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An OPEC of a Different Color

Keith Kohl

Written By Keith Kohl

Posted January 30, 2007

Baltimore, MD-Looming on the European horizon may be a new type of "natural gas OPEC" led by Russia. The secret to its success, however, will be its ability to operate under the global radar.

Considering that over half of the world’s 172 trillion cubic meters of natural gas reserves are located in Russia, Iran and Central Asia, the concept of a new "gas OPEC" may be more than just rumors.

The list of potential members includes Russia, Iran, Algeria and Libya. The standout of the group is unmistakably Russia, hosting 27 percent of the world’s total natural gas reserves. Coming in second with over 15 percent is Iran.

But what effect can this new OPEC-like group have?

A pretty considerable one, since the EU has a limited number of sources for natural gas.

And Russia, supplying one-quarter of Western European demand, is leading the charge.

The chairman of the Duma’s energy committee, Valery Yazev, has already proposed that gas producers come together to form an organization similar to OPEC, a response he claims is necessary because of EU energy policies.

An organized cartel would allow gas suppliers more influence in fixing prices.

Coming Together

Again, among the targets that Russia has been eyeing are Iran, Algeria and Libya.

Although not a major exporter, Iran still holds the world’s second largest amount of natural gas, which is quite an attractive prospect.

Russia’s largest oil and gas company, Gazprom, has already approached Iran in the hope of working together. The result was an agreement to establish a new relationship for developing oil and gas deposits, transportation and sales of natural gas.

According to Iranian President Mahmoud Ahmadinejad, "We can closely cooperate from the standpoint of setting natural gas prices . . . in the interests of global stability."

While Russia is the largest exporter of natural gas to Europe, Algeria is second, supplying 10% of European demand and exporting about 95% of its total gas production.

And in 2006, Gazprom also gained access to Algerian oil and gas fields. Encompassed by this cooperation between the two gas giants are unified efforts in the production and exploration of Algeria’s gas.

In fact, Sonatrach, Algeria’s major gas company, is supplying Russian natural gas contracts to France. Some incentives for Algeria include the elimination of a $4.7-billion-dollar debt to Russia.

Gazprom also is eyeing projects in Libya, which has proven natural gas reserves of more than 1.49 trillion cubic meters.

Last month they succeeded in obtaining hydrocarbon exploration and development rights off the shores of Libya. This deal includes a 30-year upstream license costing more than $200 million.

A Cartel by Any Other Name

As soon as the terms "gas OPEC" or "gas cartel" are uttered, the response is always denial-and Russia is very quick to minimize concerns. Yet Russia is aggressively pursuing its relationships with these countries.

To the EU, which imports nearly all its gas from these few countries, the power of such a cartel could be devastating. The idea of a "gas OPEC" raises European fears that it could squeeze supplies and/or prices.

Feasibility Issues

There may be no need to fear such an organization, however.

In the first place, the different agendas of the cartel members could make agreement difficult. There may be disagreements over strategy and market share that would impede any real cooperation.

For example, countries with huge resources like Russia are less likely to hold back supplies since they profit from selling more volume rather than boosting prices. In contrast, members with much smaller reserves would have less influence on prices.

One of the biggest obstacles in a gas cartel’s path is also that natural gas is traded in long-term contracts, sometimes lasting between 10 and 20 years. This would hinder its ability to quickly change prices the way OPEC can with oil, which trades in short term contracts.

Furthermore, the cartel might face painful trade sanctions if the countries that are directly affected decided to resist.

Given such potential conflict, the likelihood of an official OPEC-type institution being formed is small. The Russians may prefer to work behind the scenes rather than risk the wrath of their best customers. On the other hand, it’s hard to see what alternative to paying the price the Europeans would have if push comes to shove.

We’ll be following this development closely as events unfold.

Until next time,

Keith Kohl

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