The Gas Troika is Hot Air

It’s an ongoing debate.  Is the threat of an OPEC-like natural gas cartel being bandied about by the Gazprom for real, or just all talk?  It’s not about whether the exporting countries are willing to form a new series of practices to manipulate prices, but rather how successful they could possibly be in controlling a commodity as difficult as natural gas.  We’ve published opinions on both sides, and this latest item from Warren Wilczewski, a researcher at the Carnegie Council, in the Journal of Energy Security points toward the negative.

The general dynamics of the LNG market suggest a cartel may be much more difficult to put together than is feared. Russia, dominant in Europe, may benefit from a short-term respite in competition over European market share, yet with over a quarter of the world’s gas reserves it is bound, in due time, to seek a larger presence there and in other regions. Iran currently plays a negligible role on the international gas market, while Qatar, at 9.2% of world’s gas reserves, accounts for less than 2% of international gas production. OGEC would therefore need to be structured in a way that reflects not only current production but also allows for Iran and Qatar to capitalize on their reserve base by ratcheting-up production and market-share over time. Otherwise, any cooperation on price or production levels would at most be a “cessation of competition,” quickly recognized by smaller members as an attempt to throttle their revenues and ambitions.

Gazprom may seek such an”armistice” just long enough for the company to build up its capacityand to bring its more challenging fields on stream. Once theseinvestments are in, the long-term scenario suggests high output to bein Russia’s best interest, in order to make productive use of itsinfrastructure and to ensure for itself greater political influence.Investments totaling tens of billions of dollars in projects as diverseas Sakhalin-2 and Shtokman are not being developed to stand idle;Gazprom certainly expects to exercise its diplomatic clout, and to earna decent return doing it.

Before the formalannouncement of the Big Gas Troika, Russia initiated a number ofefforts to consolidate the gas market on its own terms. Gazpromactively pursues agreements with national oil and gas companies inorder to cooperate on capacity expansion, marketing, and access toexport markets. One of its first forays was a March 2006 memorandum ofunderstanding with Sonatrach of Algeria. Sonatrach accounts for 18% ofEurope’s gas imports and together with Gazprom account for 80% ofEurope’s gas imports. Notable is the way the Gazprom-Kremlin duopolyleverages military and political power in its energy dealings. Besidesthe gas arrangement, Putin and Algerian President Bouteflika havediscussed Algeria’s $4.7 billion Soviet-era debt to Russia and an armsdeal. Since then, however, Sonatrach allowed its joint marketingagreement with Gazprom to lapse, and after two months Algiers returned15 of the fighter planes included in the agreement, claiming qualitydeficiencies.

The apparent lack of success inAlgeria did not dissuade Gazprom from seeking out other partners as aFebruary 2008 agreement between Gazprom Neft (Gazprom’s oil productionunit) and the Iranian Oil Ministry suggests. Besides committing tojoint exploration and production, the two sides also agreed to”cooperation in the transportation, processing and marketing of gas…,”a recurring goal of the Russians in their dealing with other energyproducing nations. Gazprom’s discussions with Bolivia’s YacimientosPetrolíferos Fiscales Bolivianos (YPFB) a month later underscored thisstrategy. Though the agreement signed on March 18th was limited toRussian participation in exploration activities in the country, intalks with Bolivia’s President Evo Morales mention was made of”prospects for bilateral cooperation in the oil and gas area, as wellas issues concerning further joint activities.”

April17 2008 saw the signing of yet another joint venture agreement, thisone between Gazprom and the National Oil Corporation of Libya. Enteredinto during then-President Putin’s visit to Tripoli, it calls on thetwo companies to build a cross-Sahara pipeline bringing Nigerian gas toLibya. Also on the agenda were talks on Gazprom’s participation in thesecond stretch of the Green Stream Libya-Italy pipeline. Thistrans-Mediterranean connector was initially meant to provide Europewith supply diversity, so potential Russian involvement adds toEuropean concerns over energy security.

ForEurope, worried about an increasing amount of its gas coming fromRussia, such agreements produce fears of a Gazprom “pincer movement,”with the Russian monopoly controlling a greater and greater share ofgas imported into the EU. With the exception of Bolivia all countriestargeted by Gazprom for cooperation in production and marketing arecurrent or potential LNG exporters, as is Egypt, with which Gazprom hasheld numerous, though thus far unfruitful, meetings. On July 4, 2007,during a visit by Egypt’s First Deputy Minister of Petroleum toGazprom’s Moscow headquarters, the discussion focused primarily onjoint work on exploration, development, and LNG production anddeliveries. More recently the energy ministers of both countries met inCairo on March 19, 2008, to discuss both nuclear-power cooperation and,to no surprise, “cooperation in energy, [particularly] oil and gas.”