Ending reliance on Russian fossil exports will need the U.S. and Europe to work together, explain Joseph Majkut, Nikos Tsafos and Ben Cahill at the Center for Strategic and International Studies. The U.S. is the world’s largest oil and gas producer and is able to increase output. At the same time, it must meet global emissions targets. The way to do it is to increase fossil exports temporarily whilst improving its carbon reduction measures (e.g. reduce methane leaks, enable carbon capture). At the same time the U.S. must ramp up its clean energy sector. Both can happen if – crucially – it can rely on the Europeans guaranteeing demand for imports of both. The authors run through their seven recommendations, covering shale, LNG, hydrogen, strategic reserves, markets, investment, cooperation and diplomacy, government lending and support for scale-up, jobs and skills, and more.
Russia’s invasion of Ukraine has sparked an energy crisis. Prices for both oil and gas rose after the war started due to fears that supplies from Russia might be disrupted by sanctions or a Russian shut-off. Neither has happened so far. Russian oil production held steady in March, although some reductions are visible in April. Europe actually increased gas imports from Russia in March relative to February and January. Prices for oil and gas in Europe have subsided, erasing most of the gains since late February. Markets convey a sense of normalcy—even though such normalcy feels at odds with the news coming from Ukraine.
The situation remains precarious. Western countries tried to avoid total sanctions against Russian energy at first, though countries have started to implement piecemeal import bans and design exits from Russian energy dependence for the coming decade. The United States has banned imports of Russian oil, natural gas, and coal. The European Union has implemented a ban on Russian coal, and is weighing its options vis-à-vis Russian oil and gas. As the war drags on, and as images of Russia’s atrocities circulate, the calls for more immediate action are getting louder.
The United States has led in diplomatic and military terms, but it has struggled to develop a response to the energy crisis. The Biden administration has taken some measures to address the crisis, but it cannot realign national energy strategy without Congress. In Congress, the response has tracked long-held partisan positions: on the right, there is anger at the supposed “war on American energy,” coupled with a push to remove any regulation that might constrain oil and gas; on the left, there is recrimination about “price gouging” among oil companies, and a sense that this is a fossil fuel war that proves the need to transition away from oil and gas.
Increasing hydrocarbons production + emissions reductions
As the world’s largest oil and gas producer, the United States can play a unique role in shoring up energy security in the coming months and years. Oil and gas from the United States could allow for harsher sanctions against Russian energy, undercutting a key pillar of Vladimir Putin’s regime. But increased hydrocarbon production from the United States does not imply a world where climate change is a second-tier issue.
Instead, it requires a tailored strategy to support the oil and gas industry as a wartime measure. It means a time-limited ramp-up in oil production to replace Russian oil shut-in by sanctions—a function for which shale wells are ideal given their rapid decline rate. On the gas side, it calls for additional U.S. liquefied natural gas (LNG) exports to displace Russian gas (and, later, Asian coal). And in both oil and gas, this is a strategy that pairs financial resources with the bully pulpit of the White House to align views on the war effort.
These steps should be accompanied by efforts to increase exports of clean energy from the United States. The European strategy to reduce gas imports from Russia envisions a sharp increase in clean hydrogen. This hydrogen could be produced in and exported from the United States. Likewise, nascent efforts to build domestic clean energy supply chains, if developed, could make the United States a clean technology exporter. There is no reason to limit the U.S. response to hydrocarbons.
The guiding principle for the United States should be to enable a sharp reduction in Russian oil and gas exports, largely by increasing U.S. oil and gas production, but without a corresponding increase in cumulative greenhouse gas emissions. With some creative policies, such a task is possible.
Help boost oil production to allow greater sanctions on Russia
An increase in U.S. oil production could allow for stronger sanctions against Russian oil exports, targeting a key sector for Russia. But U.S. oil output is not rising fast enough. In large part, this is because investors are telling companies to not drill more. In a recent survey by the Dallas Federal Reserve, over half of the companies that responded cited investor pressures as the primary reason for not increasing oil production. Many said they needed prices over $80 per barrel to drill more (higher than the average price from 2017 to 2019 of $58 per barrel). Unclogging the U.S. oil system would yield significant strategic benefits for the war effort.
Recommendation 1: Convene shale companies and investors
The Biden administration has extended an olive branch to the oil and gas industry over the past month, encouraging the sector to invest more. White House officials have hosted banks and companies to discuss the market implications of Russia sanctions. But more could be done. The administration should invite shale companies and investors to the White House to talk about ways to boost domestic production.
The objective would be threefold. First, it would send a strong signal that more investment in oil and gas is needed and welcomed. Despite the rhetorical support of the past month, the messaging has been mixed. Second, it would help companies make the case to their investors that they can pursue moderate growth while retaining strong profitability (which should be achievable with prices above $100 per barrel). And third, it would allow stakeholders to discuss workable solutions to the genuine constraints on growth. If shortages of personnel and oilfield services equipment are the major problem, targeted lending may help. If the key challenge is a lack of clarity on leasing plans or permitting on public lands, the industry can make its case. The White House can use the bully pulpit to remind key actors, especially investors, of the economic stakes.
