No one is certain what the new organization will try to achieve, but experts here say it will not be able to set prices like the oil cartel, the Organization of Petroleum Exporting Countries. It will also not have a significant impact on natural gas prices or production in the United States, they add.
Among other reasons, the global market for natural gas is too fractured, there are too many substitutes for the fuel and two of the loudest voices in favor of the cartel, Iran and Venezuela, have little heft in the market — Iran is a net importer of natural gas and Venezuela is likely to be one soon, too.
Instead of forming a group to manipulate prices, natural gas producers appear to be responding to the growing trade in liquefied natural gas, or LNG (as opposed to gas that travels along a network of pipelines), and increasing competition in regional markets.
“Gas exporters really want a greater say in how gas markets are changing,” says Nikos Tsafos, a gas analyst at PFC Energy here.
Even if the cartel’s aim were to fix prices, producers in the United States, such as BP (nyse: BP), El Paso (nyse: EP), ExxonMobil (nyse: XOM ) and Chevron (nyse: CVX ), are likely to be unaffected, at least for now. Roughly 80% of all natural gas consumed in the U.S. is domestically produced and most imports come from Canada.
According to Tsafos, who gave a presentation Thursday on the cartel’s potential impact, comparisons with OPEC are inaccurate because oil and natural gas are two very different commodities. While OPEC sets oil prices largely by supply and demand, natural gas prices are generally set relative to crude prices. Also unlike oil, gas sales typically are directed toward specific buyers under long-term contracts.
In addition, since gas is used primarily as a heating and electricity source, it has several substitutes — including coal, nuclear and renewable energy — meaning that if the price for natural gas gets too high, companies will simply switch to alternatives.
In looking to increase cooperation, large gas producers such as Russia and Algeria apparently want to exert some influence over the burgeoning liquefied natural gas industry. LNG, which can be barreled and sold abroad, is also typically sold under contracts as long as 20 or 30 years, but there has been growing pressure to reduce the contract terms.
“That’s not going to change overnight, so the pricing impact is limited,” says Sara Banazak, a senior economist at the American Petroleum Institute, the industry group that represents oil and natural gas producers in the U.S.
Because most natural gas is still shipped through a regional network of international pipelines, it is also somewhat sheltered from potential fluctuations in gas prices, whether set by a cartel or not.
If a cartel is formed, it will likely include Russia, Venezuela, Iran, Qatar, Indonesia and Algeria, Tsafos says, but he is skeptical that the organization would have enough political leverage to influence prices if it wanted to do so. There would be no dominant country to enforce the organization’s policies, like Saudi Arabia in OPEC.
Russia and Qatar have been lukewarm to the idea of forming an outright cartel; while it has said it would like deeper cooperation, Moscow has been unwilling so far to take steps that might ratchet up conflict with the West and Qatar has close ties with the U.S. and American energy companies.
The loudest proponents of a cartel are not the strongest. Iran’s output has been mitigated by a surge in domestic consumption, infrastructure problems and U.S. sanctions against its exports. Because of these factors, Iran is already a net importer of natural gas and the other anti-American voice in the potential cartel, Venezuela, is likely to be a net importer within a few years, according to Tsafos.
Nonetheless, if a natural gas cartel is announced early next week, it will undoubtedly be met with condemnation, particularly in Western Europe, which is more vulnerable to fluctuations in supply piped in from Russia and Algeria.
Recent forecasts that the 2007 hurricane season will be severe have done nothing to reduce natural gas spot prices. Consumers in the United States are all too familiar with mercurial natural gas prices, which typically set the price of electricity.
Natural gas exporters appear to be seeking only cooperation amongst themselves for now. But as was the case with OPEC when it formed in 1960, it is unclear exactly what “cooperation” will mean a decade or so down the road, when global energy markets surely will have changed.
