A Goldilocks Solution?
Fortunately, the tradeoff between advancing America’s oil and gas abundance and protecting the environment and addressing climate change is not as stark as either some in the Trump Administration or in the environmental community would have you believe. There is certainly room to remove some regulations on oil and gas production and to support the construction of oil and gas infrastructure that will help increase production and benefit the economy more generally—without assuming that these steps need to come at the expense of the environment. In other instances, new technologies and practices may provide the answer to legitimate environmental concerns surrounding fracking. For instance, several years ago, operators insisted that fresh water was essential for fracking, but today many companies are experimenting with recycled or brackish water; Halliburton claims it can create workable fracking fluid from nearly any quality of water. General Electric is testing new technologies that allow for the reuse of water after on-site treatment similar to a desalination process. GasFrac—a small Canadian company—asserts that it has devised a fracking gel that not only is “greener,” but also eliminates the need for water altogether—and therefore its reinjection into disposal sites. Companies such as Houston-based Apache have focused on substituting natural gas for the traditional diesel used for drilling and pumping, making their overall operations cleaner and cheaper. Others have started to use infrared cameras to identify leaks at fracking sites, and experiments using drones to monitor methane leakage may ultimately prove effective in doing the same.
Yet even with advances in technology, certain regulations will be important to maintain. Advocates for oil and gas industries should think of these regulations as dual-purpose: they both protect the environment and help companies maintain the social license to operate. Happily, such regulations need not be “job killers.” In fact, a number of initiatives have identified a set of best practices and measures that can help ensure the development of tight oil and shale gas in a responsible, sustainable way. In 2011, the U.S. secretary of energy tasked a subcommittee of his advisory board to explore the question of whether shale could be safely developed. John Deutch chaired this effort and led a process that incorporated feedback from the public, industry, regulators, and other experts. The report’s bottom line was that while fracking has environmental drawbacks, many can be mitigated to preserve its benefits. Other organizations such as the IEA in its Golden Rules report or the Center for Responsible Shale Development have come to similar conclusions and advanced comparable recommendations. These reports point the way toward a constructive approach that will make fracking more sustainable and, therefore, part of the American energy landscape for the future.
Concerns that the implementation of these best-practice measures will undermine the economic competitiveness of the boom are also understandable, but not well founded. The work of Michael Porter of Harvard Business School demonstrates that embracing such best practices would increase the costs of developing these resources by only a nominal amount. In a 2016 presentation, he demonstrated that complying with the performance standards suggested by the Center for Sustainable Shale Development in the development of an average well in the Marcellus would only cost 1–2 percent of the lifetime revenues of the well. This is less than the average daily price change in the Henry Hub spot price.
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Americans will continue to differ on the question of what is the appropriate amount of regulation and even whether the state or the federal government is the desirable entity to legislate and enforce regulations. This book is not a plea for a specific form or level of regulation, but it is an entreaty to policymakers, business people, activists, and citizens not to view nurturing the energy boom and protecting the environment and addressing climate change as pursuits that are in total opposition to one another. Yes, there are places where the two will be in obvious tension. But in many other domains, they have complementary objectives. A drive to keep oil and gas in the ground or to obstruct any and all pipelines could backfire, especially if the alternatives are coal and the transport of oil through riskier means like railways. Similarly, oil and gas development with little consideration for the environment or climate change carries costs and risks—from diminishing America’s soft power to potentially curbing LNG exports to risking the loss of the social contract companies require to operate. Moreover, whereas some deregulation creates more space for economic activity, other regulations have in the past spurred incredible innovations and helped keep U.S. businesses competitive abroad. In a world increasingly cognizant of the need to meet its energy needs while protecting its environment, America’s global companies will not only be focused on domestic requirements, but will also keep one eye on the need to meet standards in their foreign markets.
What America needs now is not the zeal of either energy extreme, but the moderation of a Goldilocks solution. Such an approach is not as far-fetched as American political discourse might make one think. It is not only in the realm of academia or think tanks where such compromises can be envisioned. Several U.S. companies, including ExxonMobil and General Motors, have voiced support for a carbon tax. Some environmentalist groups—such as the Environmental Defense Fund—have dedicated themselves to working with industry to find mutually agreeable solutions. For those interested in finding a Goldilocks solution, the building blocks are in place.
