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WHO NEEDS A GAS CARTEL?
By Derek Bower
Special to Russia Profile
Russia Profile, Russia
Feb 21 2007
Why Europe Should Stop Worrying and Reexamine Its Own Energy Policies
LONDON It doesn't take much to spook energy consumers in the West
these days, so news that Russia "would consider" developing a natural
gas cartel with other exporters has had politicians hitting the panic
buttons again. The latest to line up was U.S. Energy Secretary Samuel
Bodman, who said at an energy conference in Houston, Texas recently
that he would discourage any plans to form such a cartel.
"All countries can act as they see fit, but I think it's fair to say
that efforts to manipulate markets, trying to organize the suppliers
in such a fashion, over the long term is not going to accrue to the
benefit of suppliers," Bodman was quoted by newswires as saying.
At the same conference, Russia's deputy minister of industry and
energy, Andrei Reus, was at pains to stress that no one has yet laid
out what such an organization would look like. However, the West's
paranoia about such a cartel has been steadily growing since last
year's memorandum of understanding between Gazprom, Russia's natural
gas monopoly responsible for some 30 percent of European supplies,
and Sonatrach, the Algerian state energy company that supplies 10
percent of Europe's demand.
"The context of these meetings between Russia and Algeria makes
us nervous," Andris Piebalgs, Europe's energy commissioner, said
last year.
But Europe is even more rattled now. In January, the secretary of
Russia's Security Council, Igor Ivanov, met Ayatollah Ali Khamanei in
Tehran. A good chat about uranium and arms sales included a proposal
from the Ayatollah that Iran and Russia form a "gas OPEC."
This was followed first by Russian President Vladimir Putin's
mischievous comment earlier this month that the cartel idea was
"interesting" and one that Russia would explore. Earlier this week,
he was at it again. "We do not reject the idea of a gas cartel,"
Putin said after meetings in Qatar and Saudi Arabia.
And the idea will come up again next month, when the Gas Exporting
Countries Forum (GCEF), which some say would provide the foundation
of the gas OPEC, meets in Qatar.
Russia, Iran, Qatar and Saudi Arabia are, in that order, the world's
wealthiest countries in terms of natural gas reserves. A cartel
involving them would control almost 50 percent of world reserves. A
cartel based on the GCEF, which has 16 members and includes Venezuela,
Nigeria, Bolivia, and the UAE, would control almost 75 percent.
So the panic has some basis in reality. If such a cartel were to
exercise control over prices - cutting exports when necessary to
support the market, as OPEC does with oil - consumer countries whose
addiction to imported gas has grown steadily stronger in the past
decade would be in trouble.
For Central and Eastern Europe, the possibility of further disruptions
in their supply of Russian gas is especially worrying, given that
Gazprom holds a near monopoly on exports to that region - and has
been willing to cut exports for political reasons in the recent past.
Time to Stop Worrying
However, the paranoia about Russia's foreign energy policy seems
to be clouding the judgment of many - not least of all politicians
in Europe. Even if Russia genuinely wished to create a cartel, its
chances of success are small. Furthermore, the question of whether a
cartel could succeed reveals yet another contradiction - and a great
deal of hypocrisy - at the heart of Europe's own energy policy.
A cartel stands little chance of succeeding for technical and
political reasons. Cartels succeed by taking a liquid market and
making it illiquid. The oil market is liquid, which is why OPEC has
been able to manipulate it. The natural gas market is not, which is
why a cartel would be irrelevant. Gas is traded through long-term
contracts down pipelines, with buyer and supplier committed to
take-or-pay contracts. Even in the liquefied natural gas business -
where a spot market is developing - the bulk of the world's supply
is also tied up in long-term contracts.
Another technical reason is that Iran, considered to be the gas
cartel's biggest enthusiast, has lots of gas in the ground, but exports
almost none of it. Even the small amount of gas it sells to Turkey is
unneeded in that country. So Iran's contribution to a gas cartel would
be negligible. The same is true for Saudi Arabia: it exports no gas,
making its wealth of gas reserves irrelevant to any cartel.
And political reasons make a gas OPEC even less likely. Despite
supporting Iran over the nuclear issue, Moscow considers the country
its greatest potential rival as a supplier of gas to Europe. In
Armenia and Turkey, Gazprom has been busily working to ensure that
Iran gets no foothold in either of those transit countries.
