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ISN on the Gas Cartel

Recently a new energy report in the Russian Analytical Digest series was published by the respected International Relations and Security Network (ISN ETH Zurick), a very high quality online information source which I frequently read. One of the articles, written by the analyst Matteo Fachinotti, gives the following brief quotation from this blog:

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The media has hyped the idea of a new gas OPEC which could menace the European Union with the spectre of even higher prices for natural gas. This speculation has little to do with reality however. Numerous obstacles will prevent the formation of such a global cartel. Nevertheless, other types of producer alliances may be possible and these deserve careful attention. Rhetoric Currently Exceeds Reality “Europe, the U.S., and Asia should be doing everything possible to prepare for the possible future of a natural gas cartel. Gazprom is already actively engaged in anti-competitive policies to pre-empt, disaggregate, and coordinate the energy market.” This warning from Robert Amsterdam, a former legal counsel to Yukos, is an example of a recent trend in the Western media portraying the threat of a gas cartel led by Russia as the next step in Russia’s attempt to control energy flows to Europe. This interpretation is exaggerated.

While I am flattered that my content has marginally become part of the dialogue at ISN, Fachinotti’s out-of-context quotation was nevertheless surprising to me for a number of reasons, not least because he has mistaken me to be both a member of the media and a former lawyer to Yukos (I am a current attorney to Mikhail Khodorkovsky, among other international clients).

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Does Russian gas benefit from Iran’s nuclear obsession?

Most immediately surprising is the argument that the media has over-hyped this threat. It seems to me to be quite the contrary. The overwhelming majority of the coverage of the Doha meetings of the GECF has been more soothing to the nervous importers than a dose of valium and a massage – even as the group unanimously voted to form the pricing group yesterday, copy editors couldn’t seem to grasp all the doublespeak to even write a headline. For example, yeserday on Businessweek.com, these two separate headlines were simultaneously running: “Why a Gas Cartel Could Be a Bust” and “Gas exporters to form group on pricing.” Is that not a little bit of an embarrassment, or at least confusing? But in general, most of the business press has thoroughly rejected the gas cartel idea. The Financial Times ran stories titled “Gas cartel might not be in pipeline” and “Little brother is unlikely to bully gas importers,” the Economist chimed in with “A gas OPEC: Don’t worry, there won’t be an effective gas cartel,” and the AP ran the story “Natural gas cartel would be tough to achieve, experts say” and “Energy ministers nix natural-gas cartel” among hundreds of other stories. Let’s not forget that our guest blogger and resident energy expert Derek Brower called the gas OPEC a bluff back on February 11th. So given the alarming news of the natural gas pricing committee yesterday, how could so many highly respected news sources get it wrong? Answer: actually, they generally got it right, and so did Matteo Fachinotti of ISN for the most part. I have never tried to argue that it would be feasible for gas exporters to influence prices anytime soon, especially of pipeline-delivered gas, I just argue that these meetings of natural gas exporters raise legitimate supply concerns in terms of competition that not many other sources are covering. It’s a mystery to me why ISN didn’t use the first part of my statement:

“My entire point here is that too many analysts are over-reacting to the James-Bond-like conspiracy theory of “Gasfinger” and failing to address the fundamental issues at stake.”

Or even a more recent comment, which is more illustrative of my issue with the gas cartel:

We are missing the point by concentrating only on prices, short-term impact, and a perception of collective interests on behalf of the exporters. The potential threat of the gas cartel is not on its immediate ability to influence prices – the analysts are 100% correct on this one – it has much more to do with a situation of coordination, creating a rapidly diminishing environment for competition bordering on market failure. Agreements between the top three to five gas exporters is already leading to a carve up of the markets. Call it what you want, but it is already happening.

The activities of pre-emption and market coordination carried out by Russia can happen both within and outside of the structure of a gas OPEC-like organization, which is something the ISN report seems to grasp:

Another idea proposed by Vladimir Putin is more straightforward bilateral coordination on energy projects. In this respect, Russia’s current deal with Algeria might have a particular significance. The agreement provides for a swap of upstream assets between Sonatrach and Gazprom, as well as possibilities for Gazprom to play a role in the distribution and marketing of Algerian gas to Europe. The source of potential worry for Europe, which views Algeria as an important component of its diversification strategy in gas imports, is not so much the creation of a full-fl edged gas cartel. It is, rather, the fact that Algeria has a large outstanding debt to Russia related to recent large weapons purchases, which may weaken its ability to push ahead with projects that are not in Russia’s interest. Indeed, Algeria’s bilateral agreements in the economic and military spheres taken together put Russia in a position where it might be able to exert significant influence in order to prevent projects that compete with its own plans. Russia has a history of such practices: one example is the agreement between Russia and Turkmenistan, which allows Russia to purchase virtually all Turkmen gas until 2028 at a comparatively high price, in effect preventing the construction of any infrastructure projects linking Turkmenistan more closely to China.

I don’t there that there is strong disagreement here, just rather the fear of the C-word and all its implications. OK fine, let’s not call it a cartel. Coming soon: Happy birthday, GPEC!!!