A Gas OPEC: Inching Towards Reality?

On 25 January, Qatar’s Energy Minister, Abdullah al-Attiyah, spoke of gas-producing nations’ renewed interest in the formation of a “gas OPEC,” during a news conference at the World Economic Forum in Davos, Switzerland. Representatives of the existing members of the Gas Exporting Countries Forum (GECF) will be meeting in Moscow in June 2008, where the issue of the formation of a natural gas cartel will be further discussed. A study group, set up by GECF to examine the relationship between gas producers and consumers, will report its findings at this meeting.

The GECF itself is a new organization, having been founded in 2001. Between them, the members of the forum (Algeria, Bolivia, Brunei, Egypt, Indonesia, Iran, Libya, Malaysia, Nigeria, Norway, Oman, Qatar, Russia, Trinidad & Tobago, the UAE and Venezuela) boast nearly three-quarters of global natural gas reserves, and account for 40% of global production. GECF is a loose structure, lacking a full-time staff or organizational headquarters (barring a liaison office in Doha).

Ironically, at its first meeting in May 2001, GECF strenuously denied any attempts at forming a price cartel. However, over the years, the idea of a “gas OPEC” gradually started winning favor; Russian President Vladimir Putin and his Kazakh counterpart, Nursultan Nazarbayev, spoke in favor of such a cartel as early as 2002. By 2004, Venezuela was openly calling for GECF to evolve into a cartel. At the last meeting in 2007, GECF members were openly musing what Algerian Energy Minister Chekib Khalil admitted: “In the long term, we are moving towards a gas OPEC.”

GECF’s raison d’étre is to maintain support for long-term purchase contracts; often between 10 and 30 years in length. This is done not only to produce a steady stream of revenue, but also for much-needed start-up capital for gas-related projects. Besides, natural gas tends to be bought and sold bilaterally, via pipelines. This is very different from the world of oil, which is dominated by the spot market and price volatility (and futures/options to deal with said volatility). Consequently, while analysts may speak of a “global oil market,” the same cannot be reasonably extended to natural gas. This is the reason that producers cannot, in the short-term, attempt to equalize the price differential with crude oil. In the week of 16-23 January 2008, NYMEX gas futures’ price (for February delivery at Henry Hub in Texas) was US$7.62 per million btu (MMBtu) versus US$15.11 per MMBtu for WTI crude oil.

The world’s gas markets can only integrate into a single global market as LNG grows in its share of gas demand, and the role of Qatar, as the world’s leading LNG exporter and the world’s richest per-capita nation, is instrumental here. Once cooled to temperatures well below negative 200 Fahrenheit, liquefied gas can be shipped globally, much like crude oil. However, short-term obstacles remain: LNG facilities and terminals are capital-intensive propositions, and regulatory issues have slowed their proliferation, especially in the United States. Furthermore, even the LNG trade has been dominated thus far by long-term contracts (over 90% by volume in 2003, for example).

The membership of GECF is a disparate one; whether in terms of reserves or production. Between the three of them, Russia, Iran and Qatar together possess 55% of global reserves, and would duel for leadership and influence in an organization where there is hardly consensus on long-term strategic interests. Russia, in particular, has a greater stake in selling natural gas by volume, and so has little obvious incentive to withhold exports and force an increase in prices for the benefit of fellow cartel members. Thus far, Iran, Algeria and Qatar, all of which are OPEC members as well, have been instrumental in pushing GECF forward. The organization’s future will depend, to a great degree, on cooperation between the three of them, making use of each other’s advantages in capital investment, export histories and reserves. Already GECF enjoys a 75%-80% LNG market share, although LNG demand (as a share of global gas demand) is low at 6%. Furthermore, GECF states enjoy advantages over OPEC in key gas statistics, such as reserves-to-production ratios. In return, OPEC may enjoy some influence in the global gas trade, since gas prices are oftentimes linked to oil prices in certain contracts, and gas produced from associated oil fields are affected by OPEC oil production quotas. The future interaction between OPEC and GEFC will be an interesting one to watch.

However, even if production quotas could be set, OPEC’s production history demonstrates the difficulty of successfully implementing them, especially as the scale of one country’s reserves will determine its preferred production targets. Besides, the domestic energy patterns in many of these countries remain of concern. Subsidies have encouraged very high consumption of natural gas, and some countries such as Venezuela and Iran are no longer in a position to export large quantities of natural gas. Questions have been raised about Russia’s willingness to re-invest sufficient capital to maintain/increase production, while other countries need a growing share of their natural gas reserves for electricity generation and injection into oil fields to increase oil production for export. The formation of a “gas OPEC” will do little to solve these problems.

GECF member-states are attempting to couch their pro-cartel rhetoric in the language of increased coordination between the various gas producers, and have reiterated that all future deliberations on a possible cartel formation would be in the best interests of the consumer, as Libya’s Energy Minister Shokri Ghanem asserted at the 2007 Doha meeting. Ultimately, many technical and political obstacles will continue to lie in the way of a “gas OPEC,” in spite of the desires of GECF nations to use their gas reserves to increase their global clout.

(Sources: Datamonitor, Energy Business Review, Reuters, BBC, Financial Times, Oxford Institute for Energy Studies, US Department of Energy)

Saket Vemprala covers energy issues at the Gulf Institute. He is a graduate of the M.A. Security Studies Program at Georgetown University, and has previously worked in geopolitical risk consulting, as well as at the United Nations.