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Why are we talking about an OGEC now?

Shebonti Ray Dadwal is Consultant at the Manohar Parrikar Institute for Defence Studies and Analyses, New Delhi. Click here for detailed profile
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  • February 21, 2007

    In January 2007, when the Iranian Supreme Leader Ayatollah Khamenei suggested to the Secretary of the Russian Security Council, Igor Ivanov, that the two countries should explore setting up an OGEC or an organization of gas exporting countries similar to OPEC, Ivanov dismissed it as a "general idea" and not a "proposal for discussion". At that time, Russian Trade and Economic Development Ministry officials had also remarked that there was no economic justification for establishing an international natural gas cartel.1 Therefore, President Putin's announcement along with Qatari Emir, Sheikh Hamad bin Khalifa Al Thani, during his recent visit to Doha, that Russia and Qatar were exploring the creation of a gas cartel along with some other gas producers has been the subject of renewed concern, particularly for European States who have been voicing concerns about the reliability of Russian gas supplies in the aftermath of the Ukrainian and Belarus incidents.

    Europe's concerns increased following Russia's strengthening of energy ties with Algeria - its largest rival in Europe. In May 2005, Moscow signed an energy co-operation agreement with Algiers, which granted Russian companies monopoly access to Algerian oil and gas fields and potentially increased the Kremlin's control over energy sales to Europe. The two countries have also entered into an asset swap agreement, with Russia hoping to access Algeria's European markets through the deal. As a result, EU energy commissioner Andris Piebalgs has voiced concern that if Russia and Algeria, which together supply 35 per cent of Europe's gas, co-operated in the production and distribution of gas to the EU, they could create a kind of cartel.2

    Thus, if Russia is in a commanding position, why would it propose or support the establishment of a cartel?

    First, there are signs of oversupply in Liquid Natural Gas (LNG), and a trading market in the commodity has already emerged in the Atlantic basin with the potential to allow LNG ships to alter course in search of the best price. However, Russia is essentially a natural gas exporter, and has yet to develop its LNG infrastructure. But with other gas producing countries developing their LNG sectors, the gas market could, in time, change from a largely regionalised business to a global one, which would make it difficult for Russian companies like Gazprom from controlling supplies based on their pipeline network monopoly. It is therefore no surprise that while the Russian-Algerian agreement also looked at co-operation in LNG, Russian companies are also trying to look beyond Europe to the US gas (LNG) market, with reports that Gazprom is buying spot cargoes of LNG on the open market to ship to the US.3 Although at the time it was set up, its members had stated that the organisation's objective was not intended to create a "gas OPEC," subsequently, the Trinidad oil minister Erik Williams did point out at the 2005 GECF meeting that the same could not be ruled out in future.4 Together the GECF controls 73 per cent of the world's natural gas reserves and 41 per cent of production, and there is the likelihood of these countries joining hands with rivals and developing a set of commercial terms that could lead to a carving up of markets, with each supplier getting a share.

    Nevertheless, the establishment of a successful gas cartel would require an increase in global LNG trade, which is currently about 8 per cent of the global gas business. It would also need substantial co-operation and co-ordination amongst the potential members if it has to succeed. Their gas sectors are very diverse in terms of output capacities, reserves, domestic consumption and their export markets, which gives rise to a potential for conflicting interests. Given OPEC members' record of adhering to rules on quotas, this could be difficult. Moreover, a gas cartel would have to be differently structured from that of an oil cartel, because of the very nature of the gas business. These include a largely regionalised business, as against a global one in the case of oil. The market is also structured on long-term bilateral contracts of between 10 and 25 years. Therefore, only when the gas market moves away from long-term contracts towards a more spot market-based system would there be scope for a cartel to influence prices through a quota system akin to that of OPEC. Market analysts opine that it will be several years before sufficient spot market liquidity is developed to create the conditions needed for such a system.5 Finally, there are several substitutes for gas such as coal, nuclear and renewables, unlike oil, which is the staple fuel for the transport sector, amongst others. Also, some large gas producers, like Canada, Australia and Norway, are not members of GECF and are unlikely to join the organisation. According to them, GECF is likely to continue its role as a debating forum and will seek to promote their interests, particularly with regard to market liberalisation.6