Recommendation 2: Commit to refilling the Strategic Petroleum Reserve (SPR) when prices drop below $70 per barrel
Critics argued that releasing an unprecedented 180 million barrels from the SPR over the next six months would be ineffectual. But the SPR news — along with smaller-than-expected supply disruptions from Russia — has helped to cool the market. The SPR plans have shifted market expectations of tightness in the near term and lowered the front end of the futures curve. It is still unclear how strong the buyer demand for SPR crude oil will be in the coming months, or if this daily volume can be delivered. But so far, the move is having the intended market effect.
There are inherent risks in using the SPR to smooth out market volatility rather than to alleviate acute supply shortages. The United States — a borderline net petroleum exporter with more than 300 days of import cover — may not need a strategic reserve that is filled to maximum capacity of more than 700 million barrels. But after recent sales and exchanges, the SPR has dropped to 556 million barrels as of April 15, and the recently announced releases and other scheduled sales would leave it well below 400 million barrels.
Biden pledged to refill the SPR in the future but was vague on details. The White House should state that it will replenish the SPR when West Texas Intermediate (WTI) prices fall below $70 per barrel. This would help build resilience to future shocks, and it would help shore up anticipated demand in the coming years, helping to place a floor under prices. In short, the SPR release helped cool an overheated market, and an SPR restocking will support producers when prices are lower.
If the need arises, the federal government could resort to more complex price support systems — like price guarantees — similar to those used in agriculture. The point of such a support system would be to provide some stability in the market and enable additional U.S. oil that could displace Russian oil.
Recommendation 3: Consider lending for the oilfield services sector
Oil and gas executives argue that it will take anywhere from 6 to 18 months to deliver more production growth from U.S. shale. Oilfield services companies are struggling to hire workers, especially in parts of the shale patch that have lost personnel in multiple boom-and-bust cycles. Companies cite shortages of hydraulic fracturing and drilling crews as well as frac sand, pipe, and other equipment. Supply chain challenges may make it harder than usual to overcome these constraints.
Market forces will resolve most of these challenges in time, but the government could speed the process. The Biden administration can work with the industry to identify the most significant bottlenecks, and provide targeted lending to these sectors so companies can spend more on salaries, signing bonuses, and equipment. Recipients could include below-the-radar service sector firms rather than the largest integrated oilfield services providers, so companies above a certain market capitalisation could be excluded. Time is of the essence, so a lending program of this kind would have to be deployed quickly.
Help Europe’s search for alternatives to Russian gas
The European Union wants to reduce its dependence on Russian gas, which made up 40 percent of EU gas consumption and 45 percent of EU gas imports in 2021. In REPowerEU, the European Union said it wanted to secure an additional 50 billion cubic meters (bcm) of liquefied natural gas (LNG) supplies between 2022 and 2030. In a March 25 joint statement with the White House, the European Commission committed to “work with EU Member States toward ensuring stable demand for additional U.S. LNG until at least 2030 of approximately 50 bcm/annum.” The volumes would help Europe eliminate Russian oil and gas imports by 2027, a key objective of Europe’s war effort. Helping Europe achieve this target is in the best interest of the United States.
Recommendation 4: Convene major players to help manage the gas market
The global LNG market will come under immense pressure as Europe tries to diversify away from Russia. The volumes that Europe wants to import are hard to find without major adjustments and dislocations. In the first quarter of 2022, Europe imported more LNG mostly at the expense of imports into China, Japan, India, and Korea. But there are numerous reports that economies are struggling to secure gas. Pakistan in particular has faced electricity shortages due, in part, to insufficient fuel supplies. Such crises will become more common and widespread.
In normal times, markets are the best instruments to allocate scarce supplies. But the additional demand from Europe will be hard to accommodate. Some coordination among buyers and sellers would make sense, avoiding the “free-for-all” approach that would otherwise take place. This table would need to include the United States, Australia, and Qatar, among exporters, and China, Japan, Korea, India, and the European Union among importers — at least at first. Of course, such a forum would be imperfect — it could supplement markets, not replace them. But it could be an important forum to share information, streamline purchasing decisions, and find ways to reduce LNG imports when possible. Ideally, such a forum could even approach the question of how gas is priced in Europe — fixing, in the language of a major gas trader, a “broken” market.
Recommendation 5: Support creative structures to expand U.S. LNG exports
U.S. LNG exports have been essential for Europe in late 2021 and early 2022, and the United States is now Europe’s largest LNG supplier. But U.S. exports are limited by available capacity. Given the lead time for adding LNG capacity, new U.S. LNG projects can only help Europe by 2026 and beyond. Even so, the United States has many proposed projects that could boost exports to Europe. The challenge is finding a commercial structure that will allow for these facilities to be built.
