Russia, Iran, Qatar, Venezuela, and Algeria are planning to meet in April for a discussion of the creation of a so-called "gas OPEC." In the opinion of Vlast correspondent Dmitry Butrin, the urge towards unification on the part of energy exporters is motivated by nothing more than a desire to manufacture energy from a lot of hot air.
What is hidden sooner or later always reveals itself. Russian officials vehemently denied the idea of a gas OPEC, a cartel of gas-producing countries that would control the price of what is currently the world's most popular energy resource, for such a long time that it has taken repeated clarifications from Iranian spiritual leader Ayatollah Ali Khamenei, articles full of analysis from business publications the world over, and fiery exhortations from Venezuelan President Hugo Chavez to get the Russian Ministry of Industry and Energy to admit the obvious. It is fairly complicated to explain why government organizations around the world do not like the word "cartel," and the word will not be on anyone's lips at the meeting scheduled for April 9 in the Qatari capital of Doha, but Russia is indeed interested in a gas OPEC.
That explains Russia's persistent desire to befriend Algeria, which is the leading supplier of gas in the Mediterranean, as well as the mysterious January visit by Russian First Deputy Prime Minister Sergei Ivanov to Norway, where the minister of defense (as Mr. Ivanov was then) enthusiastically discussed gas and oil topics. It also explains Russia's friendship with Qatar, one of the world's leading producers of gas and also the country where, as many Russians still have not succeeded in forgetting, a Sharia court not long ago attempted to condemn two Russian intelligence officers to death by beheading on charges of murdering Zelimkhan Yandarbiev, one of the leaders of the Chechen separatist movement. At the most recent session of the real OPEC in Vienna, Russian Deputy Minister of Industry and Energy Andrei Reus finally admitted that "a gas OPEC is an idea that Russia is ready to discuss, and it will be discussed in Doha."
The key to Mr. Reus' comment is the verb "discuss," not the neologism "gas OPEC." For several reasons, a cartel of gas-producing countries is eternally valuable, including in a monetary sense, only when it is in the discussion phase – any practical realization of the idea any time soon will send its value plummeting to zero. And here's why.
As a result of a regrettable combination of circumstances for Russia, oil – which it is already de rigueur to predict will start to run out in the Russian Federation beginning in 2012 – is a liquid, while natural gas, of which Russia has as much as Qatar or Iran, is not. Both oil and natural gas can be transported in pipelines, but while it is fairly easy to pull off supply diversification in the oil market (in other words, to reorient from one geographical market to another), achieving the same feat with gas requires a revolution in the liquefaction process. The process of transitioning to the new technology is extremely complicated and, more importantly, is extraordinarily expensive: such projects cost billions of dollars.
There is currently no well-developed free market for liquid natural gas (LNG) in which it would be possible to set prices via the mechanism of competition, and such a market is likely to appear only in the next decade. Creating a cartel to manipulate the price set by the market is possible. In any case, however, virtually all of the potential participants in the gas OPEC have no intention of abandoning the principle of long-term contracts for the delivery of gas. This is primarily explained by the weak competitiveness on the capital markets of national companies relative to multinational titans such as Shell, BP, ExxonMobil, or Chevron: as a rule, the level of corporate management and transparency to investors is lower in national companies. That is precisely why all of the countries in the world that trade in gas do so through multinational companies – it's cheaper and simpler. The only issue is the price.
The emir of Qatar, Hamad bin Khalifa al-Tani, who owns a massive amount of gas and, as bad luck would have it, has not a single solvent commercial customer, understood way back in the 1990s that liquid natural gas will be the mainstream of the world energy market by approximately 2015. By 2012, enterprises under the control of the state-owned company Qatargas will produce LNG in a volume equivalent to around 100 billion cubic meters of ordinary gas (this is comparable to the volume of Gazprom's exports to the EU). Such vast possibilities of sovereign democracy (though in practice the country is a monarchy, of course) are unfolding for this small country on the Persian Gulf that the emir of Qatar is not particularly interested in selling gas to the US for cheap.
This does not mean that Qatar has no problems that could be exploited in negotiations by Americans eager for a lower price. For example, Qatargas vice president Feisal al-Suwaidi openly talks about how cave-ins under worked-out gas fields near Doha occasionally force the government to impose a moratorium on new gas projects in the country, which means monetary losses. Problems with cost efficiency exist everywhere, but in Qatar there are few potential investors, and the majority of them are American companies. So the next steps in Qatar's gas project are likely to be underwritten by long-term contracts with Shell and BP for fairly low LNG prices, and Qatar's foreign policy orientation towards the US will not change even if it joins the gas OPEC, or even if it exercises the right of Arab national autonomy to join with Russia. But bargaining is always in order, particularly when a superpower is suggesting that you create a gas OPEC.
