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Saturday's
Lagniappe
Gas
in the Face
Illustration / Christophe Vorlet
A rumored 'gas OPEC' could wield the threat of
a supply cutoff as a geopolitical weapon.
But
unlike oil, the economies of gas limits the power of producer
nations. -Boston
Globe
By:Dmitry
Butrin
Russia, Iran, Qatar, Venezuela, and Algeria are planning to
meet in April for a discussion of the creation of a so-called
"gas OPEC." In the opinion of Vlast correspondent
Dmitry Butrin, the urge towards unification on the part of energy
exporters is motivated by nothing more than a desire to manufacture
energy from a lot of hot air.
What is hidden sooner or later always reveals itself. Russian
officials vehemently denied the idea of a gas OPEC, a cartel
of gas-producing countries that would control the price of what
is currently the world's most popular energy resource, for such
a long time that it has taken repeated clarifications from Iranian
spiritual leader Ayatollah Ali Khamenei, articles full of analysis
from business publications the world over, and fiery exhortations
from Venezuelan President Hugo Chavez to get the Russian Ministry
of Industry and Energy to admit the obvious. It is fairly complicated
to explain why government organizations around the world do
not like the word "cartel," and the word will not
be on anyone's lips at the meeting scheduled for April 9 in
the Qatari capital of Doha, but Russia is indeed interested
in a gas OPEC.
That explains
Russia's persistent desire to befriend Algeria, which is the
leading supplier of gas in the Mediterranean, as well as the
mysterious January visit by Russian First Deputy Prime Minister
Sergei Ivanov to Norway, where the minister of defense (as Mr.
Ivanov was then) enthusiastically discussed gas and oil topics.
It also explains Russia's friendship with Qatar, one of the
world's leading producers of gas and also the country where,
as many Russians still have not succeeded in forgetting, a Sharia
court not long ago attempted to condemn two Russian intelligence
officers to death by beheading on charges of murdering Zelimkhan
Yandarbiev, one of the leaders of the Chechen separatist movement.
At the most recent session of the real OPEC in Vienna, Russian
Deputy Minister of Industry and Energy Andrei Reus finally admitted
that "a gas OPEC is an idea that Russia is ready to discuss,
and it will be discussed in Doha."
The key
to Mr. Reus' comment is the verb "discuss," not the
neologism "gas OPEC." For several reasons, a cartel
of gas-producing countries is eternally valuable, including
in a monetary sense, only when it is in the discussion phase
– any practical realization of the idea any time soon
will send its value plummeting to zero. And here's why.
As
a result of a regrettable combination of circumstances for Russia,
oil – which it is already de rigueur to predict will start
to run out in the Russian Federation beginning in 2012 –
is a liquid, while natural gas, of which Russia has as much
as Qatar or Iran, is not. Both oil and natural gas can be transported
in pipelines, but while it is fairly easy to pull off supply
diversification in the oil market (in other words, to reorient
from one geographical market to another), achieving the same
feat with gas requires a revolution in the liquefaction process.
The process of transitioning to the new technology is extremely
complicated and, more importantly, is extraordinarily expensive:
such projects cost billions of dollars.
There
is currently no well-developed free market for liquid natural
gas (LNG) in which it would be possible to set prices via the
mechanism of competition, and such a market is likely to appear
only in the next decade. Creating a cartel to manipulate the
price set by the market is possible. In any case, however, virtually
all of the potential participants in the gas OPEC have no intention
of abandoning the principle of long-term contracts for the delivery
of gas. This is primarily explained by the weak competitiveness
on the capital markets of national companies relative to multinational
titans such as Shell, BP, ExxonMobil, or Chevron: as a rule,
the level of corporate management and transparency to investors
is lower in national companies. That is precisely why all of
the countries in the world that trade in gas do so through multinational
companies – it's cheaper and simpler. The only issue is
the price.
