Russian Gas Transformation

At an energy conference I attended a couple of years ago, the chief technology officer of a major oil company suggested that the big energy story of the decade was the transformation of natural gas from a local resource to a global commodity. Perhaps he was thinking of the technology involved, LNG, pipelines, and Gas-to-Liquids, but the unfolding change in Russia's gas strategy makes this observation just as relevant in geopolitical terms. In a story on the new gas agreement between Russia and Belarus, today's Washington Post quotes a Deutsche Bank analyst who sees Russia as a less reliable supplier today than it was during the Cold War. The ripples of this shift will be felt far beyond Europe, with implications for US efforts to improve our long-term energy security.

US gas storage inventories are currently ample, and the eastern half of the US is experiencing spring-like conditions in winter. As a result, US natural gas prices are 40% lower than they were a year ago. That means they are only 2.5 times their long-term historical average, rather than 5X. But unless we believe that this year's El Niño winter represents the new, global-warming normal, this is a respite, not a return to earlier gas abundance. Our reliance on gas imports is forecast to grow steadily, and as it does, we will find ourselves increasingly in competition with Europe, which will be eagerly seeking to diversify away from its reliance on Russian gas, and with China. Anything that changes the climate for natural gas production or exports from Russia will affect US natural gas prices, at least seasonally.

Ironically, one of the ripples from Russia's greater assertiveness affects an increasingly popular strategy to shore up America's energy security. In an op-ed in the weekend Wall Street Journal, former CIA Director James Woolsey responded to critics who worry that "energy independence" is an unrealistic goal. He painted a credible, vivid picture of how plug-in hybrid cars could tap off-peak electric generation capacity to wean the US from foreign oil. Missing from Director Woolsey's analysis, however, is the degree to which this is fundamentally a gas-driven scenario. The idle generators that would supply cars recharging at night are mainly gas-turbines, since nuclear and coal plants are usually dispatched as base load. And although a recent study indicated that there was enough spare electrical capacity to energize more than 80% of the cars on the road, the gas to fuel all those turbines at night doesn't currently exist. It would have to come from a new Alaskan pipeline, from LNG imports, and from demand destruction in other sectors. That means its price will reflect global natural gas prices, rendering Russia's gas policies increasingly relevant to us.

As we move into a truly globalized market for natural gas, which fuels so many of our homes and industries, Americans will have to start paying as much attention to the actions of Russia as we do to those of Saudi Arabia and the rest of OPEC. I'll be surprised if Russia's strong-arm renegotations with Belarus and with Shell prove to be the last moves in President Putin's realignment of the energy industry.