How good is a gas cartel?

October 27th, 2008 - 10:19 am ICT by IANS  

Moscow, Oct 27 (RIA Novosti) Russia, Iran and Qatar, the three nations accounting for over 60 percent of global natural gas reserves, have agreed to set up a gas cartel on the line of the Organisation of the Petroleum Exporting Countries (Opec).The three largest gas exporters want prices up, given their recent dramatic decline after the summer peak.

Unfortunately, they have no power to change that now, as gas prices are regulated by the oil and petrochemicals markets since there is no such thing as an independent gas market.

The new gas alliance established in Iran’s capital Oct 21 is in fact a “big gas troika.”

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.

In fact, gas producing nations have had a discussion platform since 2001, the Gas Exporting Countries Forum (GECF) comprising 16 member states.

But it has no charter, 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.

It is crucial for Russia that central Asian gas goes through Russia on the way to Europe rather than bypass it via the Caspian seabed or go through Iran.

Alongside these geopolitical factors, there are other practical issues for the proposed cartel to grapple with.

Gazprom’s gas supplies to Europe have been contracted for the next one decade to three. 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 liquefied natural gas (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.

It follows from the above that 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.

Miller and his counterparts are getting desperate because they cannot influence the process.

However, the very idea of establishing some sort of gas cartel is bound to raise concerns with European consumers, further complicating Gazprom’s investments in Europe, as if European partners were not already wary of dealing with the Russian monopoly.

The Russian government must certainly realize that a “gas Opec” is a harmful idea. Energy Minister Sergei Shmatko said earlier this month that the wording was inappropriate because Russia has no intention of regulating gas prices or production levels.

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