On January 20, Donald Trump will officially become the new president of the United States. There are still many uncertainties about his plans. These include those relating to energy and environmental policy.
While it is true the plan of the future government is still very uncertain on how it will proceed in the first few months of its mandate, there have recently been some clues as to what may be its first steps. Donald Trump emphasizes the statement about rethinking US involvement in the main Free Trade Agreements. Thus, it has already confirmed the exit of the Trans Pacific Treaty (TPP), which it considers “a potential disaster” and will rethink its stance on the North American Free Trade Agreement (NAFTA), in its words, “the worst Agreement in History “and to the Transatlantic Trade and Investment Agreement with Europe or better known as Transatlantic Trade and Investment Partnership (TTIP), in Trump’s words” a huge agreement no one understands. ” Everything seems to indicate that the latter will be paralyzed. The opinion within the EU is clear: Donald Trump will break with the TTIP negotiations, initiated in 2013.
What may involve the breakdown of the trade agreement between the US and the EU for the energy sector?
TTIP is a trade agreement between two consolidated economic blocs, representing approximately 40% of world GDP and almost 1/3 of trade flows. In addition, the EU is the market that most invests in the US and is its second largest supplier of goods (behind China). For the US, the EU is the second destination of its exports of goods (after Canada) and the first for its exports of services. The GDP per capita of each bloc is comparable and its social and environmental parameters, with some differences, are much closer to those that would result from comparative among other regions of the world. Therefore, TTIP means an unprecedented international trade agreement. It is a Treaty which would undoubtedly benefit not only the competitiveness of the regions but also the security of energy supply and even environmental sustainability in Europe. After Obama’s departure from the White House, it seems that all this will be nothing.
The trade of energy commodities between the US and Europe has traditionally been limited. According to the BP Statistical Review 2016, in 2015 Europe imported 465,000 barrels per day of US oil (out of a total import of about 13.6 mbd), while Europe’s export to the US was 716,000 barrels per day. On the other hand, 18% of the EU’s coal needs come from the US.
For both oil and coal, trade obeys different rules as we speak of the US or Europe and the end of TTIP is likely to have limited impacts on the trade flows of such fossil fuels.However, where the break-up of TTIP could have a significant effect, ie a great loss of opportunity, is with regard to the market for liquefied natural gas (LNG).
In general, the stop of trade negotiations between the EU and the US will lose opportunities regarding:
- Greater commercial exploitation of energy commodities between the two regions.
- – Limit progress in the development of LNG trade, preventing increased security of supply and Europe’s dependence on Russia.
- It may hinder compliance with environmental objectives, in particular for the EU. Less LNG inflow from the US could increase the coal dependency of the continent.
Impact on GNL market
Natural gas markets between the two regions act independently, the hub of reference in the US, Henry Hub, on the one hand and the different European hubs, on the other, mark different prices. However, in recent years, the United States has witnessed a revolution in its gas industry (shale gas) with a large proliferation of liquefaction projects for the export of this hydrocarbon. In this way, The United States has been among those that have a greater projection in the export of LNG and is expected that in the medium term is among the first exporters of the world, next to Australia. In fact, by 2020, 90% of the new LNG export capacity is expected to correspond to these two countries.
Thanks to this evolution of the gas market, LNG can make the market for this energy commodity become a long-term global market, as is the oil market today.
In this sense, Europe is undoubtedly an attractive market for the US to place its excess production competitively. It should be remembered that, along with its large volume, the USA uses very advanced extraction techniques that allow its gas prices, including transport costs, to compete in the European market. To get an idea, in the last ten years, the price of natural gas in the US has been reduced by 80% (from $ 15 / MMBTU to around $ 3 / MMBTU).
However, currently exporting LNG from the American country involves a heavy bureaucratic licensing process. Specifically, the export of LNG from the US requires two documents: 1) export authorization from the Department of Energy (DOE), certifying that the trade flow is not contrary to US interests. This applies to countries that do not have a Free Trade Agreement with the American country. 2) Authorization issued by the Federal Energy Regulation Commission (FERC) which includes an environmental impact study and construction permit.
It is clear that the elimination of these regulatory barriers to the export of US gas, through the signature of the TTIP, would help to increase the volume of arrival in Europe, compensating to some extent for European production, such as case of the Groningen site, The Netherlands. But in addition, increased imports into the EU would help to improve prices, making gas a more competitive commodity. Finally, this entry of LNG would grant a greater security of supply to the continent, diversifying its sources of supply and diminishing its dependence on Russia, a subject that is very present in the agenda of European energy policy, after the crisis between Russia and Ukraine.
On the European side, it is clear that increased entry of natural gas in the form of competitive prices would shift the use of coal to generate electricity. From the point of view of carbon, this scenario would undoubtedly help to meet its reduction and meet the objectives set at European level.
As for the US, the abundance of gas as a result of the revolution of the fracking, would prevent that, in spite of a great exit of gas towards Europe, this one is replaced coal. Faced with increased domestic demand, the US will simply continue to supply itself with an abundant source of gas. Therefore, its export would not influence the price due to the large gas supply in the country. It should be clear that the US gas is now abundant and cheap and this is how it will be maintained in the medium term. Therefore, the replacement of gas by coal to generate electricity is unlikely to happen.
With the breakdown in TTIP negotiations, important energy opportunities are lost between two of the world’s main economic blocs. Energy commodities, especially LNG, will not be properly exploited without more flexible regulation and the EU will miss an opportunity to strengthen its security of supply, a key point in the continent’s energy policy.
As mentioned before, opportunities are also lost on environmental measures, since the greater role of gas implies, for both regions, less use of coal and, therefore, reduction of CO2 emissions. This would help to achieve the goals to mitigate global warming.
In the coming months we will see if the paralysis of the Trade Agreement between the US and Europe (TTIP) is total or partial. It is the responsibility of the US administration to analyze in detail the implications of this Agreement, duly analyzing the great advantages it could generate. If the agreement is broken, Europe will be affected.
Enrique Battistini | Energy Consultant