Report

The White House's Faulty Math on Gas Exports

The U.S. will soon be an energy exporter. But administration officials are overselling that potential.

The Obama administration has a simple message for European countries fearful that Russia might use its energy might as a weapon: Don't worry, because the United States can export as much natural gas in a day as the entire continent uses every 24 hours. It's a comforting message for allies wondering whether to alienate Moscow by backing Ukraine's fragile government. Unfortunately, it's also wrong.

The confusion began with President Obama. On March 26, after a meeting with European leaders, the president said that future overseas sales of American natural gas could reduce Europe's dependence on fickle energy suppliers like Russia.

"The United States is blessed with some additional energy sources that have been developed in part because of new technologies, and we've already licensed, authorized the export of as much natural gas each day as Europe uses each day," Obama said.

Secretary of State John Kerry made a similar claim in Brussels on Wednesday after a summit with European Union officials that was specifically dedicated to energy issues.

"Our new capacities as a gas producer and the approval of seven export licenses is going to help supply gas to global markets, and we look forward to doing that starting in 2015. And we will supply more gas than all of Europe consumes today," he said.

Neither statement, as expressed, is correct. For the moment, the U.S. is a net importer  of natural gas, which means America consumes more gas than it produces. Down the road, the U.S. will produce enough natural gas to begin selling significant amounts to foreign countries. That could meet some of Europe's gas demand, but not all of it.

Math is always fun, so here are the numbers in question. In 2013, the 28 countries of the European Union consumed about 44.7 billion cubic feet per day. In 2013, Europe imported about 4.6 billion cubic feet per day of liquefied natural gas aboard massive tankers, which is the way U.S. firms would send natural gas to the continent. They get the remaining 38.7 billion cubic feet per day from other sources, including local production and by pipelines.

To be sure, American overseas sales will soon start to grow somewhat significantly. The Department of Energy has approved seven natural gas terminals in recent years which can export a total of about 9.2 billion cubic feet per day. The department is considering whether to sign off on the construction of 30 other plants which would allow American firms to theoretically export nearly 27 billion cubic feet per day more to the EU's member nations. In practice, many of those terminals will never be built, and much of that gas will likely be sold to customers in Asian countries in any event.

All of that is to say that Obama's statement that Washington has already authorized the export of " as much natural gas each day as Europe uses each day" is incorrect. Asian countries have already signed long-term contracts to buy future American gas. That means it would literally be impossible for all of the future overseas sales that Obama is talking about to go to Europe.

To give the White House the benefit of the doubt, many energy experts initially puzzled by the president's remarks speculate that he may have meant to make a different, more nuanced point. They point out that future U.S. exports could provide more gas than Europe currently imports by tanker each day. The key words there are "by tanker." European consumers would still be consuming much more energy than U.S. firms would be selling. Spokespeople for the White House and State Department didn't respond to requests for comment.

Making the issue even more confusing is comparing future U.S. exports with current European consumption. Most U.S. export terminals won't be operational until later in the decade, by which time European liquefied natural gas imports are expected to have risen from their lowest level in a decade as the continent races to reduce its dependence on Russia. That would make the difference between what Europe consumes, even from tanker imports, and what America exports even larger.

Kerry added to the confusion this week when he said that the United States will "supply" more gas than Europe consumes, which is also not correct. It was not clear if he was referring only to the seven approved terminals, or the other 30 that have requested approval. But even if every single molecule of that gas went to Europe the U.S. would still be unable to meet the continent's energy needs.

One administration official, speaking on condition of anonymity, said that Kerry's remarks were meant to compare future U.S. gas exports to current European liquefied natural gas imports, and that that is the message he will stress in future speeches.

Elisabetta Villa - Getty

Report

Culture of Corruption

How an American agribusiness giant's alleged bribes illustrate Ukraine's endemic graft problem.

In December, the Illinois-based agriculture and food multinational Archer Daniels Midland (ADM) paid an eye-opening $54 million fine for allegedly giving corrupt Ukrainian officials $22 million over six years. The bribes weren't an attempt to get special treatment for its products or to win lucrative government contracts. According to U.S. authorities, ADM was instead trying to grease the wheels of the country's notoriously corrupt tax system by bribing officials to help the company get the $100 million tax rebate it was owed under Ukrainian law.

