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    Diversification: Getting out of the “stranglehold”

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Summary

Former US Ambassador Matthew Bryza recalled how differently people were thinking about energy diversification 5, 10, or even 15 years ago.

by: Drew S. Leifheit

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Diversification: Getting out of the “stranglehold”

Providing some historical and geopolitical context in his remarks at the 25th Economic Forum in Krynica, Poland former US Ambassador Matthew Bryza recalled how differently people were thinking about energy diversification 5, 10, or even 15 years ago, regarding what he termed the “stranglehold” that Gazprom had on European natural gas markets. Today, the opportunities for a country like Lithuania are what he called “quite dramatic.”

He offered: “You've got spot market trading beginning; three options for Lithuanian purchasers that involve either short-term or long-term LNG as well as pipe gas; the cost of pipe gas has dropped so far, down to $6-7 mmBtu, precisely because these LNG options are available.”

Why should the United States care? he queried, answering, “Since the 1990s, the US has articulated and had a strong interest in the diversification of energy supplies – especially natural gas – to its European allies, for both economic and traditional security reasons.”

Before there was talk of US LNG exports in the last couple of years, he explained, there had been talk of gas from the Caspian Sea region, but there are no US companies involved in delivering natural gas from that region to Europe. “What I'm talking about is purely a strategic set of interests – it's not philanthropy, it's US self interests.”

Ambassador Bryza named those interests: 1) the economic welfare of its most important trading partners – NATO allies and EU member states; and 2) “pure” security.

“We care because if our allies are prosperous and independent we're better off – it's that simple.”

Of “pure” security, he said: “Until recently, our allies could be pushed around by Gazprom.”

He recalled in 2004, some of the biggest NATO allies not being willing to stand up to Moscow when it was provoking and bullying Georgia in the wake of the Rose Revolution. “Some big NATO countries simply felt too dependent on Russian gas supplies and didn't want to rock the boat,” explained Ambassador Bryza.

That's why, he said, the US had reason for helping Europe diversify its supplies of energy, especially natural gas.

However, according to him, it did take a while for the US to come up with a “unified policy.”

“In 2006, when the natural gas cut-off occurred, from Russia into Ukraine and into the rest of the EU, we argued for months, even a year after that before we could say 'we believe we need to get actively involved in helping our European allies diversify their supplies of natural gas.'

“That was at a time when Russia was exacting exorbitant rents from European natural gas consumers: it was buying natural gas largely in Turkmenistan, exporting it around the Caspian using the Gazprom pipeline network, and selling it for 3-4 times the cost at which it bought it in Central Asia to the consumers in Europe. It's a great business if you can get it; being a monopolist is great in terms of your own economic interest, but it's stupid if you're the consumer and your government's with economic and political power and you don't actively try to break that monopoly,” he said.

The process of convincing the US' European allies had taken quite some time. Ambassador Bryza said that sometimes he was even told to mind his own business regarding individual countries' diversification, but that was no longer the case.

“That's all changed, largely due to what the EU has done: the Third Energy Package is a tectonic shift in European attitudes toward the need, not only to diversify supplies, but to put in place market mechanisms that, once and for all, eliminate the ability of any monopolist to manipulate the market,” he explained.

Ambassador Bryza observed that the natural gas trading hubs in northwest Europe have evolved, become highly liquid, “And since 2008, the price of natural gas – the spot price – has converged, more or less, in the various natural gas trading hubs around the North Sea. That means there's a liquid market, localized in one part of Europe.

“So the interest in Washington now is to advance the development of spot market trading in the short run, or longer term contracts, but free market trading of gas into the Baltic market, building on the infrastructure projects that we've heard are coming: GIPL, hopefully a Baltic connector, the other interconnections that have existed over the past decade and have now finally come to be used for actual free market trading – those are dramatic developments that frankly 10 years ago seemed impossible, sitting from where I did in Washington,” he explained.

The last point, he said, is US LNG exports to Europe. “They clearly make political sense, I think. If you can replace part of your gas supply from the country you're most worried about manipulating you, with some supplies from the country you view as your most important strategic ally, it's obvious that that makes strategic sense,” opined Ambassador Bryza, who said the question remained if the economics are workable, given transport and liquefaction costs.

He offered, “In the last year, I've begun to sense a growing commercial momentum, with projects in the US that really do make sense. My guess is, if US LNG export projects can hit the $7-9/mmBtu range, those projects are not going to be just strategically attractive, but commercially attractive as well.”

To make that happen, Ambassador Bryza said a bit more help is needed from governments (“clear political statements of intent”), but he conceded that some consumers are a bit hesitant to rock the boat with their long-time supplier for pipe gas.

-Drew Leifheit