Weaponized Gas

The United States is set to become the world’s leading exporter of liquid natural gas (LNG), and that is welcome news to the countries that have been dependent on Putin’s politically perilous pipelines and are eager to find a new supplier.

In 2012, the European Union consumed more than 440 billion cubic meters of natural gas, accounting for almost a quarter of all energy consumed in the EU. More than 40 percent of that gas, was consumed by households, making it a potent political tool. Russia supplies more of the EU’s gas than any other country, at prices ranging from $397 per 1,000 cubic meters in Germany to $526 in Poland.

Some non-EU countries can buy gas more cheaply: Belarus pays about a third of what neighboring Poland does. Why is that? Everyone buys from the same source, Gazprom, so it can charge each country whatever it wants. Unlike most businesses, Gazprom’s main focus isn’t in profits, but in politics, especially manipulating Russia’s neighbors.

Gazprom operates as a core state institution. Russia’s energy minister, Alexander Novak, sits on its board. So does Aleksei Miller, a long-time friend of Putin’s. Immediately before ascending to the presidency in 2008, Dmitry Medvedev was chairman of Gazprom’s board of directors while also serving as first deputy prime minister.

Europe is crisscrossed by a network of Gazprom’s pipelines that connect gas fields in the Arctic north and the Caucasus to households and businesses across the continent. A subsidiary of Gazprom, RosUkrEnergo, a company founded by Putin and former Ukrainian prime minister Leonid Kuchma, transports gas from Turkmenistan through Russia to Europe. Along the way, the pipelines cross the Ukrainian and Belorussian plains, ford Central Europe’s major rivers, and snake around the Alps and the Carpathian Mountains.

When the pipelines were built from the 1960s throughout the 1980s, they were the only means of transporting gas. Because the infrastructure was fixed, gas could be bought and sold only through long-term contracts. After the fall of the Soviet Union, the pipeline network left Russia with a powerful bargaining position in its relations with other former Soviet states. If European countries didn’t want to pay Moscow’s price—financial or political—Gazprom could easily shut off the gas.

And they did. Ukraine lost favor in Putin’s eyes by electing Viktor Yushchenko prime minister over Putin’s preferred candidate, Viktor Yanukovich, in the 2004 Orange Revolution. When the gas contract expired in 2006, Russia (through Gazprom) tried to raise its price. The ensuing dispute led Gazprom to shut off the stream to Ukraine on January 1, 2006—in the middle of winter. The supply resumed after a few days, largely because other countries experienced pressure issues in their pipelines related to the cutoff.

The pattern repeated itself again in 2009, when the two sides again failed to reach an agreement on a new price. This time the gas stopped for 20 days, and many speculated it was a signal to Ukraine’s pro-European government not to stray too far from Moscow’s orbit.

After the February 2014 annexation of Crimea, Ukraine looked to buy gas elsewhere. In response, Gazprom shut off its pipelines a third time. Although not during winter, this shutoff was the longest, spanning June to October of that year. In 2015, the same thing happened again, and Russia is still not exporting to Ukraine directly.

So how is Ukraine getting the fuel it needs? In 2015, the EU concluded an investigation that found the company’s “destination clauses,” which forbade the resale of gas across borders, to be illegal “abuse of its dominant market position in breach of EU antitrust rules.” Since then, Ukraine has been buying Russian gas through its northern and western neighbors, essentially running gas through the pipelines the opposite of the normal direction.

The investigation also expressed “concerns that Gazprom leveraged its market dominance in Bulgaria and Poland by making gas supplies conditional upon obtaining certain infrastructure-related commitments from wholesalers,” which might as well be code for “Russian arm twisting.”

The 2014 dispute largely was seen as Moscow pressuring Kiev to abandon its negotiations with the EU, and join Russia’s new Eurasian Economic Community instead. Agnia Grigas of the Atlantic Council explains that, “While Moscow presented the EEC as an economic organization modeled after the EU, in reality it was a means to maintain political influence in the former Soviet space and have greater geopolitical sway in Eurasia.” The EEC currently includes Belarus, Kazakhstan, Kyrgyzstan, Russia, and Tajikistan, with a combined GDP smaller than that if Italy.