Gazprom, which owns gas deposits similar in volume to those of Qatar, including the Shtokman gas field, faces the exact same problem of increasing prices within the framework of long-term contracts. Unofficial consultations on the price of Shtokman gas, liquefied and sent to the US, were held five years ago, before Vladimir Putin had been turned down on the idea of a gas union between Russia and Germany in the Shtokman field and Gazprom was not yet planning to develop the Shtokman field alone, without the participation of the West.
Gazprom was not pleased by the result of the consultations, during which American companies said they were interested in the project only if it involved long-term guarantees of cheap supplies of LNG from the Shtokman field. The gas OPEC is a good excuse to return to the conversation from five years ago. And it is fairly safe to do so: basically, everyone understands that in light of the fact that there really is no free market for gas, it is impossible to create a cartel, because prices fixed according to long-term contracts cannot be manipulated like the real OPEC manipulates the price of oil.
Every country that plans to participate in the talks in Doha faces struggles with American or European partners for more advantageous conditions for the construction of LNG plants. Of course, sooner or later every country in the world is going to build LNG plants at its own expense and without the participation of foreign partners. But for now all of the participants in the nascent market for LNG are anxiously waiting for the US to open its market to foreign gas as soon as possible, and energy companies with predominately American capital have been open to talks on the creation of new consortiums for the production of LNG, whether involving the Russian Shtokman, the Iranian South Pars, the Qatari Ras Laffan, or the Egyptian Idku and Damietta fields.
Discussing a gas OPEC is an excellent means of putting pressure on consumers. The idea of manufacturing energy from all the hot air produced in the discussion is so simple that it is not surprising that Hugo Chavez, who so far has approximately the same relationship to the international gas market as the mayor of Petropavlovsk-Kamchatsky (i.e., not much), intends to sign right up and even take the helm if possible. But – and this is important – the idea of a gas OPEC will remain effective only as long as it is just an idea. Once it is created, a cartel that is incapable of regulating prices and that in any case does not want to, except in the case of LNG projects being carried out in conjunction with multinational investors, will quickly be exposed to the world as completely helpless. In contrast, the louder the statements and the brighter and more convincingly painted the presentations from top managers from Gazprom, Algeria's Sonatrach, and Nigeria's NLNG are in Doha, the higher their chances of success.
We really do live in an era of an information revolution. Never has humanity come so close to the idea of fusing the energy industry with show business. The gas OPEC will be. Or not be – but it will seem real enough.
What is hidden sooner or later always reveals itself. Russian officials vehemently denied the idea of a gas OPEC, a cartel of gas-producing countries that would control the price of what is currently the world's most popular energy resource, for such a long time that it has taken repeated clarifications from Iranian spiritual leader Ayatollah Ali Khamenei, articles full of analysis from business publications the world over, and fiery exhortations from Venezuelan President Hugo Chavez to get the Russian Ministry of Industry and Energy to admit the obvious. It is fairly complicated to explain why government organizations around the world do not like the word "cartel," and the word will not be on anyone's lips at the meeting scheduled for April 9 in the Qatari capital of Doha, but Russia is indeed interested in a gas OPEC.
That explains Russia's persistent desire to befriend Algeria, which is the leading supplier of gas in the Mediterranean, as well as the mysterious January visit by Russian First Deputy Prime Minister Sergei Ivanov to Norway, where the minister of defense (as Mr. Ivanov was then) enthusiastically discussed gas and oil topics. It also explains Russia's friendship with Qatar, one of the world's leading producers of gas and also the country where, as many Russians still have not succeeded in forgetting, a Sharia court not long ago attempted to condemn two Russian intelligence officers to death by beheading on charges of murdering Zelimkhan Yandarbiev, one of the leaders of the Chechen separatist movement. At the most recent session of the real OPEC in Vienna, Russian Deputy Minister of Industry and Energy Andrei Reus finally admitted that "a gas OPEC is an idea that Russia is ready to discuss, and it will be discussed in Doha."
The key to Mr. Reus' comment is the verb "discuss," not the neologism "gas OPEC." For several reasons, a cartel of gas-producing countries is eternally valuable, including in a monetary sense, only when it is in the discussion phase – any practical realization of the idea any time soon will send its value plummeting to zero. And here's why.
As a result of a regrettable combination of circumstances for Russia, oil – which it is already de rigueur to predict will start to run out in the Russian Federation beginning in 2012 – is a liquid, while natural gas, of which Russia has as much as Qatar or Iran, is not. Both oil and natural gas can be transported in pipelines, but while it is fairly easy to pull off supply diversification in the oil market (in other words, to reorient from one geographical market to another), achieving the same feat with gas requires a revolution in the liquefaction process. The process of transitioning to the new technology is extremely complicated and, more importantly, is extraordinarily expensive: such projects cost billions of dollars.