The case of Archer Daniels Midland in Ukraine illustrates how difficult it may be to change the country's long-standing corruption problem. Transparency International ranks Ukraine 144 out of 177 countries on its Corruption Perceptions Index. That puts it even lower than current rival Russia, which comes in at 127. Meanwhile, the IMF is insisting that Kiev crack down on theft and fraud by government officials in order to get a much-needed $18 billion bailout. But ADM's experience shows how much graft pervades even routine business in Ukraine.

"It is a fight every year." That's how one ADM executive described the process of getting the Ukrainian government to hand over the company's annual tax rebate, according to the company's settlement agreement with the U.S. Justice Department. ADM is a huge commodities trader that processes and exports corn, wheat, vegetable oil, and other agricultural products from Ukraine, nicknamed Europe's "bread basket" because it's one of the world's biggest grain exporters. When foreign companies buy wheat and corn from Ukrainian farmers, they have to pay a value-added tax (VAT), which is supposed to be refunded if the company exports the grain.

U.S. businesses, including agricultural and steel companies, have at times been owed a total of more than $1 billion, according to Morgan Williams, the president of the U.S.-Ukraine Business Council. "Basically the government was just taking the money and using it and not paying it back," said Williams.

Executives in ADM's Ukraine subsidiary, Alfred C. Toepfer International, concluded that bribery was the only way to get the money back, according to the settlement. In one scheme, employees disguised the payments as insurance premiums to a separate company that funneled the money to government officials from 2002 to 2008. People who worked for the subsidiary in Ukraine told headquarters that the company needed to make a "donation" of 30 percent of the total amount owed in order to get the tax refund, according to the settlement papers. But the payments weren't going to "local charities"; they were lining the pockets of Ukrainian officials, according to the settlement, in which the U.S. government agreed not to prosecute ADM in exchange for a $54 million fine. At one point, a company executive in charge of its tax compliance asked an outside organization about the purported charity arrangement. "Is this common practice in the Ukraine? Is it legal?" the unnamed executive asked in an email.

It definitely wasn't legal, but it may indeed have been a routine way of doing business in Ukraine. The Office of the U.S. Trade Representative said in a 2013 report that Ukrainian tax authorities "distribute VAT refunds in an arbitrary fashion that appears to favor companies connected to the government or those that pay bribes."

"Companies report that Ukraine's taxation system is a major obstacle for U.S. investors doing business in Ukraine," the report said.

The IMF specifically singled out the country's system of tax rebates last week as something Ukraine's new leaders need to fix in order to get the loans that the country now desperately needs to keep from going bankrupt.

Ukraine's new leaders have said they're going to root out corruption and make hard economic changes like cutting energy subsidies and reining in government spending. Prime Minister Arseniy Yatsenyuk blames ousted former President Viktor Yanukovych for leaving the country's coffers empty.

"The state treasury is empty. And due to unbelievable and unlimited corruption in my country we cannot collect revenues in order to execute our social obligations, but despite this we have a clear-cut action plan [for] how to tackle economic problems," Yatsenyuk said last month in an interview with the Associated Press.

The only problem is that Ukraine has said it would fix the problem before. In 2010, the last time Ukraine was seeking a big loan from the IMF, Ukrainian officials said they would "eliminate delays in refunding legitimate VAT refund claims." But the government reneged on its promises and the IMF froze the loan in 2011.

"Changing the culture of corruption in Ukraine has to be viewed realistically, as a long-term, perhaps even generational, endeavor," said Jimmy Gurule, a professor at the University of Notre Dame's law school and a former Treasury Department enforcement chief.

The IMF -- which says it is ready to loan Ukraine money again if it pledges to change -- concluded last week that the country needs $27 billion in loans from the fund and individual countries over the next two years. But former IMF chief economist Simon Johnson says he doesn't think money alone will fix Ukraine's long-term growth problems, which are a result of mismanagement more than anything else.

"This is a corrupt society," he said. "The people with political and economic power have proven themselves corrupt and they've stolen everything they can get their hands on and now we're giving them more money. That doesn't make a lot of sense."

Archer Daniels Midland, for its part, remains doing business in Ukraine. The company employs nearly 200 people and makes donations to "local charities" like the Illichivsk city hospital, according to the company's website. It declined to comment for this article.

Specer Platt/ GETTY