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Is a ‘Gas OPEC’ More Trouble Than It Is Worth?

Talks of an OPEC-style gas cartel are nothing new. The idea has existed in some form since at least as far back as 1980, when a group of exporters - including OPEC members like Algeria, as well as Mexico and the Netherlands - sought to charge consumers a higher price for their product as oil prices spiralled.

Talks of an OPEC-style gas cartel are nothing new. The idea has existed in some form since at least as far back as 1980, when a group of exporters - including OPEC members like Algeria, as well as Mexico and the Netherlands - sought to charge consumers a higher price for their product as oil prices spiralled. However, recent discussions between Russia and Iran, respectively the world’s largest and second largest gas producers have unnerved western governments.

In early October, Anastasia Ivanova, a spokesperson for Gazprom said, “In a structure that’s similar to OPEC, Gazprom is not interested in such a structure because it wouldn’t be possible to function in terms of a gas market.”

Any gas cartel is likely to function in a different manner to OPEC due to the nature of gas production and transportation. Building a cartel to control gas prices will be difficult. Unlike the global oil market, gas markets remain fragmented and regional.

An OPEC-style price-fixing structure “is not possible with gas” according to Ivanova. Apart from super-chilled liquefied natural gas (LNG), the method of transportation is very inflexible. She explained that the most advantageous form for sellers and customers has always been long-term supply contracts that sometimes span several decades. This makes the capital investment required for the pipeline recoverable over a period of years, and makes it a smaller factor in the gas price. “This is why natural gas cannot be as liquid a commodity as oil, and what objectively impedes the creation of an international structure akin to OPEC, which regulates production in order to influence prices,” she said.

Volumes traded around the world, in the form of LNG are relatively small compared with heavily traded oil markets. Most LNG is traded under long-term contracts between buyers and seller, often at prices pegged to oil. For a gas cartel to influence prices it would first have to break the tie to the world price of oil. The undeveloped nature of the global gas market impedes the formation of an effective cartel. While oil - a liquid - can easily be shipped worldwide by tanker, gas can only be transported in its natural form via pipeline, making it difficult to move the product long distances.
It is possible to make the gas more transportable by turning it into a liquid, but that process requires expensive infrastructure to be built at both ends of the supply chain. The cost of construction means that while around 18 countries have LNG receiving terminals, there's not enough trade to create a truly global market. Russia and Iran have no LNG export terminals, while Qatar has just one.

Due to the segmented regional structure of the gas market, Europe will be most affected as it supplied by Russia for as much as half of its natural gas imports — any cartel controlled by Moscow poses a threat to supply and pricing. The 27-nation European Union expressed strong opposition to any natural gas cartel Tuesday, with an EU spokesman, Ferran Tarradellas Espuny, saying: "The European Commission feels that energy supplies have to be sold in a free market." Such an alliance would have little direct impact on the United States, which imports virtually no natural gas from Russia or the other nations.

Another problem with a cartel is that gas producing countries have different markets with different demand. There is no global gas market. There is not a European gas market either. There are no "global" gas prices - they are set individually for each contract (usually a long-term). As a result, the proposed gas cartel cannot influence gas prices through restrictive quotas. By restricting exports, gas-producing countries would only harm themselves by cutting their own incomes. Gas prices in Europe are based on the market value of crude oil and petrochemicals, which gas producers do not control. The despair of the three countries richest in the commodity is easy to understand. Oil prices have plummeted to half their summer peak and natural gas followed suit.

It is more in Iran’s interest to form a cartel than it is for Russia. The Russian gas market is well established and growing. A disruption in natural price levels could stall growth and send customers looking elsewhere to countries that are not a part of the cartel. Gazprom's gas supplies to Europe have been contracted for the next one decade to three. However, Iran's gas industry is so disorganized that, despite its huge reserves, the country has to export Turkmen gas under some of its export projects.

Turkmenistan, for its part, has shown a rather cool attitude toward the proposed gas cartel. Qatar is a new player on the global gas market. Most of its projects are still in the works and involve LNG deliveries also to Europe, and that too, under long-term contracts. If it tries to limit those deliveries, its niche will be immediately seized by rivals - Libya, Algeria and others.

So the question remains, how will this gas-OPEC work? Commentators say it is likely to be little more than a talking shop. The Opec-style gas cartel will be finalized Nov 18 in Moscow with adoption of the group's charter, a document which has been in the works for two years ever since Iran initiated the idea. Gas producing nations have had a discussion platform since 2001, the Gas Exporting Countries Forum (GECF) comprising 16 member states. However, this organization has no charter and its decisions are not binding on its members and it is no more than a talking club.

Adopting a single charter has been the long-standing stumbling block for a "gas Opec." Iran wants the gas cartel to be modelled after the original Opec, setting quotas for gas production thus pushing prices up while further damaging the US economy. Moscow, in turn, is trying to avoid aggressive policies suggesting that the new organization should manage joint gas projects and gas transportation issues. The latter is especially important for Russia and its gas export monopoly, Gazprom, whose chief Alexei Miller represented Russia at the Tehran meeting.

Whatever the outcome, a “gas OPEC” will guarantee continuous discussion both within and outside the organization. It will be an experiment of trial and error. With wide criticism, complicated administration and contrasting agendas, a gas-OPEC could be simply more trouble than it is worth.

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Author: Jo Amey

Source : Neftegaz.RU