The View From 1776

A Containment Strategy To Deal With Russian Aggression In Ukraine

Read George Friedman’s assessment in the StratFor GeoPolitical Weekly:

From Estonia to Azerbaijan: American Strategy After Ukraine

Quote:

The State Department must grapple with the harsh forces its own policies have unleashed. This suggests that the high-mindedness borne of benign assumptions now proven to be illusions must make way for realpolitik calculations.

Posted by .(JavaScript must be enabled to view this email address) on 03/25 at 10:05 PM
  1. The author notes:

    "In my view, Russian power is limited and has flourished while the United States was distracted by its wars in the Middle East and while Europe struggled with its economic crisis."

    Russia's economy is about the size of that of the Netherlands, so although the Russian military is potentially dangerous, the Russian economy is its soft underbelly. Rather than seeing the response to incursion in terms of deploying tanks and foot soldiers, the NATO side is likely to be far more successful in using the economic hammer to achieve address the situation.

    Posted by .(JavaScript must be enabled to view this email address)  on  03/26  at  01:30 PM
  2. Unfortunately, our state department and executive office are totally unable to present any reasoned policy. Instead we see Kerry shuttling around to meaningless meetings and the president talking on the phone with Putin.

    The current crises have been years in the making because of poor geo- political planning. Instead of continuing the failed Afghanistan war for the past six years we could have left the Middle East quagmire for others and concentrated on true American interests: a strong domestic economy, a balanced budget, non-interference in other nations internal politics, close ties with the perimeter nations this writer refers to, and boosting our energy independence.

    I like krauthammer's suggestion to rapidly approve forty export terminals for LNG-the key product the European nations need to get out from under Russia's influence. We have wasted a decade in asserting our energy power which would provide us with real international power. Indeed each such terminal would be more important than any of Kerry's meetings or obama's speeches.
    Posted by Bill greene  on  03/30  at  08:32 PM
  3. While LNG export may have some impact in the long term, constructing LNG terminals and the associated pipelines will require many years of effort. So, the events in the Ukraine will be long forgotten before any LNG transport comes on line.

    In addition, transporting LNG by ship across the ocean is a very expensive way to transport energy because of the thermal requirements to keep the gas in a liquid state. So, LNG is not likely to be able to compete with piped natural gas on a cost basis.
    Posted by .(JavaScript must be enabled to view this email address)  on  04/01  at  03:45 PM
  4. Jay--You remind me of the one good line Spiro Agnew uttered--the one referring to liberals as "the nattering nabobs of negativism." Your argument can be restated as:

    A worthwhile project is not worth pursuing unless it can be completed instantaneously.

    This was the same old lame argument made by liberals 20 years ago that drilling for oil would not solve the energy crisis because it would take 7 years to develop the wells! Note that the solution would have occurred 13 years ago!

    Your logic assumes that long-range thinking is of no use--or perhaps that planning ahead is not possible, and yet almost all progress thoughout history has come from investments that paid off only after extensive application of time and money.

    If Obama had encouraged energy development and exports over the past 6 years we would have been able to lessen our allies' dependence on Russian oil. That would have been foreign policy with an insight that planned for future problems.

    When you don't plan ahead, you get crisis situations, like Obama telling Putin that "There will be consequences" for invading the Crimea.

    Also note that American energy corporations are already proceeding to find ways to get around Washington's stifling regulations: Construction is underway to export energy from the East coast to Europe, and in Canada they are expanding pipelines to the Pacific to supply Japan and other Asian markets. Apparently these corporate officers know that they can compete! They are the private sector in operation. Yet Washington holds back these projects, limiting their develpment. If these projects had been encouraged instead of restricted we would no longer have any "strategic interest" in the Middle East and we could get out of there. And we might just have been in a better position to help the Ukraine establish independence from Russia.