    Given these above difficulties, the timing of Putin's proposal is indeed interesting. Russia has chosen to revive the idea of a gas cartel precisely at a time when it is trying to strengthen its political leverage in dealing with European countries. Following the incidents of disruption in Russian energy supplies to Ukraine and Belarus in 2006 and 2007, EU governments have been advocating lessening their dependence on Russian energy resources from the current 25 per cent by diversifying supply sources as well as diversifying their energy mix to include alternative energy resources, including renewable energy resources. The EU has also been pressing Russia to ratify the bloc's Energy Charter, which would allow foreign companies access to Russian pipelines to transport Russian gas to its markets in Europe. But Putin has refused to ratify the Charter on the grounds that some of the protocols were damaging to Russian interests, particularly the Transit Protocol which outlines the rules pertaining to transit across third countries as well as the demand for liberalisation of the Russian energy market.7

    The fact that Russia has also made no secret of its opposition to US policies in what it considers as its strategic domain was also clear from his speech at the 43rd Munich security conference on February 10, in which he made it clear that Russia was once again ready to resume its position as a major power and is no longer willing to acquiesce in Washington's policy with respect to NATO expansion and the presence of US troops in Central Asia. And the tools that Moscow is ready and willing to employ are its vast energy resources and position as a critical supplier of oil and gas to Europe.

    For some time now, Putin has been reiterating that although Moscow's share of Asia's energy market is only 3 per cent, its aim is to increase this to 30 per cent by 2020. Following the Munich conference, the Russian President visited three Gulf countries -Saudi Arabia, Qatar and Jordan. Although the visit was ostensibly to discuss energy co-operation and weapons sales, it is being seen as a reflection of Russia's growing political clout in a region that has come to be widely seen as a traditional American sphere of interest.

    Putin's visit to Saudi Arabia was especially significant in that he was the first Russian leader to visit the Kingdom. In Riyadh, he not only stated that Russia and Saudi Arabia were partners rather than rivals in the energy sector, but also offered Russian help in the nuclear sphere. In Doha, Putin proposed the idea of setting up a gas cartel, although subsequently both Putin and Sheikh Thani were quick to point out that it was "an interesting idea" and that there would be "difficulties" in setting it up. In Amman, where he also held talks with Palestinian President Mahmoud Abbas, Putin and King Abdullah discussed means to push forward the Middle East peace process, besides signing a number of bilateral agreements for the promotion of mutual investments and cementing economic co-operation.

    On the one hand, Russia is thus using gas diplomacy to drive home Europe's dependence on Russian energy supplies, reminding these countries that they would have to pay a price for establishing close ties with Washington. On the other hand, it is strengthening relations with its oil and gas competitors. Even if a cartel may not be in its interest at present, it is likely to float the idea periodically as a means of exerting political pressure on the West.

    The establishment of a gas cartel would not be in India's interests. India's demand for gas is expected to increase from the current 120 million standard cubic metres per day (mmscmd) to 400 mmscmd by 2012, while LNG is expected to comprise around 30 per cent of the total gas demand by 2010.8 Given that long-term contracts are based on assured supplies at more or less fixed prices, India prefers the same, although it has been buying LNG from the spot market as well. It signed a long-term LNG contract with Qatar in 2003 and there is potential for sourcing more supplies from the emirate. Negotiations are also on with several other countries including Iran, Oman, Algeria, Australia, and Russia.

    However, the recent rise in international gas/LNG prices and projects could affect demand. As far as India is concerned, which imports LNG at international prices but sells in the domestic market at subsidised rates, a rise in prices would impact the several LNG terminal projects that have been planned. For instance, Iran's decision to increase prices of both piped gas as well as LNG supplies has stalled both projects. Under these circumstances, the establishment of a gas cartel, which would certainly attempt to dictate - and hike - gas prices, is a matter of concern. Given India's burgeoning oil import bill, a surge in gas prices would not only affect many of its planned industrial and power projects that are dependent on gas supplies but also adversely impact its economy.