By Andrew Mernin
Is the mooted 'gas OPEC' a real possibility, or just speculative hot air?
Alarm bells rang out across Europe last week as talk once again surfaced over the possible creation of an OPEC-style cartel between the world's gas exporters.
Ministers from 16 gas-producing nations gathered in Doha for the Gas Exporting Countries Forum (GECF) with the agenda dominated by cartel speculation. While analysts suggest that it could be a number of years until such an organisation is born however, it appears that the gas giants are no longer merely talking hot air. And a significant proportion of the gas-rich fraternity is showing a genuine desire to get the cartel wheels in motion.
Last week, delegates from Iran and Qatar both strived to play down rumours that the conference had anything to do with the forming of a ‘gas OPEC'. "I hate the name cartel. We're just here to consider our interests," said Qatar's minister of petroleum, Abdullah Al Attiyah.
Iran's energy representative, Seyed Hamaneh, told reporters: "The cartel is not an issue. We're here to exchange views on technical issues and on the markets." But as they tried in vain to dowse the fire of speculation, other energy leaders made it clear that a gas OPEC was definitely on their agendas. "In the long run, yes, we are moving towards a gas OPEC," Chakib Khelil, Algeria's oil minister said, although he added that it would be "a long time" before gas markets were liquid enough that such a group could be formed. Meanwhile, Venezuelan oil minister Rafael Ramirez also stated the case for a global gas-producing alliance. "We believe it is a good opportunity to have some discussions about this organisation," he said. "In spite of huge developments in the gas industry and growing demand to import it by consumers, great challenges face the producing countries."
Of course Russia, which controls over a quarter of the world's gas reserves, is likely to be the driving force behind any future cartel movement. At the GECF, Viktor Khristenko, Russia's industry and energy minister, said: "Russia is ready to be the one that will carry out research into the problem of price formation for gas."
In what could be the first step towards a gas cartel, the GECF member states did agree last week to set up a committee to focus on pricing. The body will be set up in conjunction with Russian gas giant Gazprom and Qatar's state-owned oil company. Asked whether the move would eventually evolve into a gas OPEC, Algeria's Khelil said: "Maybe in 10 to 15 years we will see the possibility of an organisation that would be effective in this market." It was the words of Iran's supreme leader, Ayatollah Ali Khamenei back in January that started the latest wave of speculation over an OPEC-style cartel.
During a state visit by Igor Ivanov, Secretary of Russia's Security Council, Ali Khamenei publicly proposed the formation of a gas exporters organisation. This lead Russian President Vladimir Putin to describe a cartel as an "interesting idea".
During the GECF meeting, a number of major gas-consumers spoke out against moves towards a global gas alliance. While some European leaders warned that a gas cartel would spur consumers to move to alternative sources, Andris Piebalgs, the European Union's energy commissioner said: "I'm calling for [gas exporters] not to do this because it's definitely not a healthy development in the gas market." But opposition is not limited to the West. Japan - which imports over 81 billion cubic metres of natural gas per year - has also come forward in opposition to the idea of a cartel. "If I'm asked whether we had better create one or not, I would say it's not desirable," Japan's trade minister Akira Amari said recently. "[Gas] trades in each market under free-trade circumstances, it is different from oil," he added.
Maintaining a firm stance against the forming of a gas cartel, a spokesperson for the International Energy Agency tells Arabian Business: "We believe that a cartel is always bad news for consumers and consumer countries, but cartels are also counterproductive for producing countries. Pushing up prices by forming a cartel will encourage consumers to reduce demand or switch to other fuels. This is particularly true for gas, which can be substituted with coal and nuclear power. Cartels distort behaviour and do not strengthen the security of supply."
Despite facing opposition from some of the world's largest economies however, it appears that the birth of a gas cartel is more a question of ‘when' rather than ‘if'.
So how long is it likely to be before we see its formation? According to the Egyptian energy minister Sameh Fahmi, "the world is not prepared" for a gas OPEC. The main stumbling block appears to be the fact that gas prices can vary in different areas and the commodity is not traded in the same way as oil. "At least in the OPEC, you know what the price of the crude oil is, you know the quotas. With regards to gas, nobody knows the prices and nobody is declaring the price of their exports," said Fahmi recently.
Majid Jafar, business development director of Dana Gas - the Middle East's first private-sector regional gas company - agrees that the creation of a price-fixing cartel is unlikely given the nature of the gas sector. "The ministers in Doha were correct when they dismissed accusations that the gas forum would turn into a cartel that would control prices and supply quotas on a global scale," he says. "Gas is fundamentally different from oil in one major respect - the high cost of transportation, whether by pipeline or LNG. This means that gas prices are a local phenomenon and vary considerably from region to region."
Jafar also cites the fact that oil barrels are traded multiple times and quickly - making it easier to set a global price due to the ease of shipping - as a major difference that makes oil far more attuned to the cartel-culture than gas. The use of long-term contracts in the gas industry also makes a gas OPEC with the power to manipulate prices unlikely in the near future at least.
Tilak Doshi, executive director of energy at Dubai Multi Commodities Centre, explains: "The gas market has long-term contracts between buyers and sellers [lasting] 20 to 25 years, with the value linked to oil prices. So any idea of setting prices is quite inapplicable at least until there is a global gas market with spot prices." According to Doshi, between 10 and 12% of liquified natural gas (LNG) is currently traded as spot gas - gas that is bought and sold on a short-term basis. Doshi believes that the next five years will bring the evolution of a "more global gas market but even then it's too early to talk about a cartel."
It appears that, despite ongoing speculation, the birth of the gas OPEC is a long way off and a price-fixing cartel will be tough to achieve. Fundamentally different from the oil market, the gas trade would have to undergo sweeping changes before it could adopt the OPEC model. For the moment, the gas exporting giants will have to make do with the GEFC - more informal talking shop than price-controlling alliance - as its porthole for discussion and debate. What we will see in the near future is more analysis on how gas prices are calculated, as Jonathan Stern, director of gas research at the Oxford Institute for Energy studies said recently: "It makes sense for gas exporters to re-examine why the price of gas is linked to oil prices." In the meantime, the gas giants can concern themselves with the more pressing issues that could limit supplies and drive prices up.
As equipment costs continue to rise and the skills shortage worsens, LNG production and gas investment are slowing down. Iran, that has 15.9% of the world's proven gas supply, needs more investment to fulfill its export potential. Political tension over the country's nuclear program however looks set to hinder the foreign investment needed to exploit its huge reserves. The Middle East's ability to export its gas reserves to the world could be increasingly hampered by the region's rapidly increasing domestic consumption, while Russia is similarly facing soaring demand at home alongside decreasing production at existing sites. All of which could spell bad news for price-conscious consumers.