    We landed men on the moon about 6-7 years after JFK made that goal a top priority. He didn't say it wouldn't help because it took too long! Similarly, we knew in 1974 with OPEC that energy independence would be an immense advantage--and yet for 38 years the Democrats have blocked progress. The consequences of this constant negativism have been horrific: All the lives lost in Iraq and Afghanistan, all the useless diplomatic meetings, all the foreign aid/bribes paid to Middle Eastern dictators, all these costs have been the burden imposed on America by not pursuing the obvious solution of gaining energy independence!
    Posted by bill greene  on  04/01  at  08:20 PM
  5. Bill,

    I did not say that LNG export should not be attempted. I was trying to respond to the idea offered by some that all we have to do is hurry up and build a few LNG terminals to answer Russia's push into Crimea. That is an unrealistic time scale for this kind of industrial project no matter how hard you push for it or how many "stifling regulations" you waive.

    And unless it makes economic sense, you are not going to get private entities to invest in it - and I am sure you would not like it to become a "government" development (such as NASA's landing men on the moon.)
    Posted by .(JavaScript must be enabled to view this email address)  on  04/02  at  10:17 AM
  6. Jay--If you google LNG exports, licenses, and terminals, you will see that dozens of companies have, or are waiting for licenses, and that there are terminals currently shipping LNG overseas.

    Here is an excerpt ftom one such site:

    Through our analysis, we found that LNG exports offer the opportunity for the U.S. to improve the domestic economy while providing our allies and trading partners an affordable and secure energy source. America’s abundant natural gas resources can also be used to launch strategic international energy diplomacy and geopolitical stability around the world.

    But this window of opportunity will not remain open indefinitely and we have concerns over the Department of Energy’s slow review process of LNG export applications. To date, DOE has approved only six applications to export LNG to countries without a free-trade agreement, while 24 applications are still pending. In the absence of timely approvals, our allies may be forced to look elsewhere for energy supplies, investments may dry up, and America could see increased competition from other LNG exporters. To ensure the U.S. can maximize its energy advantage, we have asked DOE to approve all remaining export licenses by the end of the year and, if necessary, we may consider legislative solutions to reform the process and accelerate approvals.

    Thus you can see the problems our government is putting in the way of companies who are investing their own money to create these facilities and jobs here in America. There is huge boom coming in spite of the government's hurdles, and, from an investment point of view, take notice!
    Posted by bill greene  on  04/02  at  05:14 PM
  7. J. Jay,

    Bill has the measure of your negativity aright, at least when the proposal originates on the right. Deny it as you like, both the tone and substance of your post #1 is negative. Yeah, yeah, you aren’t dismissing the idea as bad economics (eventually), but you are totally dismissing it as useless for quelling hostile Russia overtures. Had this come from a Democrat, you would be totally for it and defending it to the hilt. Because it came from Krauthammer, however, you felt the liberal knee-jerk need to overreact.

    As usual, you treated us with a mix of misinformation and disinformation plucked entirely from the ether; with nary a thought for how you might capitalize on this. In cases like these, a little ‘non-partisan, outside-the-box’ thinking is called for (which your nabob negativity definitely isn’t). If, instead of finding fault with Krauthammer’s analysis, you add your own negligible insights to identifying opportunities for besting Russia short of war, maybe we (collectively) can do some actual good. Handled properly, this could be a win-win for Republicans AND Democrats, and even salvage something of Obama’s dismal foreign-policy legacy. What Krauthammer proposed is right from the Reagan playbook (i.e., use our greater economic clout to beat the Russians into civility); and he is telling Obama ‘here is your golden opportunity to do something meaningful’, if he will only have the good sense to see it. Of course, he would have to allow Krauthammer (and free-market dynamics) some of the credit, but that seems a small price to pay. Krauthammer handed us one idea, and maybe undermining the Russian gas hegemony is insufficient or not the optimal way to go about it; but the concept, itself, is sound. I bet, if we pick up where the ‘Hammer’ left off, we can come up with some doozies of our own with which to cause them grief – perhaps even without any of the weaknesses you cite. How about attacking them through debt recalls, account freezes, credit denials, internet disruptions, contract cancellations, spew disinformation (your department), delay grain shipments, com-sat blackouts, … I am sure we have far more of this type weaponry at our disposal than does dear old Vlad.