SECTION THREE
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The International Environment
EIGHT
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Europe
Catching a Break
Dressed in a three-piece suit, striped bow tie, and rimless glasses, Estonian president Toomas Ilves brought to mind a mild-mannered academic when he spoke in Brussels on March 21, 2014, just hours after Vladimir Putin signed a law completing Russia’s annexation of Crimea. But Ilves’s words were far from measured as he belittled Europe’s initial response to Russia’s latest provocation. Calling European sanctions on not quite two dozen individuals “piddly” and “a slap on the wrist,” Ilves blamed Europe’s significant economic ties with Russia for being an obstacle to stronger action. “The things we hated most about the 20th century” were occurring again, he warned. “Europe is sitting here and watching it happen and saying there are 21 people who can’t visit us anymore. I don’t think that’s really an appropriate response,” Ilves scoffed. Rising to the bait, Italy’s new foreign minister, Federica Mogherini, shot back, “So, let’s bomb Russia? What is the solution then?” she asked. “Italy can do without Russian energy, but can Ukraine?”
Russia’s flagrant actions in Ukraine forced Europe to face many uncomfortable realities. Foremost among them was the fact that norms and agreements that had governed international behavior in Europe since World War II—including the sanctity of borders—had crumpled. At the same time, as Mogherini’s retort suggested, Europe had to face a separate hard truth about energy. European politicians, analysts, and businessmen had long taken comfort in the idea that Europe’s import of vast quantities of Russian energy created a mutual dependence. The enormous loss of revenues Russia would suffer from curtailing or ending exports to Europe were, many Europeans assumed, enough of a consequence to make any large-scale disruption inconceivable. This view prevailed among many—particularly those in Europe’s business community—even after two episodes in 2006 and 2009 when Russia cut natural gas exports to Ukraine, creating havoc not just there but further downstream in parts of Europe. Many argued that these crises were provoked by Ukraine’s failure to pay its bills—and therefore did not invalidate the theory of energy trade being protected by a sort of mutually assured destruction.
Crimea punched a hole in this thinking. By boldly annexing Crimea over the unequivocal objections of Europe and the United States, Putin demonstrated that some political objectives were much more important to him than any economic costs associated with reaching them might be. A
s Western sanctions increased beyond Europe’s initial tepid measures and the costs to Russia’s economy mounted, the lesson came into even sharper focus. Europe could not be complacent about Russia’s willingness to use its natural gas exports as a political tool. A letter penned by Putin to eighteen European countries three weeks after the annexation of Crimea made this even more clear. In a regretful tone, Putin explained how Russia would be forced to take the “extreme measure” of cutting off gas to Ukraine—with consequent implications for the rest of Europe—if Kiev did not pay for the gas in advance. “The fact that our European partners have unilaterally withdrawn from the concerted efforts to resolve the Ukrainian crisis, and even from holding consultations with the Russian side, leaves Russia no alternative,” he wrote.
Europeans were also reminded of a second harsh reality. The global nature of the oil market meant that potential Russian disruptions of the sale of its oil to Europe could be managed relatively easily. But Europe was in a much tougher position when it came to natural gas. Russian gas accounted for a third of all the gas Europe consumed; seven European countries, including Bulgaria, the Baltics, and Hungary, looked to Russia for at least four-fifths of their gas. But even more important, many countries in Europe had few, or no easy, alternatives to Russian gas should the Kremlin put the brakes on sales. The nature of their infrastructure tied them to Russia, in some cases exclusively.
This situation was, of course, not news to Europe, but its policies did not fully reflect these geopolitical realities. In fact, European energy policy had traditionally not viewed energy security as its most important objective. Instead, for years, the energy focus of the European Commission had been on using its regulatory power to build upon and improve the smooth functioning of markets. In the aftermath of the 2006 and 2009 crises, Europe had begun to shift its approach away from using its influence primarily to promote markets to also addressing geopolitical vulnerabilities. But other priorities seemed more pressing, be it the drive to decarbonize Europe’s economy, or the need to boost economic growth in the wake of the global recession and the European stagnation that followed.
There had been some positive developments. Lithuania had built more gas storage. Poland, Estonia, Greece, Croatia, and others focused on constructing terminals to import LNG. New reverse-flow pipeline capabilities allowed Ukraine to import at least a small portion of the natural gas it consumed from Germany via Poland and Hungary. In December 2013, the final investment decision was made to build a pipeline to connect the Shah Deniz II gas field in Azerbaijan with Southern Europe. But, despite these steps, large-scale, Europe-wide endeavors had flagged.
For instance, the Nabucco Pipeline—envisioned to bring Caspian gas to Europe—succumbed at the end of 2013 to a slow death of a thousand cuts, some inflicted by European energy companies that found the project simply too expensive in light of cost overruns and national decisions to subsidize renewable energy. In the trio of priorities among environment, economic competitiveness, and energy security, Europe—at least as a whole—often seemed to rank energy security last. In the words of Richard Morningstar, a former American official who had devoted much of his long career to helping Europe diversify its sources of energy throughout the 1990s and 2000s, “Often, the United States seemed to care more about the diversity of Europe’s energy supplies than Europe did.”
