By Gawdat Bahgat
After a meeting between Gazprom Chief Executive Alexei Miller, Iranian Minister of Petroleum Gholamhossein Nozari, and Qatari Minister of Energy and Industry 'Abd Allah al-'Attiyah in Tehran in late October 2008, the three major natural gas producing nations announced the creation of a ‘Big Gas Troika.' The purpose of the new body is to further consolidate cooperation between major gas producers ( MEES , 27 October 2008). It has also enforced the prospects that the Gas Exporting Countries Forum (GECF) might evolve into a grouping similar to the Organization of Petroleum Exporting Countries (OPEC), a so-called ‘Gas OPEC.'
Natural gas has been widely considered the fuel of choice for many consumers. It is abundant and less polluting than coal or oil. Little wonder that natural gas consumption and trade have expanded in the last few decades. Consumers in the US, Europe, and Asia have grown more dependent on natural gas. Domestic production in these regions, however, could not keep pace with rising demand. This large and growing gap between demand and domestic production has been increasingly filled by imports. The deepening dependence on foreign sources has heightened concerns about security of supply. Stated differently, natural gas consumers are increasingly concerned about potential movements by major gas producers to influence gas markets and prices, similar to the role of OPEC in oil markets. Will a Gas OPEC emerge?
On the supply side, natural gas producers have sought to coordinate their policies in order to strengthen their position in negotiating prices and terms of trade with consumers. In a meeting held in Tehran in May 2001, some major gas producing nations created GECF to facilitate such cooperation. Since then, some hawkish members, such as Iran and Venezuela, have sought to transform GECF into Gas OPEC. Others (ie Algeria and Qatar) believe it would take some time for such transformation to take place. Meanwhile, Russia, the major gas producer and exporter, has taken an ambivalent stand, sending conflicting signals.
This essay examines the prospects for the evolution of GECF into Gas OPEC. I argue that gas producers are likely to continue and expand their cooperation. Such cooperation, however, is unlikely to involve attempting to control output or influencing prices like OPEC does. This low probability that GECF would evolve into Gas OPEC is based on major differences between oil and natural gas markets. In addition, Russia is not likely to play a leading role in forming a Gas OPEC, similar to the Saudi role in OPEC.
GECF And OPEC
In 1960 Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela founded OPEC, which is headquartered in Vienna, Austria. Then the oil market was dominated by major international oil companies. Oil trade was characterized by bilateral long-term contracts and oil producers were not satisfied with the low financial return they were getting for their crude. At the outset, OPEC looked weak and did not have the powerful leverage it came to exert on oil output and prices in the following decades. The 1973 Arab-Israeli war and the subsequent use of oil as a “political weapon” was a turning point in the history of OPEC and the oil industry. Two factors contributed to strengthening OPEC's bargaining position. First, in the early 1970s US oil production peaked and Washington began its steady reliance on foreign supplies. Second, oil was almost the primary fuel in transportation, residential and industrial sectors, providing almost half of global energy requirements. In the early 1980s OPEC initiated a production quota system. Such a move has enabled OPEC to adjust its overall production in response to signals from global oil markets.
Despite these efforts to shape production levels and influence prices, OPEC members do not perceive the organization as a cartel. Still, as the following Table 1 illustrates, OPEC's huge share of the world's proven oil reserves and production ensures the organization a powerful leverage over oil prices and markets.
Table 1: OPEC's Share Of Global Proven
Oil Reserves And Production 2007 (%)
|
Member
|
Year of Accession
|
Share of Reserves
|
Share of Production
|
|
Algeria
|
1969
|
1.0
|
2.2
|
|
Angola
|
2007
|
0.7
|
2.2
|
|
Ecuador*
|
1973
|
0.3
|
0.7
|
|
Indonesia†
|
1962
|
0.4
|
1.2
|
|
Iran
|
1960
|
11.2
|
5.4
|
|
Iraq
|
1960
|
9.3
|
2.7
|
|
Kuwait
|
1960
|
8.2
|
3.3
|
|
Libya
|
1962
|
3.3
|
2.2
|
|
Nigeria
|
1971
|
2.9
|
2.9
|
|
Qatar
|
1961
|
2.2
|
1.4
|
|
Saudi Arabia
|
1960
|
21.3
|
12.6
|
|
UAE
|
1967
|
7.9
|
3.5
|
|
Venezuela
|
1960
|
7.0
|
3.4
|
|
Total
|
|
75.7
|
43.7
|
* Ecuador suspended its membership in December 1992 and reactivated it in October 2007.
† Indonesia decided to suspend its membership by the end of 2008.
Source: BP Statistical Review of World Energy, 2008, pages 6 and9.