Indeed, Russia's support for Iran's nuclear ambitions has two benefits:
it profits the country's nuclear exporters and it keeps sanctions on
Iran and Western capital out of its gas sector. Iran seems to believe
that Russia is an ally in the energy sphere. It isn't.
Meanwhile, Qatar's energy policy remains staunchly pro-consumer. It
has enormous wealth in the ground and wishes to capitalize on it for a
long time. It isn't in the business of threatening its main markets. As
for the GCEF, its lack of organization - the March meeting has been
postponed twice - is notorious.
More Euro-confusion
Yet the greatest political irony involves Gazprom and the EU. It is
the EU that wishes to see greater liquidity in gas markets, including
a continental gas spot market and the end of long-term supply
contracts. There is good business logic behind this, but if such a
market took shape, it would also lay the grounds on which a cartel
could succeed. The closer gas comes to being a genuine commodity
like oil, the more chance there is for a gas OPEC. Gazprom, on the
other hand, wants those long-term contracts - the same that render
any cartel meaningless - to continue.
The best way to read the jaw-jawing about the gas OPEC is as an
obvious, though bluff, warning to consumer countries, especially in
Europe. The EU has, after all, spent the past two years talking about
how to diversify away from Russian gas. That carries an explicit threat
to Russia's livelihood. Europe's ambitious project to build the Nabucco
pipeline from the Middle East to Central Europe, for example, was
explicitly designated as an "anti-Gazprom" line. And the EU's efforts
to persuade its member states and energy companies to act in unison
("speak with one voice") when negotiating with Russia looks, to Moscow,
very much like an attempt to create a monopsony - a cartel of buyers.
That the EU should then cry foul when Russia discusses relations
with other more willing partners in the energy sphere is seen as
yet another example of Brussels' confused energy policy. The EU's
and Russia's most important and reliable partners in the gas market
are each other: observers say they should start to act like they know
that. Failing that, Brussels ought to hope, against the odds, that a
gas cartel emerges. A serious threat to the continent's energy supply
and economic growth might for the first time bring about a serious
and credible response.
By Derek Bower
Special to Russia Profile
Russia Profile, Russia
Feb 21 2007
Why Europe Should Stop Worrying and Reexamine Its Own Energy Policies
LONDON It doesn't take much to spook energy consumers in the West
these days, so news that Russia "would consider" developing a natural
gas cartel with other exporters has had politicians hitting the panic
buttons again. The latest to line up was U.S. Energy Secretary Samuel
Bodman, who said at an energy conference in Houston, Texas recently
that he would discourage any plans to form such a cartel.
"All countries can act as they see fit, but I think it's fair to say
that efforts to manipulate markets, trying to organize the suppliers
in such a fashion, over the long term is not going to accrue to the
benefit of suppliers," Bodman was quoted by newswires as saying.
At the same conference, Russia's deputy minister of industry and
energy, Andrei Reus, was at pains to stress that no one has yet laid
out what such an organization would look like. However, the West's
paranoia about such a cartel has been steadily growing since last
year's memorandum of understanding between Gazprom, Russia's natural
gas monopoly responsible for some 30 percent of European supplies,
and Sonatrach, the Algerian state energy company that supplies 10
percent of Europe's demand.
"The context of these meetings between Russia and Algeria makes
us nervous," Andris Piebalgs, Europe's energy commissioner, said
last year.
But Europe is even more rattled now. In January, the secretary of
Russia's Security Council, Igor Ivanov, met Ayatollah Ali Khamanei in
Tehran. A good chat about uranium and arms sales included a proposal
from the Ayatollah that Iran and Russia form a "gas OPEC."
This was followed first by Russian President Vladimir Putin's
mischievous comment earlier this month that the cartel idea was
"interesting" and one that Russia would explore. Earlier this week,
he was at it again. "We do not reject the idea of a gas cartel,"
Putin said after meetings in Qatar and Saudi Arabia.
And the idea will come up again next month, when the Gas Exporting
Countries Forum (GCEF), which some say would provide the foundation
of the gas OPEC, meets in Qatar.
