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Saturday, February 03, 2007

Russia politics: Gas cartels and hot air


Russia’s president, Vladimir Putin, has cautiously welcomed the idea of co-ordinating gas supplies with Iran and other major producers—but says it will not be a price-fixing cartel in the manner of OPEC, as Iran has suggested. In reality, fears of a “gas OPEC” are overblown, for the nature of the commodity market is not conducive to cartelisation. For Mr Putin, however, flirtations with Iran and Algeria are a way of gaining leverage over European states that hesitate to deepen their reliance on Russia as an energy supplier.

On February 1st Mr Putin held his now customary annual Q&A session with the Russian and foreign press, lasting for around three hours. A number of the questions concerned energy relations with the rest of the world. In response to a question about an Iranian proposal, made the week earlier, to form a gas-producing cartel, the president responded that the idea was interesting and worth thinking about. He added, however, that Russia would not create a cartel; that the purpose of such a grouping would be to coordinate activities with a view to maintaining secure supplies to the world’s main energy consumers.

The price is fixed?

It is arguable that the talk of “co-ordinating” activity is ominous, for it suggests the potential in future to engage in price-setting behaviour. However, the likelihood of Russia and other gas-producing states actually forming a cartel—as envisaged by NATO in a report leaked last year—is fairly low.

There are several reasons why a gas cartel, operating like OPEC, is not a viable proposition right now. First, relatively low volumes of gas are traded at present. Most of the gas that is bought and sold is regulated by long-term contracts, many of which stretch for 20 years. It is therefore difficult to regulate global production and so manage the price.

Second, gas is produced, marketed and consumed on a regional basis, rather than globally. The US market is for the most part supplied indigenously, with nearly the entire import requirement met by gas from Canada and the Caribbean. The European market is supplied principally from the North Sea and Russia, although the southern states also take sizeable volumes from North Africa. In Asia, the major gas producers are Malaysia, Indonesia and Australia. The only gas supplier that can pretend to have a global reach is Qatar, which is the world leader in liquefied natural gas (LNG) and is a player in Asian, European and North American markets.

Farsi fanfaronade

The loudest calls for the creation of a gas cartel have come from Iran. The supreme leader, Ayatollah Ali Khamenei, noted in late January that Iran and Russia together held 40% of the world’s proven reserves. Although this is correct, it ignores the fact that Iran exports very little of the gas it produces; the vast majority is consumed domestically. The world’s biggest exporters, on 2005 data from the BP Statistical Review of World Energy, are: Russia (151bn cubic metres); Canada (104bn cu metres); Norway (79bn cu metres); Algeria (65bn cu metres); and the Netherlands (47bn cu metres). The idea that all or even most of these states would join a gas cartel is fanciful.

Nevertheless, steps towards gas-producer cooperation are being undertaken by Russia. Last month, state-run monopoly Gazprom concluded a deal with Algerian counterpart Sonatrach, by which the latter was given the option of participating in eight potential gas-producing projects in Russia; Sonatrach says it will study four of them. The two have also swapped some shipments, giving Sonatrach a broader profile in Europe and Gazprom some experience of LNG trading and shipping to North America. Yet the underlying impression that came out of the Algiers meeting was that Gazprom and Sonatrach were making a fuss to cover for a lack of substance. The Algerians have shown little interest in forming a cartel. The same applies to Qatar, the pre-eminent LNG player, which is one of three Middle Eastern countries that Mr Putin plans to visit next week. Expect more talk of a gas cartel to follow.

A song for Europe

Cooperation with Sonatrach does serve a purpose for Gazprom, if only because it gives the company exposure to the LNG business—which, strategically, is an area that Gazprom feels the need to be involved in. More generally, Iranian calls to form a gas cartel are useful for Russia as they serve to put pressure on European states that, in the wake of gas and oil supply disruptions over the past 13 months, are having second thoughts about deepening their dependence on Gazprom.

For Gazprom, there is no alternative, in the short-to-medium term, to selling its gas to Europe and Turkey. Those states consume about one-third of Gazprom’s output, but provide over 70% of its revenue. Russia has neither the pipeline connections, nor the LNG facilities, to export to other major consumers. It is thus stuck with Europe. Although Mr Putin spoke on February 2nd about plans to diversify export routes to Asian customers such as China, a gas pipeline to China would be very expensive to build—and, most importantly, China has so far been unwilling to agree to a gas price that would make the project worthwhile for Gazprom. Most Russian gas at present is located in Western Siberia, which is thousands of miles from any major market and only has pipeline connections to Europe. Because of this infrastructure, and in the absence of large-scale LNG development, Europe will also be the most cost-effective market for gas from Russia’s two most promising future gas regions, Yamal and Shtokman.

For the Europeans, alternatives exist—although whether there is the political will in Western Europe fully to exploit them remains to be seen. Interconnection of member states’ pipeline systems, the completion of new pipelines from Norway and the construction of further LNG terminals have the potential to allow the EU25, or at least the major West European economies, to dramatically diversify their gas supplies. Non-Russian suppliers would find the prices pertaining in Europe to be very attractive. Nevertheless, whether Europe will follow through on suggestions to cap its dependence on Russian gas is open to question. After all, Russia is by far the world’s biggest producer and exporter, and holds a quarter of the world’s proven reserves. The prospect of Russia reorienting its exports, however implausible, is a daunting one and conjures the possibility that some EU states could face a gas shortage. By entertaining the prospect of a gas cartel, Mr Putin hopes to give a prod to those states wavering over whether to commit to buying more gas from Russia in the future.
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