boom in the U.S., but it is far from enough to reduce international crude oil prices. In my opinion, the situation in Iraq is a disaster now, which will probably cause energy shortages in the next two or three years.

Except for providing certain special aid, I think the U.S. military will not intervene in Iraq. The people of the United States are tired of intervening in the affairs of other countries, because the many foreign citizens do not appreciate the aid. After Iraq and Afghanistan, the American public is reluctant to see similar experiences. Unless a direct threat against U.S. interests appears, it will be difficult for any U.S. government to justify taking military action in Iraq.

OIL PRICES DETERMINES U.S. ENERGY SECURITY

China Energy News: As an energy security expert, what are your views on U.S. energy security?

Gal Luft: The U.S. is concerned with two major issues regarding energy security. The first lies with fuels for power supply, including coal, natural gas, nuclear energy, renewable energy, etc.; and the second issues lies with fuels for transportation, which mainly rely on oil.

In terms of electricity, the U.S. has always been self-sufficient – unlike many European or Asian countries that need to import large quantities of fuel for power generation, we have many nuclear power plants, as well as large coal and natural gas supplies.

But with regards to fuels for transportation, the U.S. relies on foreign countries to a large extent. What it relies on is not the oil itself, but rather the oil prices. Even if it achieves 100% energy self-sufficiency, the U.S. will still be affected by the situation in the Middle East because of oil prices. If oil prices rise, the U.S. economy will fall into recession, and thus the economies of China and Asia will also be affected. So it is worth noting that U.S. energy security is closely related to oil prices.

Now many U.S. media believe that the U.S. energy problem has been solved and there is no need to continue to invest in energy in the Middle East, because U.S. energy will flood the market. But if the U.S. shale revolution cannot be sustained, while the U.S. fails to invest in other forms of energy production, then U.S. will face a "perfect storm" – the combination of many adverse factors is likely to cause an energy crisis. This is the issue I am worried about most now. If the U.S. fails to invest in energy production as the global economy recovers, we will be unable to obtain energy we need.

China Energy News: So are you also worried about the turning point occurring in the U.S. shale industry?

Gal Luft: As a new energy, shale gas is accompanied by much unpredictability. Many geological, environmental, economic and other problems need to be solved. This is especially in consideration of the drastic reduction in North American shale gas production – down 80% within 36 months, causing intense uncertainty. Currently, many shale gas producers in the U.S. are operating at a loss, which I worry about. It is impossible to expect that they will still be able to maintain their output when operating at a loss. It is certainly good to find a new energy source, but uncertain sources should not be the cornerstone of current energy policies. Our primary focus should be on conventional oil, natural gas and other reliable sources.

THE PROSPECTS FOR U.S. NATURAL GAS EXPORTS ARE EXAGGERATED

China Energy News: What do you think about the large order of natural gas signed by China and Russia? How do you see the U.S.’ prospects for natural gas exports?

Gal Luft: China is a huge economy. The natural gas imported from Russia may only meet the demands of three or four provinces in Northeast China, so China still needs more gas supplies. Russian gas cannot reach Guangdong due to logistical limitations, so China needs natural gas supplies from different geographies to meet demand in different provinces. U.S. and Russian natural gas can enter the Chinese market simultaneously – Russia providing natural gas for Northeast China, and U.S. natural gas entering Kunming from the south, such as Guangdong, or even via Myanmar. China has vast territory so there can be many natural gas access points. It is not a zero-sum game. It is likely that China’s demand can be met only with additional natural gas exports from both the U.S. and Russia, so I think it will not be a competitive situation.

In addition, I think that the prospects of U.S. natural gas exports are exaggerated, and I do not think that the U.S. will export large volumes of natural gas. In my opinion, exports will not be more than 6 billion cubic feet/day, in consideration of the price and the construction of infrastructure and many other factors. Geographically, American gas is now mostly exported to Europe; but the recently-signed contract, will see half exported to Europe and the other half to Asia. For the portion exported to Asia, we will definitely choose the nations with the highest bids. Russian natural gas is certainly cheaper than that of the U.S., but if China is willing to purchase U.S. natural gas at a higher cost, we are certainly willing to make deals.

China Energy News: Asia is becoming an important player in global energy consumption, and the issue of an Asian premium is becoming more significant. How can this problem be solved?

Gal Luft: I think the most important thing is to separate oil from natural gas. The prices of oil and gas have historically been linked. When we buy natural gas in Asia now, the price we are actually paying is actually pegged to the oil index - as if we are buying water at the price of champagne, which is very unreasonable. The oil market and the natural gas market are moving at different paces, and if trading hubs are to be built that should be done separately.

The third Global Forum on Energy Security was held in Beijing on June 16 and 17 with a view to promoting academic exchanges on energy security amongst global think tanks, and broadening awareness of sustainable development. It set out to serve as a communication platform to promote global energy cooperation and policy coordination, and to improve global energy security.

By : China Energy News