Russia, Iran, Qatar and Saudi Arabia are, in that order, the world's
wealthiest countries in terms of natural gas reserves. A cartel
involving them would control almost 50 percent of world reserves. A
cartel based on the GCEF, which has 16 members and includes Venezuela,
Nigeria, Bolivia, and the UAE, would control almost 75 percent.
So the panic has some basis in reality. If such a cartel were to
exercise control over prices - cutting exports when necessary to
support the market, as OPEC does with oil - consumer countries whose
addiction to imported gas has grown steadily stronger in the past
decade would be in trouble.
For Central and Eastern Europe, the possibility of further disruptions
in their supply of Russian gas is especially worrying, given that
Gazprom holds a near monopoly on exports to that region - and has
been willing to cut exports for political reasons in the recent past.
Time to Stop Worrying
However, the paranoia about Russia's foreign energy policy seems
to be clouding the judgment of many - not least of all politicians
in Europe. Even if Russia genuinely wished to create a cartel, its
chances of success are small. Furthermore, the question of whether a
cartel could succeed reveals yet another contradiction - and a great
deal of hypocrisy - at the heart of Europe's own energy policy.
A cartel stands little chance of succeeding for technical and
political reasons. Cartels succeed by taking a liquid market and
making it illiquid. The oil market is liquid, which is why OPEC has
been able to manipulate it. The natural gas market is not, which is
why a cartel would be irrelevant. Gas is traded through long-term
contracts down pipelines, with buyer and supplier committed to
take-or-pay contracts. Even in the liquefied natural gas business -
where a spot market is developing - the bulk of the world's supply
is also tied up in long-term contracts.
Another technical reason is that Iran, considered to be the gas
cartel's biggest enthusiast, has lots of gas in the ground, but exports
almost none of it. Even the small amount of gas it sells to Turkey is
unneeded in that country. So Iran's contribution to a gas cartel would
be negligible. The same is true for Saudi Arabia: it exports no gas,
making its wealth of gas reserves irrelevant to any cartel.
And political reasons make a gas OPEC even less likely. Despite
supporting Iran over the nuclear issue, Moscow considers the country
its greatest potential rival as a supplier of gas to Europe. In
Armenia and Turkey, Gazprom has been busily working to ensure that
Iran gets no foothold in either of those transit countries.
Indeed, Russia's support for Iran's nuclear ambitions has two benefits:
it profits the country's nuclear exporters and it keeps sanctions on
Iran and Western capital out of its gas sector. Iran seems to believe
that Russia is an ally in the energy sphere. It isn't.
Meanwhile, Qatar's energy policy remains staunchly pro-consumer. It
has enormous wealth in the ground and wishes to capitalize on it for a
long time. It isn't in the business of threatening its main markets. As
for the GCEF, its lack of organization - the March meeting has been
postponed twice - is notorious.
More Euro-confusion
Yet the greatest political irony involves Gazprom and the EU. It is
the EU that wishes to see greater liquidity in gas markets, including
a continental gas spot market and the end of long-term supply
contracts. There is good business logic behind this, but if such a
market took shape, it would also lay the grounds on which a cartel
could succeed. The closer gas comes to being a genuine commodity
like oil, the more chance there is for a gas OPEC. Gazprom, on the
other hand, wants those long-term contracts - the same that render
any cartel meaningless - to continue.
The best way to read the jaw-jawing about the gas OPEC is as an
obvious, though bluff, warning to consumer countries, especially in
Europe. The EU has, after all, spent the past two years talking about
how to diversify away from Russian gas. That carries an explicit threat
to Russia's livelihood. Europe's ambitious project to build the Nabucco
pipeline from the Middle East to Central Europe, for example, was
explicitly designated as an "anti-Gazprom" line. And the EU's efforts
to persuade its member states and energy companies to act in unison
("speak with one voice") when negotiating with Russia looks, to Moscow,
very much like an attempt to create a monopsony - a cartel of buyers.
That the EU should then cry foul when Russia discusses relations
with other more willing partners in the energy sphere is seen as
yet another example of Brussels' confused energy policy. The EU's
and Russia's most important and reliable partners in the gas market
are each other: observers say they should start to act like they know
that. Failing that, Brussels ought to hope, against the odds, that a
gas cartel emerges. A serious threat to the continent's energy supply
and economic growth might for the first time bring about a serious
and credible response.