Interview: Gal Luft, Co-Director of the Institute for the Analysis of Global Security

Natural Gas Europe had the pleasure to speak with Gal Luft, rising star in the global energy debate. The co-director of the Institute for the Analysis of Global Security explained his theory: methanol could be the answer to many problems. We took advantage of the interview to speak about the impact of Russia, Ukraine and American LNG on European energy security. We also asked him some anticipations of a report about Europe to be published before the G7 Ministerial meeting in early June - a few suggestions to Brussels. 

In March, you advocated that US should keep its gas to replace oil. You referred to possible use in the transportation sector, explaining that if the Congress ‘provided automakers with the right incentives, within five years, a substantial part of America’s fleet would be capable of running on natural-gas-derived methanol.’ What are the external factors – international events – that could trigger such a change? What are the possible obstacles coming from abroad?

On a caloric basis oil is between four and five times more expensive than natural gas in the United States. So, from an economic standpoint, it makes sense to replace oil with natural gas in transportation sector. The reason that I like methanol is because it is a liquid and it could be blended with the gasoline and it does not require massive investment in infrastructure changes, as is the case with CNG or LNG. Methanol can be made cheaply from natural gas.

I was referring more to eventual international events that could that could change this economic assessment.

If the price of oil drops significantly or the price of natural gas increases significantly then the economics would change. What could cause a significant drop of oil? I don’t see any reason for this to happen, particularly because the major oil producing countries need the fiscal breakeven price of oil to be over 100 dollars a barrel. So I don’t think we are likely to see lower prices. The other thing that can drop the price of oil is a major economic crisis like in 2008. But these are black swans.

You have been referring just to oil, but are there any factors that could change your assessment, increasing the price of gas? Are there any international events that could push American gas prices up? In this context, I am referring to LNG export liberalization. You advocated that American gas should remain in the country. Am I wrong?

I don’t think that the US government should prevent or limit the amount of gas that is exported. My point was that there are more economic ways to export gas than exporting it in the form of LNG. It is much better to export the gas in the form of natural gas derived products like methanol. From an economic standpoint, instead of exporting something really cheap, you can either export something which is higher in the value chain or you can keep it at home altogether. It is sort of like exporting tomatoes when you can make ketchup, and then export it.

Does your economic assessment apply also to Europe?  

Of course Europe is in a completely different situation. In Europe, natural gas is almost 10 dollars per mmbtu more expensive than in the United States. So, the economics in Europe are clearly very different. And the economics in Asia are very different. That said, I believe that because the price of oil is more or less a global one, it makes sense for Europe to review the strategic importance of oil as well. Particularly with regards to Russia, because people tend to forget that Russia is much more of an oil exporter than a natural gas exporter, in the sense that its economy depends much more on the sale of oil. 

But specifically for Europe, my understanding is that Europe relies on Russia more for its gas than for its oil. And that is because the oil market is a global market.

That is true as a fact, but gas has substitutes. If Europe wants to use more coal or change its position on nuclear, then it would be using less gas. But in transportation you only have oil. Oil has a monopoly over transportation fuels. In electricity you have a lot of options, but in transportation the cars are made to run only on petroleum fuel. 

In a sense, we are speaking about the importance of Russia for Europe. To what extent do you think that European integration passes through energy issues? In this context, what is the role of Russia? What is the role of the United States?

We have to separate between the behaviour of Russia and the behaviour of Ukraine. What I learnt from the current situation in Ukraine is that the problem is not only about Russia. Ukraine has proven to be an unreliable transit country. Germany has never had any problem buying gas from Russia via Nord Stream. At least 50% of the responsibility for Europe’s current predicament lies with Ukraine. The country is dysfunctional and corrupt. What Europe needs is not only diversification of sources of gas; it needs diversification of transit countries, shifting from unreliable countries to reliable ones, even if the alternative routes still run Russian gas.

What about Russian and American role on European integration? Do you see any important role played by these two countries?

