The EU and the US are currently negotiating the largest international free trade deal in history – the Trans-Atlantic Trade and Investment Partnership (TTIP). What would be its impact on the energy sector?
The EU and the US are key allies. Trade between them equals 31% of the global total and they cooperate across a variety of areas. In energy, the EU and the US share a common approach on the need to promote open, transparent, competitive, and sustainable global energy markets. Energy cooperation was enhanced in 2009 with the creation of the EU-US Energy Council. The Council meets annually and reports to the wider EU-US summit.
The prodigious surge in US hydrocarbon production in recent years (first shale gas and then, more recently, shale oil) continues to produce profound economic and geopolitical effects. The collapse of oil prices, the change of OPEC’s approach to price and volume management, the rebalancing of relations between producing and consuming countries, and the increasing economic pain suffered by Russia, Venezuela, Ecuador and a number of East African and Middle Eastern countries, are only the most visible consequences of the US hydrocarbon production boom. The so-called “shale gale” was enabled by the combination of two existing technologies applied to known deposits of hydrocarbons, which are considered uneconomic if extracted by traditional drilling methods. The innovative application of extraction techniques and operating procedures has transformed the US from one of the world’s potentially biggest importers of energy to a substantially energy independent nation, in which cheap energy has literally fuelled the recovery of many of its industrial sectors.
At the same time, across the Atlantic, the opposite has taken place. The domestic decline of oil and gas production due to the progressive exhaustion of traditional basins has caused a corresponding increase in Europe’s dependency on regions that, in some cases, have become more politically unstable. The steep decline in European energy demand triggered by the economic recession and the strong and costly support for renewables have only in part tempered this dynamic. And little relief can be expected from a US-style shale boom in Europe, which for a number of reasons is unlikely to take place to any significant extent.
These diametrically opposite trends in energy import dependency on the shores of the ocean have rekindled European interest in the potential benefits of energy trade with the US. In addition, following the Republican mid-term landslide in 2014, debate has resumed in the US on the removal of a crude oil export ban that was imposed in the very different energy context of the 1970s and on the role of cheap domestic energy in bolstering economic activity and competitiveness.
What’s the impact of the larget international free trade deal in history on energy?
The EU and the US are currently negotiating the largest international free trade deal in history – the Trans-Atlantic Trade and Investment Partnership (TTIP). Following the first round of negotiations in 2013, the European Commission released a number of initial EU position papers aiming to identify common ground with the US. The Old Continent’s interest in the benefits of imported US energy could not but be reflected in the controversial negotiations for the Transatlantic Trade and Investment Partnership (TTIP), which have been under way since 2013. In this context, the European Commission has repeatedly proposed to dedicate a specific section of the treaty to the energy trade, with a view to greatly facilitate US LNG exports towards Europe.
As things stand currently, US LNG export projects have to go through complex and costly authorisation processes. The European Commission sees the inclusion of an energy section as a way of not only shoring up its security of gas supply, but also laying the path to a lifting of the obsolete ban on crude exports. The US has resisted this, mainly because of the very high sensitivity on the subject of energy independence.
Unless, against all expectations, the TTIP treaty makes a contribution to the removal of the oil exports ban, to date the implications of the treaty on energy markets are likely to be fairly limited. This is not just because tariff barriers on the energy trade are generally limited, but also because of the specific characteristics of trade in resources in the EU and US. Coal, together with other solid fuels, is the main energy source traded between the US and the EU. The EU imports about 18 percent of its needs from the US, and there are neither tariff nor non-tariff barriers to this trade. There is, if anything, a problem of coherence within the EU’s environmental policies but on which the TTIP would have no effect.
US LNG exports to Europe under the TTIP
The treaty could have some impact on US LNG exports to Europe, with LNG that may well become the most important energy commodity traded between the two shores of the Atlantic. Following the shale boom and the proliferation of liquefaction projects for LNG exports in the US, many importing countries (particularly in Asia and in Europe) have begun to look to US LNG as an important diversification lever with respect to an excessive dependence on a small number of large producers. US LNG may also represent an opportunity for pricing mechanism diversification, by including in European buyers’ portfolio some Henry Hub indexed gas (Henry Hub is the main US gas hub).
There are currently more than 20 LNG export projects in the US going through the authorisation process, which they must complete before arriving at the Final Investment Decision and therefore begin construction and operations. The export of LNG from the US requires two licenses: an export authorisation from the Department of Energy (DOE) that certifies – for countries that do not have a free trade agreement (FTA) with the US – that the exports will not be contrary to the national interest, as well as an authorisation from the Federal Energy Regulation Commission (FERC) that includes an environmental impact assessment and a construction permit.
The streamlining of DOE approval procedures, which already took place in 2014, effectively means that TTIP’s ratification would have little practical bearing on the trade of LNG towards Europe. The real obstacle to LNG exports from the US to Europe seems to be, if anything, the very small price differential between gas traded on the Henry Hub and on European hubs (about 4 dollars per million BTU, 2015 YTD), which is insufficient to cover the costs of processing and logistics (estimated at no less than 5 dollars per million BTU) of exporting gas from the US to Europe.
Also, taking a longer-term market view, the US-EU hub price spread is not expected to recover to a level capable of ensuring permanent affordability of these gas flows. Moreover, the US is also negotiating another FTA: the Trans-Pacific Partnership (TPP), which includes some of the leading importers of LNG in the Pacific, further reducing the already modest advantage for Europe that could have resulted from US LNG following the signing of TTIP.
On a systemic level, trade in a commodity benefits from the factor that is specific to the export sector; it triggers a shift of all other factors towards production that is intensive in that factor; and therefore, it ultimately works to the benefit of the economy which is most abundant in that factor. The US, now rich in hydrocarbons, has no reason to fear for its competitiveness in a free trade Atlantic community.