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Subject: [PINR] 13 April 2007: Economic Brief: The Implications of a Russia-led
Gas Cartel
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Power and Interest News Report (PINR)
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13 April 2007
In light of today's developments in Baghdad, PINR recommends the
following analysis:
"Intelligence Brief: The Implications of Strategic Withdrawal from Iraq"
http://www.pinr.com/report.php?ac=view_report&report_id=629
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Economic Brief: The Implications of a Russia-led Gas Cartel
Drafted By:
http://www.pinr.com
Russia, Iran, Qatar, Venezuela, and other members of the Gas Exporting
Countries Forum (G.E.C.F.) met in Doha on April 9 amidst Western fears that
Moscow may encourage the birth of a "gas O.P.E.C." Western decision-makers fear
that such a new organization could give producers of natural gas an advantage
over consumers.
Russia (the world's leading producer and exporter of natural gas) as well
as Iran and Qatar (the two Middle Eastern powers with the largest gas reserves)
have repeatedly denied that a gas cartel is under construction. Moreover,
energy analysts agree that the natural gas market is still very different from
that of oil, and that a "gas O.P.E.C." would not be easy to establish.
According to the argument, natural gas does not have a global market like
oil. For the most part, gas is not traded on the open market (unlike oil), and
the majority of contracts between producers and buyers are long-term deals.
Hence, gas pricing functions differently than oil pricing.
In addition, natural gas transportation is more dependent on pipelines
than is oil, since the former needs to be liquefied (and subsequently
re-gasified) if transported by ship. Consequently, the regional geography that
links producers-exporters and buyers still prevails over a more global network
of transport routes. For instance, Russia (the exporter) and the European Union
(the importer) are tightly linked by the fact that an extended network of gas
pipelines exist between the Russian Federation and Eastern, Central and Western
Europe.
Nevertheless, the idea of a gas cartel resembling O.P.E.C. cannot be
dismissed. Russian, Iranian, and Qatari denials of such plans can be
interpreted as a series of declarations aimed at easing U.S. and European
concerns over the eventual creation of a "gas O.P.E.C." As usual in political
and strategic issues, actions are far more important than words. In spite of
such denials, Russia, Iran, Qatar, Venezuela and the other G.E.C.F. members are
evaluating the pros and cons of setting up the gas cartel.
Not all powers that host huge quantities of natural gas are major gas
exporters. Iran and Venezuela, for instance, lack the investment and technology
to exploit their natural gas resources fully. Russia is by far the world giant
in natural gas production and exports, as it holds 47.8 billion cubic meters of
gas reserves (the largest amount globally) and controls 21.6 percent of the
world's natural gas exports. On the contrary, Iran, despite its 26.7 billion
cubic meters of gas reserves, only counts for 3.1 percent of world exports.
Since Russia's energy giant Gazprom is rapidly becoming Europe's dominant
natural gas operator, Moscow is interested in augmenting its political and
economic influence on those countries that may provide Europe with an
alternative. As such, Gazprom quickly moved to secure alliances with Algeria's
national champion Sonatrach (in 2006) and with Turkmenistan's national energy
sector (in 2006, before President Saparmurat Niyazov's death), and Moscow is
now eying Qatar, Iran, and Venezuela as potential partners for a newly
structured gas suppliers organization.
The events of the last few years, which saw Russia consolidating and
securing control over its huge gas reserves before moving aggressively toward
market domination in Europe and parts of Asia, suggest that Moscow is willing
to co-opt its main Eurasian competitors in a sort of "soft monopoly."
Algeria's energy minister, Chakib Khelil, said after the Doha meeting
that "in the long term, we are moving toward a gas O.P.E.C.," while the
U.A.E.'s energy minister, Mohamed Bin Dhaen al-Hamli, declared that "the time
of cheap gas is a matter of the past."
Moscow still denies that it wants to build a gas cartel resembling
O.P.E.C. It is far from clear, also, if Qatar and the U.A.E. would join an
organization that would be strongly opposed by the United States and its
allies, at a time when instability in the Middle East makes Washington a needed
security supplier for the small energy-rich Gulf monarchies. As a consequence,
the birth of a gas O.P.E.C. is not certain.
Regardless, its potential effects upon European energy security are
already visible. Europe is still lacking a common energy strategy, and its
enhancement -- which is one of the German E.U. presidency's priorities -- is
still too slow to be effective. The result is that Russia could succeed in
co-opting its main competitors in natural gas markets before Europe is able to
actually implement a strong diversification strategy.
The bottom line is that European powers are rethinking their nuclear
power policies. Civil nuclear power has many new supporters in Europe, but the
memory of the disastrous Chernobyl incident (1986) and the problems linked to
nuclear power's dual use (especially at a time of proliferation) makes it
difficult to propose a robust investment policy in new nuclear policies in many
European countries.
Poland, Lithuania and Estonia, however, announced last week that they are
going to jointly upgrade a Lithuanian power plant, as they clearly stated the
urgency to ease their energy dependence on Moscow.
Russia may not give birth to a gas O.P.E.C., but it will probably be able
to coordinate natural gas supply policies to a certain extent. Brussels will
find it hard to implement its needed diversification strategy in an effective
way. At the same time, research in solar- or hydrogen-based energy is years
away from producing industrially and commercially viable alternatives.
Therefore, strong political trends directly linked to energy security
will likely make the revival of nuclear power in Europe unstoppable.
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