European integration is something for the Europeans to decide. Of course, integration of Europe towards the East would trigger Russian response. It is all a decision of what Europe is. And this decision has to be taken by Europe .

In a recent conference organized by the Atlantic Council, politicians and diplomats argued that Europe should get ready for disruptions - by desire or accident. Do you agree with them? Is it a real risk?

It is possible that there will be disruptions, but one should not overreact. If you ask me if there will be disruptions of Russian gas flowing toGermany, the answer would be: I don’t think so. I think that the fact that European Parliament rejected the South Stream pipeline is a mistake. Russia will continue to supply gas to Europe. If we will have the Nord Stream and South Stream, we would have other ways to judge Russia, not only through its activity in Ukraine, but also through other countries, other more reliable transit countries.

Do you think that Russian gas prices could change in the aftermath of an eventual LNG export liberalization in the United States?

First of all, I don’t know if US LNG would necessarily reach Europe. It all depends on price; it all depends on what happens in Asia. Russia is clearly moving east. Russian main objective now is to diversify and to ship its hydrocarbons to China, South Korea, Japan and India. So in the end, it is going to be a matter of price. In other words, who can win the price war? Who can offer the best deal? And it is very premature to say because Russia has not settled the price with Asian countries. It has not built the pipelines, and so we don’t know. 

Are you saying that it is logical for American authorities to delay the approval of LNG export terminals, right?

No, there have been 7 approvals already. That is more than enough for the US to export more than 9 bcm a day, so there are sufficient approvals already. The problem is the actual investment and construction.

You are speaking about 7 LNG export terminals approved since the beginning of the so-called shale gas revolution in the United States. At the same time, there more than 20 LNG projects in the queue, how many do you expect to be approved in the next five years? How many do you expect to be built?

Approval is a piece of paper. It does not mean anything. First of all, all of those projects – and we are not speaking about 20 but more like  30 – have been approved for export to countries with which United States has free trade agreements. It is not true that they have not been approved. They have not been approved for countries that don’t have free trade agreements (with the United States). But for the 7 projects that have been approved, there is no destination requirement. You can export to any country. The question is, again, not the piece of paper; it is the construction of those terminals. When you receive the piece of paper saying ‘approved,’ you have to get off-takers, you have to raise tens of billions dollar, you have to built. The problem is not the approval. We should focus on the 7 – maybe more as we go forward – that have been approved, and build them.

You mainly focus on American policies, but could you please give some advice to Europeans in this moment.

Well, I am now finishing a study with recommendations for Europe. And this should be published just before the G7 Ministerial meeting in early June.

Can you give me some anticipation? Some tips, some bullet points…

So, bullet number one is to change your approach to coal and nuclear power. A lot of what is happening today is due to the fact that Europe has struck the wrong balance between the environmental policies and the energy security policies. It has given too much weight to climate policies at the expense of the energy security.

What about the second bullet point?

There needs to be a system of strategic reserves for gas, very similar to the system we have today with oil, with regards to the International Energy Agency’s oil banks that release oil in time of emergency. We don’t have the same with gas.  We don’t have a centralized system that oversees the strategic reserves of gas and coordinates the release. 

Are you referring to a global system or a more regional one? Are you speaking about a European gas bank?

Mainly European. I think that within Europe there needs to be a better coordination of emergency response and release of gas. But then the question is: how do you do it? That is why my recommendation is to use methanol as a way to store natural gas. It does not require energy to keep it in the liquid form. 

And what about the third bullet point?

The third bullet point is the reliability of the grid. Where is see the biggest threat to energy systems today is not a matter of supply of gas, but it is vulnerability of electricity system to cyber attacks. As we saw in the example of Estonia, you don’t need to sabotage the supply of gas, you can just get down the grid altogether. So, we definitely recommend much stronger coordination and attention paid to cyber energy security, including the formation of cyber energy security learning centre in Europe, including simulations, exercises, recovery efforts and monitoring, so that Europe is much better protected against cyber attacks on its energy system by Russia or by any other perpetrators. 

Sergio Matalucci