    Here is another proposal worth exploring – help Europe develop some of its own fracking capabilities. Europe lags behind Russia, the USA, Australia and even Africa in developing its own gas resources. It is not that Europe hasn’t any (Britain, Poland, and Spain have already gone some way in developing theirs) it is only that, geologically, other countries have certain advantages, and investment went to the low hanging fruit first. One reason gas development took off in Russia in the first place (late-1990s) was because a) cash poor Russia was desperate enough to take risks other countries (i.e., Europe, America) were not and b) because Russia was suddenly free of any kind of restriction (e.g., massive regulation, central planning, political correctness). If not developing your own resources means you are stuck under extortionate Russian influence, wouldn’t it make sense to liberate yourself from that vulnerability, even if it means paying more for local gas development? Geopolitical outcomes have costs too, and when those costs are factored into the overall calculation, it may be the money will be well spent. It took us only a few years to develop our own fracking capacity, and, assuming it really is cheaper developing gas locally than transporting it to Europe, then the economics will dictate that.

    That brings me to the next bit of confusion you’ve sown wherein you claimed “transporting LNG by ship across the ocean is a very expensive way to transport energy” basing your argument on an equally false premise “the thermal requirements to keep the gas in a liquid state” are prohibitively expensive. Like so much else you spew, the stuff you know to be true just ain’t so! According to ‘The Economist’ (see http://www.economist.com/node/21558456 ), Russian gas costs around $12/mBtu, whereas the price of U.S. gas (non-liquid) goes for around $2.50/mBtu. The current asking price for LNG flowing to Asia is even higher than that going to Europe. According to a Washington Post article, it “costs about $3 per 1,000 cubic feet to liquefy natural gas, about $1 to transport it to Europe and $1 or so to turn the liquefied natural gas back into a gas.” Those numbers are high by a factor of 253% according to a more reliable source (see http://extension.psu.edu/natural-resources/natural-gas/news/2012/02/understanding-the-role-of-liquefied-natural-gas-part-1 ). The lower heating value of LNG is 19,350 BTU/lb, and has a density of 2.8lbm/CF, giving us a cost adder of $0.32/mBtu (negligible). So, even with the added cost of liquefaction, transportation and re-gasification, that is extremely competitive with Russian gas at around $2.53. Even using the higher WP estimate, this adds less than a dollar to the cost of American LNG. Either way, this pretty much deflates your silly assumption that it costs too much converting and transporting gas to Europe, when, in fact, the additional cost is trivial.

    [BTW, all the energy used to liquefy, transport and re-gasify LNG comes from the LNG itself and from entrained impurities. The impurities (other hydrocarbons like propane, ethanol, &c) are used to cool/distill the liquid and are then burned off, and would have to be processed out even when used domestically (so, not really adding much to cost to condense).]

    In fact, the cost of keeping LNG in a liquid state at sea is likewise negligible; as anyone with a bulk gas facility can tell you. LGN is shipped at a mere 4psig (max), and it is the containment sphere which primarily keeps it in a liquid state. If nothing else were done, the liquid would gradually warm, and that would cause pressure to rise within the spheres. Three things mitigate this happening, however. First, the spheres are thickly insulated. The second is that the ship rides in a near perfect heat sink – the ocean. If heat transfer to the ocean via hull conduction is insufficient, then sea water can also be circulated to cool the LNG. And, the third (and most important) factor is that some of the LNG is continually drawn off to power the ship in transit, relieving the pressure buildup in the process.

    As to your assumptions “Russian power is limited” and “the Russian economy is its soft underbelly”, those are easily debunked as wishful thinking. It was not all that long ago an impoverished Russia (Soviet Union) kept the entire world trembling from its might. You conveniently forget Russia still possesses a considerable nuclear arsenal, army and a rebuilt air force and navy with which to intimidate. Just because it has an economy the size of the Netherlands, does not mean it is without financial clout or military resources. It has enough of both to be a threat. More importantly, the Russian people are highly supportive of Putin and his adventures, and have ever been drawn to pugnacious leaders. Yes, its economy is Russia’s greatest weakness, but that never stopped it from bleeding itself (and others) dry pursuing objectives only a Russian (or highly committed, objective observer) will understand. Russian thinking is significantly different from ours, and that has ever been the real danger in misjudging how far they will go when feeling themselves hemmed in.

