TRADE IN ENERGY UNDER THE TTIP: BENEFITS OF ALLIED POWER.

• Author: Ventocilla, Michael S.

This article examines the potential for a secure and sustainable trade in energy between the U.S. and the E.U. through the Transatlantic Trade and Investment Partnership (TTIP). Since the start of negotiations on the comprehensive trade agreement in 2013, the E.U. has made clear its desire to have access to the abundant shale energy sources that have transformed the U.S. into the world's largest producer of both oil and gas. (1) Until present, longstanding political barriers and insufficient transport infrastructure have acted to keep most of the fruits of the U.S. shale revolution within North American borders. (2) Recent changes in energy export restrictions, however, may soon see the U.S. become a major energy exporter, by providing viable export markets through free trade agreements (FTAs) such as the TTIP. (3) This report will address a brief history and the development of U.S. energy policies and interests, modern U.S. energy export policy, opportunities for transatlantic energy trade, obstacles to trade development, and inclusion of a separate energy chapter in the TTIP. This information will be used to analyze the potential for a robust energy trade between the two parties, and its implications for global energy markets.

A day will come when we shall see those two immense groups, the United States of America and the United States of Europe, facing one another, stretching out their hands across the sea, exchanging their products ... and joining together, to reap the well-being of all, these two infinite forces, the fraternity of men and the power of God. (4)

1. THE DEVELOPMENT OF U.S. ENERGY POLICIES AND INTERESTS II. MODERN U.S. ENERGY EXPORT POLICY III. OPPORTUNITIES FOR TRANSATLANTIC ENERGY TRADE IV. OBSTACLES TO TRADE DEVELOPMENT V. INCLUSION OF A SEPARATE ENERGY CHAPTER VI. IMPLICATIONS FOR THE FUTURE I. THE DEVELOPMENT OF U.S. ENERGY POLICIES AND INTERESTS

   With limited exceptions, (5) the U.S. has followed a protectionist policy with regard to its crude oil resources since the government made the decision to impose a ban on exports over 40 years ago. (6) The Energy Policy and Conservation Act--enacted in the wake of the 1973-74 Arab oil embargo--created an approach to federal energy policy that centered on increasing domestic energy production and supply, restraining energy demand, and promoting overall energy efficiency. (7) The urgency for the U.S. to become more self-sufficient in energy became painfully evident after members of the Organization of Arab Petroleum Exporting Countries banned petroleum exports to the U.S. in retaliation for its support of Israel in the 1973 Arab-Israeli War, or Yom Kippur War. (8) The disruption in supply sent the price of crude oil spiraling upward and caused nationwide fuel shortages in the U.S., (9) where production had been declining since 1970. (10) In fact, oil became so scarce during this time that the U.S. had to institute an allocation system. (11) While the Nixon Administration was able to negotiate an end to the embargo in March 1974, (12) the vulnerability exposed in the crisis--the danger of long-term U.S. dependency on foreign oil--operated to position energy independence firmly at the top of the national security agenda. (13)

   Though stopping short of an outright ban on foreign exports, the U.S. also imposes trade restrictions on its natural gas resources through a very stringent export-licensing regime. Under the Natural Gas Act of 1938 (NGA), as subsequently amended, the Department of Energy (DOE) is responsible for the administration of natural gas export licenses to prospective exporters on an ad hoc basis. (14) Section 3 of the NGA specifies that authorization for exports will only be issued after a determination is made that such exports are "consistent with the public interest." (15) While the guiding criteria for determining whether a given natural gas export is in the public interest do not accompany this provision of the NGA, the DOE has since provided some insight into how it makes its assessment. The 1984 DOE guidelines, for example, affirm that considerations such as the domestic need for the natural gas proposed to be exported, domestic security of supply, and other factors relevant to the public interest determination (i.e., the environment, geopolitics, etc.) principally govern the evaluation. (16) Further taken into account is whether the prospective exporter has already completed the requisite pre-filing process before the Federal Energy Regulatory Commission (FERC), from which the exporter must also gain approval for the siting, construction, and operation of import and export facilities for liquefied natural gas (LNG). (17) Pursuant to the National Environmental Policy Act of 1969, an analysis of the likely impact that an LNG terminal will have on its surrounding local environment must be conducted by FERC, using input from relevant agencies, including the Environmental Protection Agency, the U.S. Coast Guard, and the U.S. Army Corps of Engineers. (18)

