Derek Brower: What to call the “gas Opec”

It’s bluff By Derek Brower, Journalist IF THE last few years of energy relations between Russia and the West have shown anything, it is that the Kremlin’s enthusiasm for an expansionist energy foreign policy is matched only by the West’s paranoia about it. The latest fuss about the creation of a gas Opec is part of the same story. For good measure, it even includes the bogey country, Iran. russia%20iran.jpg Ivanov: dropping in to chat about arms, uranium and gas cartels On the face of it, Russia seems keen on a gas cartel. President Putin said last week that it was an “interesting idea” and one Russia will explore. For governments in Europe already worried about their dependence on Russian natural gas supplies – and Gazprom’s apparent willingness to shut down those supplies whenever it gets into an argument with a transit country – Putin’s words caused more panic. Adding substance to the notion of the gas cartel has been a busy few months of Russian diplomacy involving the world’s biggest gas powers. Last month, Russia’s security council, Igor Ivanov, was in Tehran openly discussing the gas Opec idea with Ayatollah Ali Khamenei. Later this month, Putin will visit Saudi Arabia and Qatar. And in March, all of the potential members of such a cartel will meet in Qatar talk about it. Those four countries are also the world’s wealthiest in terms of natural gas (see table 1). All are members of the Gas Exporting Countries Forum (GECF, see table 4), a body that on paper, at least, looks scary enough to most consumers. The GECF’s members control some 73% of the world’s natural gas reserves and 42% of its production, according to Datamonitor, a consultancy. table%201%20again.jpg From Europe’s point of view, it all looks ominous, especially given Gazprom’s ever-closer relations with Algeria’s state oil and gas company, Sonatrach. Between them, Russia and Algeria control almost 40% of Europe’s natural gas supply. For some countries, like Italy, the figure is far higher. And, of course, as Europe’s own production declines, Russia’s and Algeria’s share of Europe’s gas market will grow. Calm down Whether all of this amounts to a concerted effort to create a gas cartel is a debatable. But what we do know is that such a cartel would be a disaster – not just for consumers, but for the main exporters as well. That being the case, the last thing the West should be doing now is ratcheting up any rhetoric that might push these countries even to attempt a cartel. Such an attempt would fail because a gas cartel is fundamentally unworkable. Why? First, because of the way natural gas is traded, typically through long-term (10- or 20-years) contracts involving pipelines and a take-or-pay commitment from the buyer. Gazprom’s strategy in the EU, its main market, has been to pursue such contracts in order to guarantee its own “security of demand”, to use one of the company’s favourite expressions. Gazprom is not interested in the kind of short-term liquid markets in which cartels are most successful. The second reason is the difference between oil and gas and the way they make their way to market. Oil produced in the Middle East, Opec’s heartland, is exported through a handful of key exporting hubs. When the members agree to shut in exports of oil, the procedure is relatively straightforward. Production in excess of the export quota that the members have agreed on goes into storage. In the simplest terms, shippers who turn up at one of the exporting hubs arrive to find fewer barrels of oil for sale. That pushes the price of oil up around the world. Table%202.jpg The same doesn’t happen for gas, not least because no equivalent spot market for gas exists, and its markets are still local, not global. That could change one day, if the liquefied natural gas (LNG) sector develops into the short-term market many expect. But the volumes of LNG shipped in one trade – some $30m or more worth of gas – are so large that they make liquidity in that market difficult. And for the time being, most LNG is tied up in long-term contracts. Furthermore, if exporters were to manipulate that market, they would need to shut in output from LNG liquefaction trains – or keep tankers loaded with LNG afloat for as long as any quota restrictions exist. Again, difficult. There are other market and infrastructure reasons why the cartel couldn’t work. But the main one is political. Whose interests would it serve? Iran seems to be the most enthusiastic promoter of the cartel. But its exports are marginal – despite its wealth of reserves, Iran isn’t even in the top 10 of exporting countries (see table 3) – and all of them go to Turkey. As Turkey is over-supplied with natural gas, Iran can’t even manipulate that market, never mind anyone else’s. Saudi Arabia? It doesn’t export any gas and has no plans to do so. Riyadh is more interested in developing its domestic gas market so that it can increase oil exports. Qatar will soon become the world’s largest LNG exporter and could theoretically play the role of swing-producer in world LNG markets. But its policy has been staunchly supportive of consumer countries. It likes long-term contracts. Of the countries that are said to be interested in the cartel, that leaves Algeria. table3edit.jpg If we exclude the possibility of persuading Norway – never an enthusiastic participant in these kinds of bodies – to join a cartel, joint cooperation on prices between Algeria and Russia could still be a serious problem for consumers in Europe. Withholding sales in order to increase prices, the nuts and bolts of the cartel business, would mean breaking existing contracts and damaging Europe’s economy. One could argue that such a situation would do Europe a favour. Although Brussels has identified the continent’s main energy security problem – over-reliance on Russian supplies – it has not yet found the political will to do anything serious about it. Faced with a cartel, it would. That, though, is exactly why Russia will not pursue it. Why would it? Russia’s method of making money through exports relies on volume, not price, points out Datamonitor. So it would have little incentive to withhold exports in order to help smaller members of a cartel. And, in any case, Gazprom has Europe exactly where it wants it: addicted to Russian gas and asking for more. Forcing Europe to examine that addiction properly would not be in Moscow’s interests – and Moscow, whose energy foreign policy remains light years ahead of Brussels’ – knows that. If that’s true, then why are Russia and Iran talking about a gas Opec? For one thing, keeping consumers on their toes has been good for Russia so far. The notorious “gas war” with Ukraine in 2006 has encouraged European politicians to cut their own bilateral deals with Gazprom. That is what the Russian monopoly wants. Talking up a gas Opec helps to remind consumers of who their supplier is – and how much power it has. And so Russia will continue to deny its interest in forming a cartel – as its energy minister, Viktor Khristenko, did again on Friday – but it will also continue to allow its spectre to hang over its relations with consumers. It’s good for business. Poor old Iran But the biggest loser behind this facade is not the West. Consumer countries need only call the bluff of the cartel-hopers. The real victim is Iran, which seems genuinely to believe that Moscow is seeking some kind of alliance with Tehran. It isn’t. Russia understands that Iran is the only country that could eventually challenge its pre-eminence in the gas world. So its strategy is to keep Iran from realising its potential as a gas exporter. It does this in two ways. First, by supporting Iran’s nuclear ambitions. Russian gains from that twice over: it can sell technology to Iran at the same time as it ensures that Iran will remain the international bogeyman. The second part of that is crucial to keeping Iran under sanctions and, therefore, badly needed Western capital out of the country’s gas sector. Russia’s second method is to sew up countries like Armenia and Turkey that could become future transit states for Iranian gas (to read more about that, go here). That rivalry with Iran is why, despite the kind words, Moscow is unlikely to endorse any kind of genuine alliance in the gas sector with Tehran. And without Russia, the gas Opec would be stillborn. Instead of worrying about a new cartel, governments in the West – and especially Europe – should remind Russia that its future lies in a transparent and reciprocal relationship with consumers in Europe; not in a shady geopolitical stitch-up with the Ayatollah. Expose the cartel idea for the fraud it is. And at the same time, those Western governments should also realise what Russia realises: that Iran remains the only country that could genuinely diversify Europe’s supply of natural gas. If they’re serious about solving the security of supply problem, they should be serious about engaging Iran as a partner, too. Table%204.jpg