    As to the length of time it takes to build LNG plants and terminals, I seem to recall within your lifetime (or that of a parent) something similar was called for in order to contain and beat back the fascists. It did not take a decade to convert American industry to a war footing, nor to throw together an arsenal and weapons that defeated the Nazis and Japanese in less than five years; and it should take even less time today when our capacity to get things done (and cheaply) is far greater. I am not suggesting anything so draconian as actual warfare or converting the country to a war footing; but, the problem is not how long it normally takes to build LNG plants, but how fast we can build them given we pull out all the stops. Most of the time spent building such plants is not spent in building or even planning. Most of it is spent procrastinating over regulations and fending off environmental wackos. Cut out most of the red-tape, and we could build several in less than three years. Yes, this might stress the ‘all holy ecology’ a bit, but it needn’t cause much real damage and should be weighed against the far greater dangers of doing nothing.

    The Economist article further commends converting existing excess re-gasification plants in the Gulf into LNG export terminals (low cost, fast track). A substantial number of these plants were built before the fracking boom when it was believed we were stuck with importing LNG. The switch from being gas poor to gas rich has rendered many such recently built plants redundant and uneconomical for their intended use. These plants already have many of the components needed for condensing; only requiring some upgrades to convert them to LNG export terminals. This would more than make up for the losses they currently incur (i.e., literally turning sow’s ear into silk purse). Now, were talking new plants in under a year.

    Finally, it does not matter it takes a year or ten years to respond using LNG as a weapon. It is enough that we signal global bullies like Putin his actions come with a cost. It may be relatively ineffectual (as compared to threatening an armed response), but it beats the heck out of doing nothing, and fits within Obama’s limited comfort zone for taking action.

    Further sources:
    http://en.wikipedia.org/wiki/LNG_carrier
    http://www.freeportlng.com/The_Project.asp
    http://www.bloomberg.com/news/2013-05-21/u-s-lng-export-potential-gaining-momentum-goldman-sachs-says.html

    http://www.washingtonpost.com/blogs/wonkblog/wp/2014/03/25/can-u-s-natural-gas-rescue-ukraine-from-russia/ - article makes some useful points despite some reluctance to take the capitalist plunge
    http://www.deloitte.com/assets/Dcom-UnitedStates/Local Assets/Documents/Energy_us_er/us_er_GlobalImpactUSLNGExports_AmericanRenaissance_Jan2013.pdf
    http://www.navigant.com/~/media/WWW/Site/Insights/Energy/NG_Market_Notes_July_2012.ashx
    http://accf.org/wp-content/uploads/2013/11/ACCF_LNG_Price_Impact_11.06.13_d3.pdf
    Posted by .(JavaScript must be enabled to view this email address)  on  04/02  at  08:03 PM
  8. Bob,

    You present a lot of interesting data, although in the context of accusing me of being negative on the export of LNG. There are many cost hurdles to overcome, including the cost of tankers ($160 million each),regassification terminals ($2 billion each), and marine facilities (say, $100 million each if dredging is required.)

    But Bloomberg is not as high on LNG's profitability as you are. But the picture will become clearer with time.
    Posted by .(JavaScript must be enabled to view this email address)  on  04/06  at  09:31 PM
  9. J. Jay,

    Regarding “hurdles,” yes, there are some, but no more than any other large project of the type. As someone who manages projects and who spent a few years working for an oil company, I see nothing to discourage investment here and much to commend it. You say Bloomberg is “not high on LNG’s profitability”, but I fail to see where you show that to be true (another of your factoids plucked from thin air, perhaps). Regardless, Bloomberg is an ordinary market reporter, and does not provide solid reportage on energy. For that, I go to better sources.

