Jane Nakano is a senior fellow in the Energy and National Security Program at CSIS. Her areas of expertise include U.S. energy policy, global oil and gas markets, energy security issues in Asia, and global nuclear energy trends. She frequently writes and speaks on these issues, at conferences and to the media. Also, she has testified before Congress on energy issues in Asia.
Prior to joining CSIS in 2010, Ms. Nakano was with the US Department of Energy (DOE) and served as the lead staff on energy engagements with China and Japan. She was responsible for coordinating DOE engagement in the U.S.-China Strategic Economic Dialogue, U.S.-China Energy Policy Dialogue, and U.S.-Japan Energy Dialogue. She also worked on U.S. energy engagement with Indonesia, North Korea, and the Asia-Pacific Economic Cooperation forum. From 2001 to 2002, she served at the U.S. embassy in Tokyo as special assistant to the energy attaché. Ms. Nakano graduated from Georgetown University’s School of Foreign Service and holds a master’s degree from Columbia University’s School of International and Public Affairs.
Foretelling the substance of U.S. energy policy in the near future is particularly difficult given the large degree of uncertainty surrounding the presidential election this fall, as well as the enormous changes we have seen in the energy system in the last few years. Nonetheless, there are several underlying major themes that likely will significantly influence the contour and pace of U.S. energy policy evolution.
The first theme is that of “resiliency”, especially concerning the nation’s energy infrastructure, much of which was built multiple decades ago. Our energy infrastructure lack the level of resiliency necessary to meet various challenges, including threats from extreme weather and sabotage, as well as to continue serving the economic needs of the U.S. as a productive, industrialised society. Resiliency will likely be a key consideration in determining the level of policy support for specific energy infrastructure projects, as well as fuel and technology choices.
Also influencing the U.S. energy policy is the role of climate change. The growing consensus on the need to address climate change is beginning to affect how the public as consumers make purchase or lifestyle decisions; and how energy companies formulate business strategies, thereby influencing the way we produce, transport and consume energy in the U.S., which in turn will influence our energy trade relations.
Another major theme is that of “energy governance”. The shift in energy demand growth from industrialised economies in the west to emerging economies in the east is one of the major developments that are altering the global energy landscape, underlying both opportunities and challenges new to the existing global energy governance system. How the U.S. approaches the changing energy landscape and views its role in global energy governance from geopolitical and economic competitiveness perspectives will define the menu of its energy policy options. This in turn will greatly affect the future of energy governance system as well as U.S. relations with key Asian stakeholders in the system.
The advent of robust U.S. LNG exports is one of the major developments in the history of global gas markets. It was only a decade ago that we were looking to build several dozen LNG export facilities; today, the U.S. is on the verge of becoming a net exporter. Even before the first shipment of U.S. LNG left the Sabine Pass LNG terminal in February, the wave of commercial agreements between U.S. exporters and customers around the world has begun to embolden many LNG buyers to seek greater flexibility in contractual terms with non-U.S. suppliers.
As additional liquefaction capacities come online in the U.S. later this decade, the Henry Hub price based LNG supplies with destination flexibility may well herald a new era in the global gas business. While U.S. LNG supplies will not eliminate traditional gas trading features, they will diversify LNG contractual models that have been long dominated by oil-indexation, destination restrictions as well as multi-decade commitments. Unless the low price environment and resultant delays in reinvestment do not lead to a significant supply shortage in the midterm, such flexible features of U.S. LNG could particularly help Asian LNG markets become more transparent and competitive by enhancing market liquidity, which in turn can help facilitate fuel-switch to gas in Asian countries like China.
The G7 Energy Ministerial in Japan, in May, reinforced the importance of energy security and need for oil and gas while also focusing on climate change. Also, the Ministerial sent a strong signal against the danger of complacency in a time of low energy prices. The acknowledgment of the danger seems to signify their clear recognition that the G7 economies, many of which are energy import dependent, have much to suffer from a potential price spike and increased price volatility resulting from inadequate and delayed investment in upstream activities.
Moreover, the discussion on natural gas this year focused much more on market functions, including pricing regime, than on physical infrastructure. In particular, the clear recognition given to the centrality of market liquidity in enhancing gas supply security was highly welcome. As important as they may be, technical issues, such as storage and reverse-flow capabilities, are inadequate as a sustainable solution to supply security challenges in the absence of market liquidity.
The slow-down in regional demand growth has alleviated the sense of energy insecurity by North Asian economies. Yet, the recent Japanese announcement to create more flexible LNG markets and to develop a LNG trading hub in Japan not only underscores the fiscal challenge associated with gas import dependence; it also mirrors the desire of buyers—Japanese or otherwise—to better position themselves against the return of high prices, as much as their ambitions to proactively influence the course of LNG market evolution.
Energy policymaking is about seeking the “right” balance among economic objectives, foreign policy objectives and environmental/climate objectives. It is no different for the regional governments in North Asia. Yet, the concentration of highly energy import dependent major economies that have active intra-regional geopolitical tension can complicate priority-setting. While most in the region have expressed commitment to addressing the challenge of global climate change, the trade-off between economic and energy security objectives complicates the prospect for a rapid reduction in coal dependence – especially as the heavy reliance on natural gas as a bridge fuel could incite a sense of supply insecurity among the regional governments.
The theme aptly captures the current state of the energy landscape where both the opportunities and uncertainties are abound. The extent in which U.S. has succeeded in commercialising its unconventional oil and gas resources has affected the global energy markets—enhancing market liquidity and diversifying business models— and highlights the excitement over transformational impacts that technological progress can bring about. Such potential carries a particular significance in the ongoing global effort to address the challenge of climate change.
At the same time, there is a confluence of uncertainties abound in the energy landscape, where the dramatic supply-demand rebalancing is only one of many. The pace and scope of de-carbonisation efforts, as exemplified by the international climate discussions, remain largely subject to the health of global economy as much as individual, national aspirations. Also, market questions, such as the trajectory of price recovery and their impact on renewable energy deployment, as well as policy and societal questions, such as the effect of anti-fracking movement or divestment movement among some of the institutional investors, warrant continued dialogue among stakeholders for the informed decision-making by government and business leaders.