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Benefiting from Instability

gas_tank062308.jpgDoublespeak is not a uniquely Russian characteristic, but when they do it, it is pulled off with artistry and aplomb. Emblematic of the country’s icon of the double-headed eagle, everyone from a citizen to a tourist to an investor is bound to have the experience at one point of being told one thing by the government, and then seeing the exact opposite happen. The energy market is of course not immune to the trend. Today, reports are picking up on an interview published in Itogi magazine with Gazprom CEO Alexei Miller, in which he denies any interest in having Russia join a potential natural gas cartel: “If one day there’s talk of creating a gas OPEC, these lessons should be taken into account… Right now it’s not even worth talking about it.” Miller seems to strongly contrast with his boss, Vladimir Putin, who following some very chummy meetings with Iran’s Ayatollah in April of 2007, saidWho told you that we turned down an offer to create a cartel? Quite the opposite, in fact. I said that it was an interesting suggestion!” Given that even the resource speculators are hoping for a gas cartel to boost their returns, and that Miller isn’t exactly the bastion of credibility after his $250 oil remark, one would be inclined to interpret the exact opposite from this statement; that Gazprom and the Kremlin are indeed working on building a gas version of OPEC. But that’s almost beside the point – it’s the instability of these mixed messages that creates the benefits.

First of all, there are just far too many international activities in recent weeks and months to take Miller’s statement at face value. Look at the establishment of a North African regional headquarters for Gazprom in Algeria, deepening relationships with both Libya and Venezuela, and rumors of investment in Iran. It’s no secret that the Russians are aggressively and successfully courting Nigeria, and may be able to throw a monkey wrench into the Trans-Sahara Gas Pipeline to co-opt Europe’s efforts to diversify supply.As Ariel Cohen has predicted, Russia’s efforts to build a gas cartel will be gradual, stealthy, and always appearing to be reasonable and rational.However we need to be clear that what we are talking about here. Such a cartel would not function in the same manner as OPEC – and this is the most frequent sticking point for critics who say there is nothing to worry about. Given the regional nature of natural gas (LNG is still not produced in high enough quantities to generate a spot market), it is unlikely that cooperating exporters could ever achieve production quotas in order to put supply pressures on price. However, this closer alliance among Russia, Algeria, Libya, Iran, Nigeria, and Venezuela (the Qataris have remained slippery on the issue) will indeed end up driving prices higher due to decreasing competition as markets get carved up.The Gas OPEC issue, along with the sky-high oil price predictions, are a demonstration of how today’s political leadership in Russia sees a benefit in the generation of instability – oil and gas prices get driven higher, and if conflict erupts in areas like the Mideast, the Gulf of Guinea, or even the Venezuelan-Colombian border, the Kremlin still wins with its #2 export: arms.Naturally nothing in global politics and business could be so simplistic or cut and dry … but until we cut down on the doublespeak from Russia’s state-owned energy companies and get some transparency in terms of where foreign policy ends and business affairs begin, these kinds of conclusions are only going to gather evidence.