There is currently no well-developed free market for liquid natural gas (LNG) in which it would be possible to set prices via the mechanism of competition, and such a market is likely to appear only in the next decade. Creating a cartel to manipulate the price set by the market is possible. In any case, however, virtually all of the potential participants in the gas OPEC have no intention of abandoning the principle of long-term contracts for the delivery of gas. This is primarily explained by the weak competitiveness on the capital markets of national companies relative to multinational titans such as Shell, BP, ExxonMobil, or Chevron: as a rule, the level of corporate management and transparency to investors is lower in national companies. That is precisely why all of the countries in the world that trade in gas do so through multinational companies – it's cheaper and simpler. The only issue is the price.
The emir of Qatar, Hamad bin Khalifa al-Tani, who owns a massive amount of gas and, as bad luck would have it, has not a single solvent commercial customer, understood way back in the 1990s that liquid natural gas will be the mainstream of the world energy market by approximately 2015. By 2012, enterprises under the control of the state-owned company Qatargas will produce LNG in a volume equivalent to around 100 billion cubic meters of ordinary gas (this is comparable to the volume of Gazprom's exports to the EU). Such vast possibilities of sovereign democracy (though in practice the country is a monarchy, of course) are unfolding for this small country on the Persian Gulf that the emir of Qatar is not particularly interested in selling gas to the US for cheap.
This does not mean that Qatar has no problems that could be exploited in negotiations by Americans eager for a lower price. For example, Qatargas vice president Feisal al-Suwaidi openly talks about how cave-ins under worked-out gas fields near Doha occasionally force the government to impose a moratorium on new gas projects in the country, which means monetary losses. Problems with cost efficiency exist everywhere, but in Qatar there are few potential investors, and the majority of them are American companies. So the next steps in Qatar's gas project are likely to be underwritten by long-term contracts with Shell and BP for fairly low LNG prices, and Qatar's foreign policy orientation towards the US will not change even if it joins the gas OPEC, or even if it exercises the right of Arab national autonomy to join with Russia. But bargaining is always in order, particularly when a superpower is suggesting that you create a gas OPEC.
Gazprom, which owns gas deposits similar in volume to those of Qatar, including the Shtokman gas field, faces the exact same problem of increasing prices within the framework of long-term contracts. Unofficial consultations on the price of Shtokman gas, liquefied and sent to the US, were held five years ago, before Vladimir Putin had been turned down on the idea of a gas union between Russia and Germany in the Shtokman field and Gazprom was not yet planning to develop the Shtokman field alone, without the participation of the West.
Gazprom was not pleased by the result of the consultations, during which American companies said they were interested in the project only if it involved long-term guarantees of cheap supplies of LNG from the Shtokman field. The gas OPEC is a good excuse to return to the conversation from five years ago. And it is fairly safe to do so: basically, everyone understands that in light of the fact that there really is no free market for gas, it is impossible to create a cartel, because prices fixed according to long-term contracts cannot be manipulated like the real OPEC manipulates the price of oil.
Every country that plans to participate in the talks in Doha faces struggles with American or European partners for more advantageous conditions for the construction of LNG plants. Of course, sooner or later every country in the world is going to build LNG plants at its own expense and without the participation of foreign partners. But for now all of the participants in the nascent market for LNG are anxiously waiting for the US to open its market to foreign gas as soon as possible, and energy companies with predominately American capital have been open to talks on the creation of new consortiums for the production of LNG, whether involving the Russian Shtokman, the Iranian South Pars, the Qatari Ras Laffan, or the Egyptian Idku and Damietta fields.
Discussing a gas OPEC is an excellent means of putting pressure on consumers. The idea of manufacturing energy from all the hot air produced in the discussion is so simple that it is not surprising that Hugo Chavez, who so far has approximately the same relationship to the international gas market as the mayor of Petropavlovsk-Kamchatsky (i.e., not much), intends to sign right up and even take the helm if possible. But – and this is important – the idea of a gas OPEC will remain effective only as long as it is just an idea. Once it is created, a cartel that is incapable of regulating prices and that in any case does not want to, except in the case of LNG projects being carried out in conjunction with multinational investors, will quickly be exposed to the world as completely helpless. In contrast, the louder the statements and the brighter and more convincingly painted the presentations from top managers from Gazprom, Algeria's Sonatrach, and Nigeria's NLNG are in Doha, the higher their chances of success.
We really do live in an era of an information revolution. Never has humanity come so close to the idea of fusing the energy industry with show business. The gas OPEC will be. Or not be – but it will seem real enough.