   The frustrating effects of this onerous licensing regime on natural gas trade were later reconsidered by the U.S., when it sought to restructure its electric power industry. (19) Developing a competitive wholesale electricity generation market would require large quantities of Canadian natural gas for use in power generation. (20) In an apparent effort to expedite the import process and circumvent the established DOE authorization protocol (which applies to the importation as well as exportation of natural gas), the Energy Policy Act of 1992--incorporating an exception to the "public interest" rule--was passed. (21) For any nation with which the U.S. has "in effect a free trade agreement requiring national treatment for trade in natural gas," Congress explained, consistency with the public interest would be automatically presumed. (22) The provision further added that applications for importation or exportation of natural gas under such circumstances "shall be granted without modification or delay." (23) The FTA contemplated by the Congressional act was, of course, the Canada-U.S. FTA entered into just three years earlier. That agreement, in Article 902, incorporated the "national treatment" obligation of Article III of the General Agreement on Tariffs and Trade (GATT) with respect to transfers of energy between the partners. (24) The obligation requires that laws and regulations do not discriminate between foreign and domestic goods on the basis of nationality. (25) Although carving out this FTA exception did provide the U.S. with expeditious access to Canadian gas imports, it did not likely consider the eventuality of a transformed U.S. natural gas market--one in which U.S. exports could escape the burdens of this outmoded regime by way of an FTA only. (26)

2. MODERN U.S. ENERGY EXPORT POLICY

   Until 2009, much of the dialogue about oil reserves and the long-term adequacy of their supply to meet future demands centered on a theory called "Peak Oil." (27) The theory rested on the assumption that oil is a finite resource and that, as such, oil discoveries and the related reserves would necessarily peak at some point before eventually slipping into an irreversible decline. (28) In fact, as recently as ten years ago, many industry stakeholders believed that global oil production was either already in decline or soon would be. (29) In the case of the U.S., much concern (stemming from previous shortages) was caused by the perceived national security risk of increasing U.S. dependency upon imported oil. (30) It should then come as no surprise that American energy policy planners repeatedly urged domestic conservation and the diversification of energy supplies to combat what were believed to be dwindling oil and gas resources. (31)

   Fortunately for the U.S., these early pessimistic forecasts proved to be misguided, as they failed to appreciate the extent to which technology would play a role in exploration, drilling, and production. (32) As prices increase, additional capital is also invested in research and development, which, in turn, fosters innovation. (33) Horizontal drilling and hydraulic fracturing are the two innovations most responsible for reversing the U.S. energy outlook. (34) Hydraulic fracturing--injecting a mixture of water, sand, and chemicals underground at high pressure--causes cracks and fissures to spread through part of a formation to release the gas or oil trapped within. (35) Horizontal drilling-- sinking a well a mile or more straight down, then a mile or more sideways--made it possible to expose a much greater area of resource-bearing rock to injections at various boreholes that are opened in the horizontal extension. (36) Utilizing these two exploration and production techniques jointly resulted in an enormous increase in shale gas and shale oil production in the U.S. (37) The effect of new shale exploration on supply of natural gas was, in fact, so profound and immediate that U.S. natural gas proved reserves were estimated to have increased by 11% in 2009 to 284 trillion cubic feet (Tcf)--the highest level in nearly 40 years. (38) Underscoring the value of the synergy found by coupling and refining these methods is the consideration that these historical levels were achieved despite an approximate one-third decline in the prices used to assess economic viability for 2009 reserves as compared to the prices used in 2008. (39)

   The "shale revolution"...