    Before we go there, let us review just why this is a topic of geo-political (not especially economic) discussion the better to see why it is you are being so ‘negative’. It is clear to us (if not yet to you) that you went out of your way throwing wet blankets on the Krauthammer proposal. If economics, were the only consideration, I might concede your ‘wait and see’ approach has some legitimacy. As you are using economics only as a dodge to distract us from the geo-political elephant – or, should I say, bear – in the room, I won’t. You have been doggedly ignoring the bear, and that is the negativity of which we speak. You gladly discuss economic merits of exporting LNG only because it avoids discussing merits of economic-warfare as might ‘piss the bear off’. The Krauthammer proposal was made on its economic-warfare merits, not its economic ones (which are, indeed, arguable), and it is this warfare aspect which draws your negativity.

    Is it that you recognize your feckless leader hasn’t the gonads to challenge the bear that you avoid offending Putin; that Obama might wet himself? Is that why you dodge this particular question so doggedly?

    The following reports and estimates tell me there is strong incentive right now to further expand gas production into additional markets; and, all other things being equal, that is what should happen – and quickly. That is what happed historically, but no longer happens today as before. Instead, we saw the gas market explode domestically (as expected), then, almost as quickly, slowed to a crawl well short of a sated market, never even touching the foreign market where it should have its greatest impact. That was unexpected and caught a lot of otherwise savvy investors off guard. So, what is wrong with this picture? Several things come to my mind, and none are directly economic.

    First of these is regulation combined with an administration known to be obsessively hostile and obstructive against fossil fuels and their development. If it is true that sluggish regulation (including some that is deliberately obstructive) and ridiculous court challenges (spawned by our AG) without a chance of being upheld represents most of the delays, then streamlining that same regulation to the extent possible (without seriously compromising safety) and dropping the phony challenges will go far in cutting that timeframe of yours in half.

    Second is economic uncertainty that is holding back markets generally and gas investment particularly (no one wants to take risks where the rules are constantly changing). Another is energy producers past experience of government’s false signals; such as loose monetary policy as leads to ‘bubbles’. This last is a conflicting signal telling producers to rush ahead all the while other signals are screaming hold fast until something (or someone) more reliable comes along.

    Correcting just these two tendencies by a president announcing it will be done in order that we might punish aggression will send a strong signal to Putin; and may very well be all that is necessary should he then give ground. If, not, then it hasn’t cost us nearly as much as it will Russia, and will, at minimum, be something for which Obama will gain grudging respect from his own opposition (can’t very well do otherwise afterwards, right?). Just so you don’t mistake my meaning, not all of the blame for this mess is on Obama, but, right now, it is entirely his to amend.

    This brings us to the peculiar hyper-political sensitivity dimension, which is the real crux of your negativity. Investing in new infrastructure when you don’t know where the political winds blow (or soon will blow) is a clear discouragement to businessmen to take this kind of risk on themselves. Nor is geo-politics their role to pursue. We used to have a term for that sort of thing in this country, ‘free-booting’ (but, sadly, that was a long time ago). It is Obama’s role to provide leadership (while dangling a carrot, if necessary). Let’s assume for a moment gas marketers went ahead with this challenge to Putin on their own (thanks to a leadership vacuum), and the Europeans then cave to Putin while Obama sits it out. The producers, then, get left holding the bag. Worse, Obama has a field day raking them over the coals (ala certain car-making VPs). That gives them strong reason to avoid committing to such a policy without a President who also commits. So, this kind of thing requires political will even to launch (not just commercial incentives), and that to makes your discussion on the basis of economics alone a discouragement to others.

    That is also why I deliberately put this on a par with putting a man on the moon or Lend-Lease during WWII (so as to restore it to the geo-political realm, which is its proper focus). Those, too, were ‘uneconomic’ undertakings for which there were overriding rationales. Our Merchant Marine (my dad included) did not sign on to those undertakings just for high wages, nor did those shipping companies sign on just for war profits. They signed on, at enormous personal risk, because they believed it would help and was the right thing to do. Right now, America is looking to Obama for leadership. Our people and our industries are willing to take on additional risks in a good cause, and the case of Ukraine is an instance of that. And, as Krauthammer shows, this is one response Obama can make relatively safely (duh, it’s a no brainer!).