The demand signal from the European Union is too short-lived to allow for a major expansion in LNG supply. The European Commission aims to increase LNG imports through 2030, which leaves too little time for any new export project to recoup its investment. Europe, moreover, will not invest in new infrastructure unless it is consistent with its climate ambitions — and such public financing is likely needed to reassure those trying to interpret a very unclear price signal at the moment. The goal is to square the need for a sustained demand signal with Europe’s climate ambitions.
These are ways for Europe to enable new LNG projects in the United States — one is to use public money to support projects that revert to the state after a certain period (similar to models used for airports and other infrastructure projects). Such a reversion could be waived if the LNG project could demonstrate that its continued operation was consistent with a net-zero world.
LNG projects could also sign back-to-back contracts with European and Asian customers, delivering energy security for Europe for a decade and then decarbonisation in Asia over the next decade (crucially, this gas would need to reach Asia at a discount; otherwise, this LNG would struggle from the competitive challenges that undermine LNG now). With public financing, European firms could put in strict conditions on methane emissions — ensuring that this expanded infrastructure has the best climate footprint possible.
Support clean energy exports
As Europe diversifies away from Russian gas and oil, it plans to significantly accelerate its own energy transition through the deployment of renewable power sources and the consumption of renewable hydrogen. Without adequate and diverse supply chains, such a rapid shift risks trading one nondiversified supply chain for another, or simply will not work if there is inadequate international supply.
For example, REPowerEU aims to replace 25-50 bcm per year of natural gas consumption with 15 million tons (mt) of renewable hydrogen. Of that 15 mt, 5 mt will be domestically produced and 10 mt will be imported. Such an expansion in low-carbon hydrogen consumption will need supply to grow rapidly. Today, under 1 mt per year of low-carbon hydrogen is produced globally.
Recommendation 6: Build export hubs for hydrogen
The U.S. Department of Energy is currently designing a program to support the formation of clean hydrogen innovation hubs. The H2hubs program is faced with the challenge of matching willing U.S. producers of clean hydrogen with viable buyers and end users. A lack of market demand is one of the biggest risks that the program faces.
Here, the European energy plan could offer an early market for exports of clean hydrogen, ammonia, or electrofuels, as long as prospective hubs will be considered with exports as a large part of their business model. With at least four regional hubs slated to come online before 2026, the U.S. program could make significant contributions to global low-carbon hydrogen supply.
Exporting low-emissions hydrogen from the United States to Europe will raise some challenges. In particular, the European Union may resist importing hydrogen produced from natural gas, even if the associated emissions of CO2 are captured and stored. This class of hydrogen, known as blue hydrogen, can be produced with low lifecycle emissions, but may still be treated as nonrenewable by the European Union. This potential reluctance could be addressed with best practices from the U.S. industry for methane emissions upstream, CO2 capture at plants, and transparency and disclosure, as well as diplomatic support from the U.S. government. The production of hydrogen through electrolysis powered by renewables or nuclear power would not face the same resistance.
Recommendation 7: Support manufacturing programs for clean energy exports
The United States has not developed a strategy for becoming a major manufacturer of clean energy technology. But as the European Union works to accelerate its own energy transition, the United States could play a role helping allies to secure the necessary supply chains and technologies. Such a strategy can be defined by positive and mutually beneficial exchanges with allies and trading partners like Europe, as much as by diversification away from China. The accelerated energy transition in Europe will need solar panels, battery cells, heat pumps, and more. It may even require new technologies, like small modular reactors. These are new and growing markets for the United States to supply.
The Defense Production Act and other national security authorisations might allow the president to make specific interventions to increase manufacturing or guarantee demand. But like the SPR release, that is likely at best a temporary measure and a strategic shift would require changes in law. There are several existing proposals that would incentivise the manufacture of clean energy technologies in the United States and could therefore contribute to an increased ability to export, trade, and increase global supplies. The proposed 48C tax credit would incentivise investment in manufacturing facilities for renewable technologies, energy storage, low-carbon fuels, and efficiency products. More focused measures could support solar manufacturing or the establishment of critical mineral supply chains. A concentrated effort at implementing such a strategy would be identifying where U.S. resource endowments, labour markets, or intellectual capital could advantage U.S. industry and where trade with the European Union and other allies could meet U.S. demand for complementary products necessary for energy security in a decarbonising system.
Joseph Majkut is director of the Energy Security and Climate Change Program at the Center for Strategic and International Studies (CSIS)
Nikos Tsafos is interim director and senior fellow with the Energy Security and Climate Change Program at the Center for Strategic and International Studies
Ben Cahill is a Senior Fellow, Energy Security and Climate Change Program at the Center for Strategic and International Studies
This article first appeared on April 25th 2022 and is published with permission
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