For former Soviet states eager to make the most of their independence, most notably Ukraine and Georgia, the EU offered a path to economic development and political normalization. Western European countries, interested in buying gas in a stable political environment, wanted to expand the EU as well. Russia and its EEC stood in the way.

Enter the United States. The fracking revolution has unleashed the world’s biggest recoverable supply of natural gas, and technological innovation in the last three decades has made it a globally marketable asset. Unlike natural gas in pipelines, which can be bought and sold only through long-term contracts, liquid is traded in a spot market, like oil. With the use of specially designed import and export terminals, which cool the gas to a liquid colder than -200 degrees Fahrenheit, ships can be loaded with gas and sent wherever. If a new deal is struck after a ship leaves port, it can reroute itself to a new destination. Needless to say, pipelines can’t do that.

While LNG is inherently more expensive than pipeline gas because of the liquefaction process, many European countries seem willing to pay a premium for a supply that won’t shut off for political purposes. There are currently 29 LNG import terminals in Europe (up from 13 in 2011), with two under construction, and 27 more planned.

American companies are expanding rapidly to meet that demand. For most of the last decade, the monthly volume of natural gas exported from the U.S. hovered around 100 million cubic meters. Starting in 2016, that number spiked. In February 2017 alone, the U.S. exported nearly 1.5 billion cubic meters. There are just two existing LNG export terminals in the U.S.: a ConocoPhillips facility in Kenai, Alaska, and a new Cheniere facility in Sabine, Louisiana. Another 11 have been approved, of which seven are under construction. Both White House economic adviser Gary Cohn and Secretary of Energy Rick Perry have indicated their support for expanding LNG exports.

Meanwhile, Russia is recovering from almost two straight years of economic contraction. Low oil prices are already hurting government revenues, and low gas prices could compound the effect in the next few years. EU expansion in former Soviet territory has made Ukraine and Belarus—the two most important “transit countries” lying between the Russian gas and Western European consumers—less pliable by Kremlin.

In response, Russia has sought to circumvent its troublesome former possessions, protecting their access to the market while depriving their neighbors—Ukraine especially—of billions of dollars in transit fees.

The first step in disintermediation took 14 years. Gazprom made the move with a Finnish company to lay a pipeline in the Baltic Sea in 1997. That pipeline, Nord Stream, came online in 2011, and pumps gas from Vyborg in Russia through the Gulf of Finland, across the Baltic Sea, to its terminus in Greifswald, Germany. Nord Stream can pump 55 billion cubic meters of gas a year, and enlargements are planned to double that flow by 2019— all without a transit country getting in the way.

The other half of the pincer, the planned South Stream pipeline, would connect southern Russia to the Balkan Peninsula across the Black Sea. (This would have the added effect of rendering the Baku-Tbilisi-Ceyhan pipeline, which unites former Soviet republics Georgia and Azerbaijan to Turkey, obsolete.) Russia’s aggression against Ukraine in 2014 stalled the project indefinitely.

Foreseeing that Europe might not be as reliable a market as it once was, Russia began a “pivot to the East” in 2014, penning a 30-year deal with China and beginning construction of a new pipeline, Power of Siberia, that would transport up to 38 billion cubic meters of gas each year from fields north of Lake Baikal to the Chinese border 2,000 miles away. The completion date is expected in 2019.

That plan, like the abortive South Stream, seems to be obsolete before completion. Reports indicate that China has begun buying gas from Turkmenistan for a lower price than it agreed to pay Russia, suggesting the deal may be off. In May, the Chinese and American governments reached a trade agreement that would open Chinese markets to American LNG, further deteriorating Russia’s energy monopoly.

Russia still has 144 million of its own people who need gas, so it’s not likely to stop producing it any time soon. But thanks to the American energy revolution, it can no longer use its natural resources as a geopolitical cudgel.