The Wall Street Journal: Russia and Iran Discuss A Cartel For Natural Gas

Potential Clout Alarms
Big European Buyers;
Previous Effort Fizzled
By RUSSELL GOLD and GREGORY L. WHITE
February 2, 2007; Page A1

Russia and Iran — which hold nearly half the world’s natural-gas reserves — are talking about creating an OPEC-like organization for gas, a move that has the potential to unsettle energy markets and redraw geopolitical alignments.

Gas accounts for a growing share of global energy use, but the nations that produce most of it don’t work together to influence markets. That’s a stark contrast to the oil market, in which members of the Organization of Petroleum Exporting Countries manage output to keep prices at levels they favor.
 
During his annual news conference in the Kremlin yesterday, Russian President Vladimir Putin said “a gas OPEC is an interesting idea. We will think about it.” His comment comes days after Iranian Supreme Leader Ayatollah Ali Khamenei publicly called on a visiting Kremlin official to establish a group of natural-gas producers similar to OPEC. Russia and Iran are the world’s largest and second-largest holders of gas reserves, respectively.

While there are several reasons why a gas cartel isn’t likely to work as well as OPEC has managed the oil markets, the talk has alarmed big gas consumers, particularly in Europe, which gets a quarter of its gas from Russia. A cartel would be less menacing economically in the short-term to the U.S., which still gets most of its gas within North America.

Still, over time, the market is becoming more internationally flexible as shipments of liquefied natural gas rise. U.S. imports of LNG have more than doubled since 2002, though they still account for a small fraction of gas consumption here. Other Western countries are seeing demand for the clean-burning fuel climb even as their home-grown supply of gas declines. These shifts have turned gas in the last few years from a humdrum commodity into a prized fuel increasingly subject to geopolitical spats.
 
Comparing gas prices is difficult because until recently, there hasn’t been a global market for the fuel. Asian gas-delivery contracts have tended to be pegged to the price of crude oil, while in the U.S., spot gas prices are typically set by trading at a Louisiana pipeline hub. U.S. gas cost between $2 and $3 per thousand cubic feet in the 1990s, but has averaged more than twice that in recent years. A contract for the delivery of gas in March closed yesterday on the New York Mercantile Exchange at $7.54 per thousand cubic feet, up over the past few weeks due to the cold weather.

The prospect of Russia and Iran working together to influence markets can’t be comforting for Western countries. While Russia doesn’t have the same pariah status as Iran, Moscow has under Mr. Putin faced increasing criticism for using its vast energy riches as a diplomatic lever. Early last year, state-controlled gas giant OAO Gazprom cut off supplies of natural gas to neighboring Ukraine in a pricing dispute that briefly reduced the volumes delivered further down the pipeline in Europe.

Together Russia and Iran hold more than 40% of the world’s known gas reserves, according to the BP Statistical Review of World Energy. Moscow has cultivated relations with Tehran in recent years, building a nuclear-power plant in Iran and last year selling it air-defense missiles. Moscow has also resisted efforts to increase international pressure on Iran over concerns about Tehran’s nuclear ambitions.

In his remarks yesterday, Mr. Putin rejected charges that Russia uses energy as a political weapon and he downplayed any price-fixing rationale for creating an OPEC-like structure. “We do not intend to set up a cartel, but I think it’s right to coordinate our activities,” he said, “bearing in mind the key goal of absolutely reliable supplies to the main consumers of energy.”

A previous effort to create an organization of gas exporters fizzled, and many are doubtful this one would succeed. The Gas Exporting Countries Forum, which included Russia, Iran and Qatar, was formed in 2001 but hasn’t met since 2005. “At the moment, they haven’t gotten it together to even meet, much less coordinate anything,” says Jonathan Stern, director of gas research at the Oxford Institute for Energy Studies in Britain. As for talk by Russia and Iran of a gas OPEC, he says: “I’m unexcited by it.”
It isn’t known exactly how a gas cartel would operate, but OPEC has been a huge market force for decades. For a period in the 1970s, OPEC members set prices for their oil, and Western countries paid up. But oil demand eventually fell because of the high prices. In response, OPEC started cutting back output to influence prices and let market forces do the rest. That is still the strategy it employs today: In recent months, alarmed about falling oil prices, OPEC announced production cuts totaling 1.7 million barrels a day.

Talk of creating a gas cartel appears partly to be an outcome of dissatisfaction among gas suppliers with the emerging international gas market. After investing billions of dollars into boosting output over the past five years, “it’s difficult to place all of this gas in the market at a price that they’re comfortable with,” says Ira Joseph, executive director of international gas at PIRA Energy, a New York-based energy consultant. The discussion of a cartel, he says, is “in large part a reflection of that.”

India and China, both growing importers of tankers full of liquefied natural gas, have used their huge demand potential as leverage in negotiating long-term pricing. There is concern among gas suppliers that other Asian buyers, in particular Japanese and Korean utilities, may seek similar pricing when numerous long-term contracts begin to expire in coming years.

While oil is traded in a global marketplace, gas is bought and sold in fragmented markets. The U.S., for instance, gets most of its gas from domestic sources as well as Canada and Trinidad. Europe gets most of its gas from the North Sea, Russia and exporters from North Africa and the Middle East.

Russia’s interest in pooling its gas supply would be unusual, given that it never joined OPEC, despite being the world’s second-largest oil exporter, perhaps because it didn’t want to submit to quotas set by other countries. It has resisted past calls to curtail output to support prices.

Still, Mr. Putin has been working to strengthen Moscow’s ties with other major gas producers. After he visited Algeria last year, Gazprom last month reached a series of cooperation agreements with Algeria’s Sonatrach, Europe’s No. 3 supplier. European Union Energy Commissioner Andris Piebalgs called for an explanation from Algeria and Russia, since they could use their 35% share of the European market to potentially fix prices.

Next week, Mr. Putin travels to the Persian Gulf on a trip that will include the first-ever visit by a Russian leader to Qatar, which controls the world’s third-largest gas reserves.

Iran state television quoted Mr. Khamenei as saying on Monday: “Iran and Russia can establish the structure for an organization of gas cooperation like OPEC, as half of the world’s gas reserves are in Russia and Iran.”

Earlier this week, Qatari Oil Minister Hamad al-Attiya said on television that he thought it would be difficult to form a gas producers’ organization, but didn’t rule it out. He pointed out that most gas-supply contracts are typically long term because of LNG’S up-front production costs, extending more than 20 years. That would undercut any concerted effort to make short-term adjustments to production or otherwise influence prices.

Write to Russell Gold at [email protected] and Gregory L. White at [email protected]