By 2014, when Putin swept into Crimea, Europe’s position was exactly the scenario Ronald Reagan had feared when he picked his first major fight with Europe less than a year after he took office in 1981. Germany, Italy, and other Western European countries were struggling under the high price of oil in the wake of the Iranian Revolution that had occurred two years earlier and were eager to transition their economies to natural gas where possible. They saw a 3,300-mile gas pipeline from Soviet Siberia to Western Europe as the answer to their dilemma—and agreed to finance and help construct it. Reagan dismissed the ongoing détente with the Soviet Union in which many Europeans were still invested and decried the pipeline effort, not only because of the subsidies but also due to the leverage that such dependency would give the Soviets over Europe. Even if the Soviets never actually terminated the flow of gas, their ability to do so would provide its own quiet form of influence.
Much has happened in the three short years since Russia’s annexation of Crimea compelled the European Commission to “securitize” its energy policy and make it more geopolitical in nature. As discussed below, Europe remains, and will continue to be, a major consumer of Russian gas. But Europe is unquestionably more energy secure and can be confident that the age of Russian natural gas dominance is coming to an end. A variety of factors has come together to deliver this result.
First, Europe’s regulatory efforts have, over time, constrained Gazprom—Russia’s biggest business, the world’s largest natural gas company, and a majority-owned entity by Moscow—and fundamentally altered how it interacts with Europe. European initiatives to promote competitive markets have successfully leveraged the power of the Single European Market to force Russia to abide by certain rules in the sale of its gas to Europe. For instance, the 2009 “Third Energy Package” of regulations for natural gas and electricity markets in the European Union gradually forced Gazprom to adhere to new laws that prevent it (as well as others) from owning both the pipeline infrastructure and the natural gas that flows through it. Even more telling is the proposed settlement of a long-standing antitrust suit in which the EU prosecuted Gazprom for anticompetitive practices, such as charging unfair prices and inhibiting cross-border gas trade. Under the proposed settlement still under discussion as of mid-2017, Gazprom would commit to specific measures for a duration of eight years—in order to avoid potentially billions of dollars in fines; Gazprom would have to allow countries to resell gas and to bring the high prices paid to Gazprom by Central and Eastern European countries more in line with those paid by its other customers.
Second, policies to support infrastructure improvements have had similarly transformative effects on Russia’s ability to use gas as a weapon. In particular, Europe has plowed its resources into building interconnectors between countries reliant on Russia for their natural gas. As a result, were Russia to halt natural gas exports to one country today, the target nation would be able to meet its needs by turning to others—perhaps to supply Russian gas, but at least to do so through a less direct route. Natural gas has traditionally flowed from east to west, but the ability to make a quick adjustment and send gas in the opposite direction now exists.
Nowhere has the impact of such interconnectors been so dramatic as in Ukraine. I met Andriy Kobolyer on a sunny Kiev morning in October 2016. I did not know much about him, except that he had taken over as CEO of Naftogaz, Ukraine’s state energy company, a month after protests dislodged Ukrainian president Viktor Yanukovych from power and a week after Kobolyer’s predecessor was arrested for corruption. At thirty-six, Kobolyer found himself in charge of over 175,000 employees and inherited a company with more than $5 billion of unpaid bills, most of them to Russia, a neighbor waging a covert war against Ukraine. Yet, two and a half years later, Kobolyer was able to share some good news about what he had been able to achieve. For years, Ukraine depended on direct purchases of natural gas from Russia for an overwhelming proportion of its imports—a relationship that proved problematic for both sides. But, thanks to gas market reforms, a slowing economy, and shifting gas market realities, Ukraine imported exactly zero natural gas directly from Russia in 2016. The growing use of reverse pipelines was the most important factor in delivering this outcome. Sure, Ukraine still consumed some Russian natural gas, but it purchased all that gas through other countries such as Poland and Slovenia. Moreover, Kobolyer had high hopes that Naftogaz would further benefit from the surfeit of global LNG. He was seeking a pipeline from Poland dedicated to gas sourced from LNG. “Gas is so abundant now,” he explained. “If our suppliers do not provide adequate amounts of gas, others will immediately step in to fill the gap. Gazprom has lost i
ts ability to dictate price and volume.”
Finally, the new energy abundance has also played a significant role in loosening the Russian noose around European energy consumers. As Kobolyer’s words suggest and the rest of this chapter explores, the global advent of shale gas and the remaking of gas markets has created a wide array of new opportunities for Europe to become more impervious to Russian efforts to use energy for political ends. Yet, as has been the case in other parts of the world, these breaks are not of the variety most commonly anticipated—and the liberation from Russia not necessarily of the nature most crave.
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