Gas Cartel Cannot Work – Cooperation Amongst Gas Producers to Take Other Forms

RelevanceNews last year that Russia was attempting to set up a “gas OPEC” had Western policy makers scurrying around for analysis. Of immediate concern was the issue of Russia extending its influence in European gas markets. But the news that Algeria and Iran (amongst others) were involved prompted a reaction from NATO’s economics experts, who sent a study to member states warning against the geopolitical implications of such a cartel.

The Doha meeting of the Gas Exporting Countries Forum this Monday indicated that producers had agreed, amongst other things, to study pricing policies and other issues facing the gas sector.

Some delegates at the meeting suggested that this was the first step in setting up and OPEC style gas cartel, while others played down the idea.

Most likely the pricing study (to be led by Russia) is motivated by the concerns of some producers that the growing LNG industry is eroding their pricing power in local markets. Russia also has interests in slowing down supply to Asia, a market it has had its eye on but has been slow to supply due to delays to key projects.

The reality is that the structure and dynamics of the gas industry do not lend themselves to a cartel arrangement such as OPEC. The most that the participants can expect to achieve is long term support for gas prices. Day to day manipulation of the markets is out of the question.

AnalysisThe news last year that several of the large gas producing nations, led by Russia, were talking openly about creating a cartel sent shivers around consuming nations. But such a cartel cannot work. Here’s why: 

  1. There is no swing producer to manipulate the supply-demand balance, in the way that Saudi Arabia does in the oil markets. In fact Russia is at maximum capacity and, through years of under investment, cannot keep up with existing demand.
  2. It will be very difficult for the major gas producers to coordinate investment and production plans due to the long lead times and size of gas projects.
  3. Many of the producers have gas industries that are under developed or much less developed than their oil industries. Nigeria, Norway, Trinidad and Tobago, Algeria and Libya would find it difficult to attract the needed foreign investment and technology if production cut backs were threatened under a cartel.
  4. Gas is not as easily traded as oil, with pipelines tying the producer and consumer together. This infrastructure requires big investment outlays, and any reduction in revenue through cartel action can hurt the project economics substantially.
  5. Gas contracts are often long term (therefore the gas is already designated to a seller), and only a small percentage of gas is traded short term (largely through LNG). Gas pricing is usually in the form of a formula linked to oil and/or a basket of fuels. These two facts make price manipulation through cutting back supply much more difficult.
  6. The gas industry is extremely fragmented and consists of a series of individual markets, each with its own pricing mechanisms. Determining the impact of coordinated supply action through a cartel will be very difficult.
  7. Gas competes with other fuels, particularly in power generation. Thus the prospect of consumers switching out of gas during a sustained period of high prices is real.
  8. Big gas producers such as Norway and Nigeria seem reluctant to join a cartel.

Furthermore, a gas cartel is against Russia’s stated energy policy of interdependence between producer and user, and it seems strange that Russia would want to blackmail its biggest (and pretty much only) customer, Europe.

Future cooperation amongst gas producers will be limited to ad-hoc arrangements, such as the recent Russia-Algeria deal to limit gas investment and foreign ownership. This could have serious implications for long term gas prices, but a full blown OPEC style cartel, with short term price manipulation is unlikely.

10 April 2007

Speak Your Mind

Do NOT follow this link or you will be banned from the site!

We use cookies to ensure that we give you the best experience on our website. If you continue to use this site we will assume that you are happy with it. Ok