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The Gas Cartel Idea: On the Road to Another OPEC?

The Gas Cartel Idea: On the Road to Another OPEC?

As oil sees its image tarnished from the disastrous oil spills that took place off the coast of the Gulf of Mexico and off the coast of Dalian, China, and as the most promising oil fields remain off limit to the Western oil majors, gas is gaining in popularity.

Gas is present in large quantities and in many countries of less questionable reputation such as in the United States and is also less harmful to the environment than oil. Though gas is not intended to replace oil, some gas-rich countries such as Russia and Iran are strongly advocating for a gas cartel to regulate the industry, which can explain the reluctance of Russia to adopt sanctions towards Iran at the United Nations as both countries heavily rely on the income generated by their natural resources.

When the 156th Meeting of the OPEC Conference ended in Vienna in March 2010, the idea of a gas cartel was still floating in the air.  The Organization of the Petroleum Exporting Countries is a 50 years old organization whose mission, according to Article 2 of its Statute, is to coordinate and unify the petroleum policies of its Member Countries and ensure the stabilization of oil markets in order to secure an efficient, economic and regular supply of petroleum to consumers, a steady income to producers and a fair return on capital for those investing in the petroleum industry.

Its members are Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates, and Venezuela.

In 2001 The Gas Exporting Countries Forum was established in Tehran, Iran. Though it isn’t an equivalent to OPEC, it is a venue for gas producing countries to meet.  Its members are Algeria, Bolivia, Egypt, Equatorial Guinea, Iran, Libya, Nigeria, Qatar, Russia, Trinidad and Tobago and Venezuela.  Algeria, Iran, Nigeria, Qatar and Venezuela belong to both.

Interestingly, Russia is not part of OPEC as it never wanted any organization to monitor, control and regulate its output. In fact, Russia was taking advantage of OPEC self-imposed output reductions to increase its own output. In the second quarter of 2009, Russia exports rose to 7.4 million barrels per day against 7 million barrels per day for Saudi Arabia.

What Benefits for Gas Users?

When the price of oil went skyrocketing OPEC did not react too promptly to alleviate the burden on oil consumers despite its stated commitment to economic supply to consumers. After all, every additional dollar to the price of a barrel results in billions in the bank at the end of the year for many oil-producing countries.

Few countries had excess capacity to offer to increase the offer in order to alleviate the out of control price escalation. Saudi Arabia, the only country that had then an excess capacity of about 2 million barrels per day and sufficient enough to cool down the market, dragged its feet when oil prices spiked out of control to reach almost $150 per barrel in the summer of 2008 and only released about 250,000 more barrels per day which did little at the time to put an end to this price inflation. In this context, one can wonder what gain end-users would get from the creation of a gas cartel operating in similar ways to OPEC.

Russia’s bad habits of cutting off gas when having disputes with its Ukrainian and Belarusian neighbors - through which transits respectively 80% and 20% of the gas going to Europe – has shown that Russia has no qualms about using energy as a political and economic pressure tool irrespective of the damage to its long-term public image.

Many member countries of OPEC are often the first ones to break the quotas such as Angola and Nigeria, the latter overproducing 300,000 barrels per day in December 2009. The result is that some countries end up having to produce more oil to offset the drop in price, pushing the price of oil further down. The lack of effective sanction mechanisms towards cheaters plagues OPEC and would probably plague a gas cartel, as no country would really want to be part of an organization sanctioning them too harshly.

It is also questionable to think that some countries would want any interference with what is for them a critical life supply of hard currency. For instance, Libya is known for doing what it feels like doing. Furthermore, it has signed some very promising contracts, notably with Italy to supply Europe via a Southern route that is very appealing to counterbalance the unpredictable Eastern route controlled by Russia.

Another country like Turkmenistan, said to hold the 4th or 5th largest world gas reserves has repeatedly put forward its neutrality status and would not want to get caught in political games that would undermine its status.  Also, after having been heavily dependent on the goodwill of Russia and on the Gazprom pipelines for the transit of its gas to Europe, which was interrupted for nearly nine months in 2009, it is doubtful Turkmenistan would want to be told how much it could supply China, which became a leading client after the opening in 2010 of a new pipeline linking Turkmenistan to China via Kazakhstan and Uzbekistan.

Another factor to take into consideration is the huge infrastructure and equipment investments made by some countries to become leaders in the Liquefied Natural Gas (LNG) industry.  LNG is a revolution in the energy industry as long pipelines are no longer part of the equation, except to bring LNG to the tankers. Some countries have become leaders such as Algeria, Libya and Qatar. Others, such as Australia, Egypt, Nigeria and Norway are building up their export capabilities.

Gas Cartel coming soon to town?

In light of the above it is very doubtful that a gas cartel as structured as OPEC will become a reality. The inability to strictly enforce quotas and to sanction wrongdoers is little incentive for any rule-abiding country to become a member. The prevalence of individual interests with some of its members not abiding by the rules and decisions of the cartel has weakened the organization.

Furthermore, though OPEC members hold two thirds of world reserves, they only account for less than 40% of world oil, enabling a lot of other players to have an impact on the oil scene outside the framework of OPEC. The Gas Exporting Countries Forum will remain, as it name states it a forum, but the creation of a legal structure is most doubtful and so is the ability of the existing members of the Forum to structure it into a well-operating international organization.

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