    You may think we conservatives are delighted at Obama’s serial bad luck backing wrong causes and/or wrong approaches. Yes, we want him to fail in his promotion of socialism, but that is all at which we want him to fail. It does not mean we want him to fail our country, our allies or our fellow human-beings. We aren’t delighted by his failures because those hurt America, and it sometimes gets people killed. It also makes us look bad as a people, as uncaring. I can’t speak for others, but I would love to see him just once get it right; or rather, get the right things right.

    I find interesting that in this and a couple of other recent blogs, you broadcast a dismissive ‘wait and see” attitude (very Pelosi-like, BTW). In this case it was your concluding remark, “the picture will become clearer with time”, which insinuates we too should do nothing but wait – at least until you (The Great Jay) can divine our future. This contrasts strongly with your criticism of Hoover having “done too little [to prevent the Great Depression]”, even to praising Roosevelt for trying everything and anything to fix it even when that clearly does more harm than good. So far as Hoover could then have known (back then), he was faced with no worse than a bad recession. It should be noted at this point, you have yet you recant this particular slur against Hoover’s character (however misguided he may have been). And, had FDR not stepped in ‘to save the day’ or had Hoover stopped his own meddling, that is, in all probability all that would have transpired – a recession. In that case, we would not now have a ‘Great Depression’ against which to compare all other recessions and all other messiahs, nor a national tragedy for you socialists to impale poor Herbert. In so saying, you registered a strong distain of those who refrain from action in such a situation, regardless how small or large his portion of prescience. Thus, Hoover is supposed to have divined his own future that you can make such a judgment of him. Assuming we (America) follow your counsel and something really awful happens as a consequence of your own prescription to inaction, just what judgment ought we to make of you?

    LNG outlook readings:
    http://www.eia.gov/forecasts/aeo/MT_naturalgas.cfm#windprod
    https://www.energyaspects.com/publications/view/russian-roulette
    http://www.lukoil.be/pdf/Trends_Global_Oil_ENG.pdf - outlook from Russian perspective, as directed at American investors
    http://www.investorschronicle.co.uk/2013/09/19/shares/sectors/outlook-for-lng-is-far-from-clear-gJ4iwyUuhWIoYyYJxrrWZJ/article.html - British gas investment reporter says “regulatory and energy policy uncertainties in both Japan and South Korea could result in less LNG supply being developed. However, there's a range of variables at play - not least the US domestic gas glut - that will have a major bearing on the global supply/demand balance, and subsequent pricing, between now and the end of the decade” – September 2013; gives some indication just how much regulation affects development, and not just here. Japan is, if anything, even more regulated than here. On the plus side (for them), is that right now they are gas hungry and, therefore, more likely to curb their regulatory impulse.
    http://www.prnewswire.com/news-releases/world-lng-market-forecast---forecasts-to-2017-253502821.html - lead-in emphasizes demand is greater than is being met, and projects a 109% increase in LNG facilities by 2017 (despite Obama and his obstructionists); so I don’t know what the heck Bloomberg is reporting, but it isn’t what oil sources expect to happen. Doubling of LNG facilities (globally) is a pretty strong indication of a high gas demand somewhere. Regardless the gas flows to Europe or Japan or wherever, it increases supply Russia does not control, and we know Putin does not like competition.
    _
    Posted by .(JavaScript must be enabled to view this email address)  on  04/08  at  05:38 AM
  10. Jay -- I am ignoring Bloomberg, and you, and listening to the very positive investment plans of EPD, ETE, MWE, PAA, KMI, and the other fast growing MLP's that are investing billions in their (and thereby also partly mine)essential infrastructure to process, transport, and export our abundant energy resources.

    It is educational, as a part of this scenario, to recall the prophets of doom during the 1970's, 1980's, 1990's, etc. who claimed we were running out of energy in America! The Malthusians, like the socialists, will never learn. Instead they philosophize about their theoretical conjectures without looking to the hard evidence before them. Fortunately, America still has many common sense concrete thinkers who make everything positive happen.

    The weakness America has in constructing a strong foreign policy rests on the fact that it is these same theoretical intellectual elites that run the State Department, while the rather more shrewd and clear-thinking characters run the basic industries.
    Posted by bill greene  on  04/08  at  09:18 AM
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