The
emir of Qatar, Hamad bin Khalifa al-Tani, who owns a massive
amount of gas and, as bad luck would have it, has not a single
solvent commercial customer, understood way back in the 1990s
that liquid natural gas will be the mainstream of the world
energy market by approximately 2015. By 2012, enterprises under
the control of the state-owned company Qatargas will produce
LNG in a volume equivalent to around 100 billion cubic meters
of ordinary gas (this is comparable to the volume of Gazprom's
exports to the EU). Such vast possibilities of sovereign democracy
(though in practice the country is a monarchy, of course) are
unfolding for this small country on the Persian Gulf that the
emir of Qatar is not particularly interested in selling gas
to the US for cheap.
This
does not mean that Qatar has no problems that could be exploited
in negotiations by Americans eager for a lower price. For example,
Qatargas vice president Feisal al-Suwaidi openly talks about
how cave-ins under worked-out gas fields near Doha occasionally
force the government to impose a moratorium on new gas projects
in the country, which means monetary losses. Problems with cost
efficiency exist everywhere, but in Qatar there are few potential
investors, and the majority of them are American companies.
So the next steps in Qatar's gas project are likely to be underwritten
by long-term contracts with Shell and BP for fairly low LNG
prices, and Qatar's foreign policy orientation towards the US
will not change even if it joins the gas OPEC, or even if it
exercises the right of Arab national autonomy to join with Russia.
But bargaining is always in order, particularly when a superpower
is suggesting that you create a gas OPEC.
Gazprom,
which owns gas deposits similar in volume to those of Qatar,
including the Shtokman gas field, faces the exact same problem
of increasing prices within the framework of long-term contracts.
Unofficial consultations on the price of Shtokman gas, liquefied
and sent to the US, were held five years ago, before Vladimir
Putin had been turned down on the idea of a gas union between
Russia and Germany in the Shtokman field and Gazprom was not
yet planning to develop the Shtokman field alone, without the
participation of the West.
Gazprom
was not pleased by the result of the consultations, during which
American companies said they were interested in the project
only if it involved long-term guarantees of cheap supplies of
LNG from the Shtokman field. The gas OPEC is a good excuse to
return to the conversation from five years ago. And it is fairly
safe to do so: basically, everyone understands that in light
of the fact that there really is no free market for gas, it
is impossible to create a cartel, because prices fixed according
to long-term contracts cannot be manipulated like the real OPEC
manipulates the price of oil.
Every
country that plans to participate in the talks in Doha faces
struggles with American or European partners for more advantageous
conditions for the construction of LNG plants. Of course, sooner
or later every country in the world is going to build LNG plants
at its own expense and without the participation of foreign
partners. But for now all of the participants in the nascent
market for LNG are anxiously waiting for the US to open its
market to foreign gas as soon as possible, and energy companies
with predominately American capital have been open to talks
on the creation of new consortiums for the production of LNG,
whether involving the Russian Shtokman, the Iranian South Pars,
the Qatari Ras Laffan, or the Egyptian Idku and Damietta fields.
Discussing
a gas OPEC is an excellent means of putting pressure on consumers.
The idea of manufacturing energy from all the hot air produced
in the discussion is so simple that it is not surprising that
Hugo Chavez, who so far has approximately the same relationship
to the international gas market as the mayor of Petropavlovsk-Kamchatsky
(i.e., not much), intends to sign right up and even take the
helm if possible. But – and this is important –
the idea of a gas OPEC will remain effective only as long as
it is just an idea. Once it is created, a cartel that is incapable
of regulating prices and that in any case does not want to,
except in the case of LNG projects being carried out in conjunction
with multinational investors, will quickly be exposed to the
world as completely helpless. In contrast, the louder the statements
and the brighter and more convincingly painted the presentations
from top managers from Gazprom, Algeria's Sonatrach, and Nigeria's
NLNG are in Doha, the higher their chances of success.
We really
do live in an era of an information revolution. Never has humanity
come so close to the idea of fusing the energy industry with
show business. The gas OPEC will be. Or not be – but it
will seem real enough.
Dmitry
Butrin is
a Kommersant-Vlast Magazine
writer. Petroleumworld not necessarily share these views.
Editor's
Note: This commentary was originally published by Russia's Kommersant
( Russian monthly magazine for political and business elite),
on Mar. 29, 2007. Petroleumworld reprint this article in the
interest of our readers.
