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The Times: Don't rule out a gas cartel; it makes sense to Russia

The Times April 26, 2006

Don't rule out a gas cartel; it makes sense to Russia

By Carl Mortished

WHAT ARE the prospects for a gas cartel, an organisation of gas exporting countries or Ogec? The unpleasant truth is that they look better every day and not just because Gazprom, the world’s biggest gas exporter is being vocal about its ambition to dominate global gas markets.

With periodic gas shortages and thermal units selling at high prices in Britain and the US, you might think that a gas exporter, such as Gazprom or Algeria’s Sonatrach, has nothing to worry about. There is ample demand and constrained supply. Europe’s big reservoirs of gas in the North Sea are depleting quickly, power stations are hungry and Russia struggles in periods of peak demand to maintain the pressure in export pipes.


Europe needs much more gas, so why should its potential suppliers — Russia, Algeria, Libya, Nigeria and Qatar — risk political opprobrium among consuming nations by combining forces. The answer is fear. Many fear a glut of liquefied natural gas (LNG) and their fear is justified.

Oversupply is building in LNG, a market which is upsetting the old wisdom about gas being a local, disconnected market of rigid long-term contracts between suppliers and consumers linked by pipelines. To everyone’s surprise, a trading market in LNG has quickly emerged in the Atlantic basin where refrigerator ships loaded with frozen gas can alter course to Europe or America, in search of the best price.

Britain will soon have four terminals for receiving LNG and three massive gas liquification plants are under construction in Qatar, the Gulf state, which has 910 trillion cubic feet in gas reserves and has made plain its ambition to supply the world with LNG.

This is alarming to Gazprom. Worrying because, although Russia leads the world in both gas in reserve and gas produced it lags in LNG, a technology Russia never developed during the Cold War years. There is every sign that frozen gas in ships will transform a localised gas market, fragmented by geography and dominated by regional pipeline suppliers into a global commodity business.

That means more transparent and more volatile prices. Insecurity and loss of control for Gazprom, which is soon to commit to spending tens of billions of dollars to develop Shtokman, a gasfield in the Barents Sea with enough fuel to supply Britain for 35 years. Shtokman will be an LNG scheme and Gazprom will want to sell the gas on rigid terms with prohibitions on resale of gas to third parties. Gazprom’s efforts to impose such contracts have encountered resistance within Europe. Will it prevail in the global LNG market?

Russia is a member of the Gas Exporting Countries Forum, an obscure organisation established six years with no stated ambition to create a cartel but every opportunity to collude. Its 15 members include Opec nations, such as Algeria, Libya, Nigeria and Venezuela, which have a common interest in keeping prices high. In pursuit of a common interest Gazprom and Sonatrach, the Algerian state energy company, recently held talks over co-operation in LNG With so much money being spent on gas refrigeration plants, LNG output is expected to double by 2010. Logically, gas exporters would co-ordinate their projects to avoid a sudden surge in capacity but each is building as quickly as possible in order to capture a big share of the market.

There is a point at which commercial ambition and protective self-interest collide and the former gives way to the latter. Within Gazprom, those tensions are becoming evident as the company rushes to extend its reach beyond Europe to the US gas market. So anxious is Gazprom to build a business in America that it is buying spot cargoes of LNG on the open market to ship to the US.

It will be only natural if Gazprom seeks to agree with its rivals in North Africa and the Middle East a set of commercial terms that facilitate the carving up of markets, ensuring everyone gets a share of the pie.

Too cash rich

AMONG the West’s big oil companies, the price of crude has gone beyond a mere embarrassment of riches to the point where it is damaging business plans.

So hot is the market that companies struggle to staff projects, acquire materials and equipment. BP recently suffered a tripling in the day rate of its drillship in the Gulf of Mexico and, in Qatar, they are no longer worrying about tender prices but about a lack of bids. There are simply not enough equipment procurement contractors to service the profusion of projects.

The surging price is doing damage in other areas for the major oil companies, causing political problems at home and abroad. Oil producing nations no longer need the oil majors to provide either cash or technology. The latter they can buy from oil service companies, which have picked up the staff and skills abandoned by the majors during the price collapse of the 1990s. Flush with funds from high prices, they no longer need the oil majors’ capital.

Finally, there is the threat of taxation. With no better access to the oil reserves of the Gulf, the majors have little ability to spend the riches that are falling into their pockets. At a $60 oil price, BP says it will pay back $65 billion to its investors over the next three years.

The oil price is now $70 and rising. If ExxonMobil, BP, Shell and Total cannot spend more on finding more oil, is there not a very real risk that governments will ask them to hand over the cash?

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