Highlights
– OPEC-style gas cartel to be founded in at June 2008 GECF meeting in Moscow
– US and EU concerned the gas cartel will lead to increased natural gas prices and the use of natural gas supplies to influence the foreign policy of consumer countries
– Iran will likely seek to use the cartel as a vehicle to gain influence over EU markets and political support for UN sanctions
Negotiations surrounding the possible emergence of a gas cartel similar to the Organization of Petroleum Exporting Countries (OPEC) have raised eyebrows in the United States (US) and the European Union (EU) in recent months. Of particular interest to Western consumers is the impetus behind gas-OPEC’s creation. The West is concerned that gas-OPEC’s potential founders, Russia, Iran, Venezuela, and Algeria, will use their increased influence of the global Liquefied Natural Gas (LNG) market to manipulate the foreign policy of consumer countries.
Despite Western concerns, the idea is gaining ground among Gas Exporting Countries’ Forum (GECF) members. Russia and Iran are currently working separately on potential charters for the new organization and will meet in the coming months to merge the documents into a single, negotiated document. It is anticipated that the gas cartel will be formed at the GECF’s June 2008 meeting in Moscow.
Potential Influence Over Global Markets
According to Energy Information Administration estimates, Natural gas supplies 23 percent of the world’s energy consumption, trailing oil and gasoline (36 percent) and coal (26 percent). GECF members, including Algeria, Bolivia, Brunei, Egypt, Indonesia, Iran, Libya, Malaysia, Oman, Qatar, Russia, Trinidad and Tobago, the United Arab Emirates, and Venezuela, account for 73 percent of the world’s proven gas reserves and 41 percent of production. Of these, Russia produces more than 22 percent of the world’s natural gas supply, followed by Algeria (3.2), Iran (3.1), Indonesia (2.8) and Malaysia (2.2).
Unlike oil, natural gas is not a globally spot-traded commodity. Natural gas exports are primarily shipped regionally via pipelines, due to the prohibitively high cost of storage, and subject to long-term contracts, the average duration of which is 10 to 20 years. This fact causes experts to doubt the potential for a gas cartel to mimic OPEC’s influence on the global oil market.
However, opponents of an OPEC-style gas cartel led by Russia and Iran point to Russia’s use of its supply of gas exports to Ukraine and Georgia as political leverage over the budding Western allies. The EU expressed concerns that a gas-OPEC would similarly attempt to exert influence over its foreign policy, particularly given that cartel members Russia and Algeria supply more than half of the EU’s natural gas imports.
Other opponents point to increased global demand for LNG (natural gas that was liquefied for ease of transport) exports and planned GECF talks concerning the division of consumer markets. Given the rising price oil and supply concerns, LNG is increasingly attractive as an oil alternative; as a result LNG demand is rising.
Unlike natural gas, LNG is stored and transported on cargo ships, making it, therefore, a globally, spot-traded commodity. As demand continued to rise, so would the market influence of member countries of the newly formed gas cartel. Likewise, the division of consumer markets would increase the cartel’s influence over price by eliminating regional price competition and creating an environment for price fixing.
Iranian Incentives
Despite its large proven natural gas reserves, Iran currently imports more gas from Turkmenistan than it exports to Turkey. Iran’s failure to capitalize on its natural resources is primarily linked to UN and US imposed sanctions limiting its access to foreign investment. Given its limited options, Iran has turned to Russian investors. For its part, Russia welcomed the opportunity to invest in Iranian natural gas production in order to increase its influence over Iranian foreign policy and future pipeline construction.
For Iran, Russian investment and the potential formation of a gas cartel will equal increased access to consumer markets, including European markets. In turn, Iranian gas exports will grant Iran enhanced international standing and influence. As Iranian exports to Europe increase, Iranian leaders anticipate enhanced European opposition to US propagated sponsored sanctions and pre-emptive strike proposals.
Therefore, the proposed gas cartel will continue to be vehemently opposed by the US and the EU. Iran and Russia will persist in their insistence that the newly formed organization will seek only to formalize the relationship between GECF members, and not to manipulate natural gas prices. Subsequently, the gas cartel will likely be founded in Moscow in June with limited fan fare. However, in the long run, the gas cartel will grow in stature and increase its influence over the global gas market, giving rise to the enhanced political influence of its members.
