[GGP] Delivery of Russian LNG Heats Up Discussion About U.S. Energy Dominance & Sanctions

On January 28th, a French tanker, Gaselys, with liquefied natural gas (LNG) docked in Boston, where a cold snap that curtailed regional gas supplies had created demand for imports. The delivery came as a shock to many international and national observers as it seemingly contradicted the recent narrative of U.S. self-sufficiency in natural gas. To add insult to injury, the shipment included gas from Russia’s Yamal LNG project, where a newly built LNG export terminal has been just opened despite U.S. sanctions.

But while this may sound alarming, a closer look into the issue tells a more nuanced story.

First, the U.S. has to import LNG not because it lacks sufficient natural gas production but because market and non-market mechanisms prevent natural gas from being delivered to the northeastern part of the country whenever demand increases rapidly and at a relatively short notice. The underlying obstacle here is insufficient pipeline and storage capacity to bring in and store otherwise abundant U.S. natural gas. In addition, the region is not able to cost-effectively import U.S.–sourced LNG due to barriers caused by the Jones Act. This 1920 policy prevents ships built and registered outside of the U.S. from delivering goods between U.S. ports. And there are currently no U.S.-made, U.S.-flagged LNG tankers.

But while these obstacles prevent sufficient volumes of U.S. gas from accessing the Northeast during times of shortage, they do not limit the U.S.’s ability to produce or export natural gas. By 2022 the US is expected to produce 1/5 of global natural gas, output with half of the increase in U.S. production to be used for LNG exports. In this context, Northeast delivery limitations may even facilitate US LNG exports as gas that does not find its way via pipelines to Northeast will instead be liquefied and sent abroad.

This brings us to the second concern spurred by the Gaselys shipment - an apparent loophole in sanctions imposed on Russia by the U.S. While these sanctions include measures against Yamal LNG’s major shareholder, Novatek, they do not cover the natural gas it produces. The gas that entered the U.S. market not only did not come directly from Yamal but also is not the property of Novatek. Instead, it is owned by a French company, Engie, and is sourced from many locations, one of which is Yamal. This would suggest that Novatek indeed found a way to evade U.S. sanctions.

But while U.S. sanctions did not prevent Russian LNG from accessing the global market, they made it difficult to find financing for the Yamal project. To help, the Russian government effectively subsidized the terminal by granting a 12-month Mineral Extraction Tax holiday, exempting it from export taxes, and financing some of the construction activity. Thus, even though in a limited way, U.S. sanctions worked by burdening Russian government with infrastructure expenses and restricting the revenues that Yamal sales could otherwise bring into the Russian federal budget. All this comes against the backdrop of the Russian economy’s weak performance in 2017. Official data shows Russian GDP only grew by 1.5%, which is lower than most- already low- predictions that ranged between 1.7 and 2.2%.

As such, the U.S. sanctions have achieved what was possible for unilaterally imposed and narrowly defined measures in an increasingly global natural gas market l. As long as there are other market players who are willing to trade with the sanctioned entity, the (non-sanctioned) natural gas this entity produces will be able to find its way onto the market via (1) actual delivery of indistinguishable molecules sourced from numerous producers by a non-sanctioned entity (as in the case of Gaselys delivery) or (2) displacement.

In this context, the U.S. should rethink its approach to Russia and sanctions; it should look for multilateral, broad commitments rather than unilateral and narrow measures. At the same time, the recent importation of Russian LNG does not suggest that the U.S. is unable to produce sufficient natural gas to meet domestic and export demands. It points, however, to regional market barriers (insufficient pipeline and storage capacity) and damaging effects of an old policy—the Jones Act—that does not reflect current market realities and needs.

Anna Mikulska is a nonresident fellow for the Center for Energy Studies at Rice University’s Baker Institute for Public Policy; Follow her on Twitter: @anna_b_mikulska 

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