Saturday, August 23, 2014

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EU-US Free Trade Agreement Could Boost Gas Exports to Europe

The United States and the European Union have begun preliminary negotiations in Washington on a potentially historic free trade deal. Known variously as the Trans-Atlantic Free Trade Agreement (TAFTA) or the Trans-Atlantic Trade and Investment Partnership (TTIP), an agreement could boost economic growth on both sides of the Atlantic. In particular, it could have a significant impact on the global energy landscape, leading to increased gas exports from the US to the EU and domestic development of shale in Europe.

The prospect of lowering tariffs and boosting trade between the world’s two largest economies has generated optimism on both sides of the Atlantic that a deal can be reached. It is possible that an agreement could be reached by the second half of 2014. If a deal is achieved, it could be one of the most ambitious economic enterprises since the signing of the North American Free Trade Agreement in December 1993. It is estimated that a transatlantic free trade agreement could result in an additional US$160bn to the EU economy annually, US$120bn to the US economy, and US$85bn for the rest of the world.

US natural gas exports to Europe could help alter the strategic energy landscape

Energy companies will be watching the outcome of negotiations closely. It is likely that the terms of any agreement could provide Europe with increased access to US natural gas. At a time of mounting energy bills across much of Europe, an influx of cheaper gas from the US will be welcomed by European consumers.  A recent report commissioned by the UK Department of Energy and Climate Change suggested that US imports could help bring about  a 12% fall in British gas prices by 2020.

From a geopolitical and macroeconomic standpoint, greater access to US gas will also reduce dependency on energy supplies from Russia, which has increasingly been seen as expensive, unreliable, and subject to inefficiency, corruption and arbitrary political interference. There has already been a move away from Russian oil and gas to cheaper, more reliable and less politically controversial sources. As European demand decreases, Russia will increasingly reorientate its energy exports to Asian markets, as illustrated by a recent agreement finalised by Rosneft to supply US$270bn of oil to China or the deal reached between Novatek and China National Petroleum Corp to supply 3m tonnes of liquefied natural gas (LNG) to China annually.

Gas exports to Europe could rebalance US trade deficit with EU

From an American standpoint, increased gas exports to the European market will be a welcome boost to trade and help rebalance the US$107bn trading deficit with the EU. It would also lead to an expansion of existing gas installations on the eastern seaboard of the United States. For example, in anticipation of increased gas exports to European markets, Dominion is proposing to construct liquefaction facilities for exporting LNG at its Dominion Cove Point Terminal on Chesapeake Bay, Maryland. Dominion Cove is already one of the largest LNG facilities in the United States and will play an increasingly critical role in coming years.

A transatlantic free trade agreement (FTA) would certainly speed up the process of exporting gas to Europe. Whereas the Department of Energy currently has to formally approve energy exports to non-FTA countries, exports to FTA- participating nations are typically rubber-stamped as a matter of procedure.

However, a cautionary note should be struck. Firstly, it is not clear whether companies seeking backing for export projects to Europe can convince investors that the ventures will be profitable.  Given the higher price of natural gas in Asian countries like Japan and South Korea, many investors feel that focusing on this market would be a wiser strategy. Secondly, American companies which currently enjoy a competitive edge over their European counterparts, due to the recent glut of cheap domestic natural gas, are loathe to give up this advantage.

Investor-state dispute resolution may challenge opposition to fracking

The proposed trade deal is also being closely monitored by public interest groups, especially from the environmental lobby, who have expressed misgivings that an agreement could open the door to an expansion of hydraulic fracturing (fracking) in Europe. In particular, there are concerns that EU states could soon find domestic laws subject to challenges in tribunals where national legislation has little weight.

A proposal for greater investor-state dispute resolution in the free trade negotiations could enable US companies investing in Europe to avoid European courts and directly challenge EU governments at supranational tribunals. The same right would of course apply to European companies investing in the US, something that European lobbying groups, such as the German Bund der Deutschen Industrie (BDI), have also campaigned hard for.

A concerted campaign by powerful lobbying groups such as Business Europe, the US Chamber of Commerce, AM Cham EU, and the Transatlantic Business Council is already underway to give energy companies the ability to mount legal challenges to regulations both at home and abroad. There is also considerable precedent for this. For example, on the basis of the North American Free Trade Agreement (NAFTA) between the US, Canada and Mexico, the US company Lone Pine Resources Inc. is demanding US$250m in compensation from Canada following Quebec’s moratorium on fracking in response to environmental concerns.

On 14 July, Francois Hollande stated that there would be no shale gas production in France during his administration. However, despiteHollande’s declared hostility to fracking, governmental opposition to shale gas extraction may not be so straightforward in the event of a free trade deal. The proposed investment chapter in the EU-US trade agreement could empower energy companies to challenge measures undermining and obstructing profitable business operations.

Shifting sands

A trade deal between the EU and the US could be a powerful new ingredient in the shifting sands of the global energy landscape. There will certainly be no overnight surge in American gas exports to Europe. However, in the medium term, a free trade agreement will certainly make a significant increase in gas exports to Europe both easier and more likely, and could have serious geopolitical implications for Europe’s own relationship with Russia and the Middle East. In addition, the provision for more investor-state arbitration in the proposed deal may also make it easier for energy companies to circumvent opposition to fracking in the EU, opening up new and potentially lucrative markets.  

Author Trevor Slack is a Senior Analyst for Europe and Central Asia at Maplecroft. 

The article is provided by Maplecroft, a Natural Gas Europe Industry Partner.  For more information on Maplecroft's latest in-depth Country Risk Report - Russia,  please email at info@maplecroft.com or call +44 (0)1225 420000

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