The Ukrainian crisis has worsened with the United States, the United Kingdom, Germany, Japan and Australia imposing sanctions on Russia after Russian President Vladimir Putin recognized the independence of Ukraine's breakaway enclaves of Donetsk and Luhansk on Monday. But apart from geopolitical factors, other factors are also at play, most importantly, the fight for economic interests, behind the intensifying confrontation between the US and Russia over Ukraine.

The US' shale gas production has surged in recent years. Between 2016 and 2020, US natural gas production increased from 727.4 billion cubic meters to 914.6 billion cubic meters, accounting for 85 percent of the increase in global natural gas supply.

Rising production has also made the US one of the main exporters of natural gas in the world. For instance, the US exported 137.5 billion cubic meters of natural gas in 2020, accounting for 11 percent of the global natural gas trade, second only to Russia. By the end of this year, the US is likely to have the world's largest liquefied natural gas export capacity, by overtaking Australia and Qatar.

About 80 percent of the natural gas the US produces is consumed domestically, with rest being exported. About 55 percent of the natural gas the US exported in 2020 was supplied to Canada and Mexico through pipelines. It's hard for the US to further increase imports to the two countries, since Mexico has limited demands while Canada itself is a major natural gas producer too.

And although Mexico's demand for natural gas has not changed much, the same cannot be said about Canada, because it is one of the major natural gas producers in the world.

So the US is desperate to explore new buyers for its natural gas.

About 41.7 percent of the US' LNG exports in 2020 was destined for the European market, followed by Japan, the Republic of Korea and China, which together account for 30.6 percent. But China, whose demand for natural is high, imports only 5 percent of the US' LNG exports, which is unlikely to change given the worsening relations between the two sides.

Also, compared with the main LNG exporters to the Northeast Asian market such as Qatar and Australia, the US has many disadvantages such as high extraction costs and long transportation distances. Besides, in the medium to long term, US LNG will face fierce competition from high-quality but relatively cheap Russian pipeline natural gas. So it is difficult for the US to become the main LNG exporter to countries such as Japan and the ROK.

That is precisely why the strategic significance of the European market has become increasingly important for the US.

As the world's third-largest natural gas consuming region, Europe is highly dependent on natural gas imports and has long been the largest buyer of the US LNG. And the fact that Europe is expeditiously transforming its energy structure to achieve carbon neutrality has raised the demand for natural gas in the region, which the US wants to capitalize on.

But for years, Europe has been highly dependent on Russian pipeline gas. In fact, it imports more than 40 percent of its natural gas from Russia. Therefore, if the US wants to change the pattern of the existing natural gas market in Europe, it has to find a way to push Russia out of the European market.

Since the intensifying standoff between Russia and Ukraine and the resulting Western sanctions against Moscow will halt the supply of Russian natural gas to Europe creating fuel shortage in the region, the US sees it as a golden opportunity to increase its LNG exports to the region.

But the high cost of US LNG still makes it difficult for Washington to squeeze Moscow out of the European market. Russia's production cost has remained at $0.75-0.9 per million British thermal units (MMBtu) in recent years, while the US' shale gas extraction cost is about $1.6-3/MMBtu. Plus, the transportation cost of US LNG is also higher than Russian pipeline gas, because the US needs to supply the fuel across the Atlantic while Russia is close to the European market and has obvious advantages in terms of transportation cost.

The US LNG exports to Europe had been only marginally profitable, but the Ukraine crisis has made the business lucrative. The cost of US LNG to Europe is $5-8/MMBtu, and the Dutch TTF natural gas price was below this range for most of the past three years.

Before April 2021, the LNG trade between the US and Europe yielded meager profits for Washington. But after the Ukraine crisis broke out in March last year, the price of natural gas in Europe increased — in fact, it increased by 10 times from the beginning to the end 2021. LNG exports to Europe offers huge profit margins to the US, and it is estimated that in the second and third quarters of 2021 alone, the US' net profit from LNG trade with Europe exceeded $2 billion.

However, access to the European natural gas market is not the main reason why the US has triggered the Russia-Ukraine confrontation. But by doing so the US can pave the way for its huge investments in political, economic and military resources in eastern Ukraine.

No wonder the US Congress approved $200 million in new defense aid to Ukraine in December last year, and the US embassy in Kiev confirmed that parts of the aid arrived in the country on Jan 22. This is not only a sure bet compared with increasing LNG exports to Europe, but will also meet the US' long-term strategic interests and short-term economic interests.

The author is chief economist of Sealand Securities.

The views don't necessarily reflect those of China Daily. 

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