Include energy in trans-Atlantic trade talks

There are voices on both sides of the Atlantic calling for energy trade to be included in the text of the EU–US Transatlantic Trade and Investment Partnership, writes Maya Rostowska

In the wake of the events in Ukraine, the European Union has more resolutely turned its attention to its energy security. With Moscow’s annexation of Crimea, the EU’s dependence on Russian gas (which accounts for ca. 30% of imports) and oil (ca. 35%) is becoming untenable for many Member States, as fears grow regarding Russia’s future actions and possible Western reaction to these.

As well as other steps discussed at the March European Council – such boosting energy solidarity by building links between national power networks – importing energy from the United States in a bid to diversify the EU’s energy suppliers is being considered as a possible security measure.

U.S. energy has been on Europe’s radar for some time. The American shale gas revolution has caused gas prices there to fall to one-third of the level of those in the EU. Now events in Ukraine have made the United States seem like an even more attractive potential supplier of gas and oil.

However, the U.S. has strong domestic restrictions on energy exports. As a result, there are voices on both sides of the Atlantic calling for energy trade to be included in the text of the EU–U.S. Transatlantic Trade and Investment Partnership (TTIP), which is currently being negotiated.

The potential for American liquefied natural gas (LNG) to replace at least some of the EU’s Russian imports is definitely there. The U.S. Energy Information Administration predicts that the United States will become a net exporter of LNG by 2016. Meanwhile, the EU only uses about one-third of the capacity of its regasification terminals, meaning it has the capacity to increase LNG imports.

But the route to Europe is guaranteed smooth sailing for American LNG. The 1938 Natural Gas Act requires exporters to apply for licences, which have a lengthy approval process. Moreover, technical hurdles such as the need to convert LNG import terminals to export gas, and the need to build pipelines from the central states to the coast still need to be overcome.

Politics and commercial interest may also hinder U.S. gas exports to Europe. For one, exporting LNG is likely to push up domestic gas prices in the U.S. Moreover, the final destination of LNG will be decided by American energy companies according to commercial interests — they would go to the highest bidder, not to the firmest ally. As a result, they are likely to go to Asia, as LNG import prices there are about 50% higher than in Europe.

However, TTIP could certainly go some way to easing transatlantic LNG trade. Gas export licences are easier to obtain for export to territories with which the U.S. has a free trade agreement (FTA), as long as it ensures so-called “national treatment” of American gas. By ensuring the requisite assurances are in the deal, negotiators could remove a big hurdle to U.S. LNG exports making it to Europe.

As well as its gas boon, the U.S. is on its way to becoming the world’s biggest oil producer. It currently produces 7.8 million bpd and has built up hefty reserves: Strategic Petroleum Reserves are currently at double the required level of 200 days’ supply.

Nevertheless, the U.S. administration is loath to encourage oil exports. Maintaining high oil reserves has been a sensitive issue in the United States since the 1970s oil shock. The resulting 1975 Energy Policy and Conservation Act and 1979 Export Administration Act made acquiring an export licence for crude oil very difficult. The low number of crude oil export applications can be linked to the vague nature of the legislation, which grants export licences only to projects deemed to be in the “national interest” and approved by the Department of Energy.

But U.S. energy companies are raring to export oil, which brings bigger returns for shareholders than gas. Parts of the European energy industry—such as the refining sector, which in 2012 exported 349,000 bpd of gasoline to the U.S.—are also keen to see an energy chapter in TTIP, hoping the deal will do away with cumbersome regulation.

Overall, the U.S. has prospects as a potential alternative supplier of both oil and gas to Europe, and could help reduce the EU’s dependence on Russian energy in the medium term. Including a section on energy in TTIP could boost FTA licensing procedures for U.S. LNG exporters and clarify the legislative situation for potential crude oil exporters, encouraging them to apply for licences.

TTIP is by no means the only – and certainly not the fastest – vehicle for ensuring the EU’s energy security. Following the fourth round of talks (10-14 March), negotiators have yet to agree whether energy should have a dedicated chapter. Moreover, public opinion in Europe is increasingly turning against the deal. It seems unlikely that TTIP will be agreed on “one tank of gas” as was previously hoped.

Nevertheless, steps can be taken to ensure that once agreed, TTIP will in fact boost EU–U.S. energy trade. In particular, the deal should provide national treatment of U.S. gas exports. The text should also ensure U.S. crude oil exports to the EU will be deemed to be in the “national interest”. However, Brussels should be careful not to give away too much for the sake of energy in TTIP – particularly the EU’s health and consumer protection standards.