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World Russia’s energy sway raises stakes for development of North American energy resources

Ukrainian soldiers man a check point in the village of Strilkove, Ukraine, Sunday, March 16, 2014. Russia raised the stakes Saturday when its forces, backed by helicopter gunships and armored vehicles, took control of the Ukrainian village of Strilkove and a key natural gas distribution plant nearby the first Russian military move into Ukraine beyond the Crimean peninsula of 2 million people. The Russian forces later returned the village but kept control of the gas plant.

Sergei Grits/AP

Europe's energy insecurity has forced the United States to use its own booming production to counter-balance Russian strength, as Moscow moved on the weekend to ensure continued natural-gas deliveries into the disputed territory of Crimea.

Throughout the intensifying conflict and the occupation of Crimea, Russia's state-owned OAO Gazprom has continued to provide natural gas to Ukraine, and through it, the rest of Europe. But on Saturday, in advance of Sunday's disputed referendum in which Crimeans voted to become part of Russia, the government in Kiev said Russian troops had seized a village in southern Ukraine, which is site of a key gas distribution station for Crimea.

Russia's dominance of the region's oil and gas supply is both complicating and intensifying the geopolitical stakes in the conflict. Europe relies on Russia for a third of its gas supply – much more in Eastern Europe – as well as a significant portion of its crude imports. Calls for sanctions against Moscow run up against the hard reality that the world, and especially Europe, needs Russian oil and gas.

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Four central European states – Poland, the Czech Republic, Hungary and Slovakia – have urged the United States to fast-track permits to export liquified natural gas (LNG), a call that was taken up by Republicans in Congress, including House Speaker John Boehner, who called on President Barack Obama to "do everything possible to use American energy to reduce the dependency on Russia for our friends in Europe and around the globe."

But in the immediate crisis, U.S. action would be symbolic. Ukraine remains dependent on Russian gas, even as Gazprom says the former Soviet republic has $1.8-billion (U.S.) in unpaid bills.

"In the short term at least, there's no way that U.S. gas could get to Ukraine and in anything like the quantities that would be needed," Richard Mallinson, a London-based analyst with Energy Aspects consultancy, said in a telephone interview.

Over the longer term, the North American oil-and-gas boom holds the promise of a fundamental realignment in global energy geopolitics by reducing the clout of countries like Russia, Saudi Arabia and Iran, which are rich in oil and gas.

Exports of liquified natural gas and oil from North America would provide greater competition in the global marketplace, and reduce the reliance of consuming nations on Russia and the members of the Organization of Petroleum Exporting Countries (OPEC), David Goldwyn, a former senior State Department energy official, said last week.

"It could be an enormously pivotal moment for U.S. national security," Mr. Goldwyn told the IHS CERAWeek energy conference in Houston. "If we embrace the production, if we embrace the opportunity, this could vastly increase U.S. national power. ... And making markets more competitive is enormously important to other countries."

The U.S.-based industry and its political supporters have seized on the Ukraine conflict to argue for unfettered development and export of North American oil and gas resources, even citing it to bolster their case for controversial projects like the Keystone XL pipeline. The Washington Post, The New York Times and the Wall Street Journal have backed the notion that rising LNG exports would be an important foreign-policy tool in the standoff against Russia over the Ukraine.

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But U.S. exports would not be achieved overnight. While Republicans assail Mr. Obama for not approving LNG exports quickly enough, the projects that have been approved will take years to complete. Cheniere Energy Inc. received the first U.S. gas export permit in 2012 for its Sabine Pass LNG project in Louisiana; it expects to deliver the first shipments in late 2015.

So far, Russia has avoided a repeat of the episodes in 2006 and 2009, when Gazprom cut off gas to the pipeline that supplies Ukraine and central Europe over financial disputes aggravated by political tensions. But there is clearly concern in Ukraine – and among its neighbours – that Russia could play its energy card if the crisis escalates.

Ukrainian officials have been in discussions to reverse the flow of a pipeline that moves Russian gas to central Europe if necessary. European storage tanks are bulging after a mild winter, but the continent could not supply Ukraine for more than a few weeks, although the urgency lessens as the weather warms.

Ukraine wants to develop its own shale gas resources, and has signed contracts with Chevron Corp. and Royal Dutch Shell to develop two fields. Ousted president Viktor Yanukovych – who signed the deals last year – said they would make the Ukraine self-sufficient by 2020. But other European countries – notably Poland – have touted shale gas potential, only to be disappointed.

But dependence cuts two ways. Russia is heavily reliant on oil and gas exports to drive its economy and finance its governments. Security of demand is as crucial to a producing nation as security of supply is to a consuming one. So a concerted effort by Europe and the United States to reduce the need for Russian oil and gas is a grave threat.

Follow me on Twitter: @smccarthy55

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