On the other hand, GECF is an informally structured organization. Its members meet at the ministerial level once a year to discuss topics of mutual interest. One of the key themes of the GECF meetings has been the existence of long-term contracts between gas exporters and importers. The GECF has been keen to see these long-term contracts maintained in order to assist with the underwriting of large capital projects and to provide stable incomes to its members. Another theme has been the pricing formulas that link gas prices to those of oil and how to “de-link” the pricing of these two strategic commodities.
Little progress, if any, has been achieved on both themes. This can be explained by the fact that the GECF, unlike OPEC, lacks bureaucratic infrastructure, has no formal headquarters yet, has no budget, and has loose membership rules. Since its inception in Tehran in 2001, the GECF has held meetings in Algiers, Doha, Cairo and – most recently, in December 2008 – in Moscow. Membership has risen to 15 from the inaugural 11. These 15 members control a substantial share of the world's natural gas reserves and production (Table 2).
It is important to point out that significant natural gas producers such as Australia (1.4% reserves and 1.4% production), Canada (0.9% reserves and 6.2% production), and the Netherlands (0.7% reserves and 2.2% production) are not members, while Norway (1.7% reserves and 3.0% production) attends only as observer. Meanwhile, Iran is barely a natural gas exporter and Venezuela does not export. In short, membership in GECF is less coherent than in OPEC.
The figures in Tables 1 and 2 show that, while the Middle East is the unparalleled driving force in the global oil market, Russia is the dominant power in gas. In other words, natural gas deposits and production are less concentrated than those of oil. In addition, eight nations (Algeria, Indonesia, Iran, Libya, Nigeria, Qatar, UAE, and Venezuela) are members of both OPEC and GECF. Despite this overlap in membership and interest between the two organizations, major differences between gas markets and oil markets suggest that the GECF is unlikely to evolve into a Gas OPEC, at least in the near future.
Table 2: GECF's Share Of Global Proven
Gas Reserves And Production 2007 (%)
|
Member
|
Share of Reserves
|
Share of
Production
|
|
Algeria
|
2.5
|
2.8
|
|
Bolivia
|
0.4
|
0.5
|
|
Brunei
|
0.2
|
0.4
|
|
Egypt
|
1.2
|
1.6
|
|
Indonesia
|
1.7
|
2.3
|
|
Iran
|
15.7
|
3.8
|
|
Libya
|
0.8
|
0.5
|
|
Malaysia
|
1.4
|
2.1
|
|
Nigeria
|
3.0
|
1.2
|
|
Oman
|
0.4
|
0.8
|
|
Qatar
|
14.4
|
2.0
|
|
Russia
|
25.2
|
20.6
|
|
Trinidad & Tobago
|
0.3
|
1.3
|
|
UAE
|
3.4
|
1.7
|
|
Venezuela
|
2.9
|
1.0
|
|
Total
|
73.5
|
42.6
|
Source: BP Statistical Review of World Energy, 2008, pages 22 and 24.
Oil Vs Gas
Members of OPEC and GECF share similar goals – to coordinate their policies to obtain what they perceive as a “fair” price for their products. However, geological and commercial differences between oil and gas and their respected markets have laid the ground for OPEC to become a powerful force in shaping oil prices and markets. These same geological and commercial characteristics pose challenges that GECF has to overcome in order to play a similar role in influencing natural gas prices and markets. Specifically, the two commodities and markets differ in how they are traded and priced, and in terms of substitutability.
First, oil is easier and cheaper to transport than gas. Every day, tankers carrying millions of barrels of crude oil and petroleum products sail from producing regions to consuming markets. On the other hand, given the high costs of transporting gas, the fuel is largely transported via pipelines, with a small but growing proportion in the form of liquefied natural gas (LNG). A difference in shipping expenses is a major reason why oil has developed into a global market while natural gas is still a regional market. In other words, oil consumers buy the fuel from any producer regardless of the distance. Meanwhile, natural gas consumers import most of their needs from nearby producers. Thus, most of imported gas in the US comes from Canada; Europe is heavily dependent on gas supplies from the North Sea, Russia, and North Africa; while China, India, Japan, and South Korea rely on neighboring producers particularly Australia, Brunei, Indonesia, and Malaysia.
Second, the quality and prices of crude oil are shaped largely by two characteristics: viscosity (thickness or density) and sulfur content. Crude oil with lower density is referred to as light crude while that with higher density is called heavy crude. Similarly, the one with low sulfur content is known as sweet oil and the one with high sulfur content as sour crude. 1 The three major benchmark crudes – West Texas Intermediate (traded mainly in the US), Brent (traded mainly in Europe), and Oman-Dubai (traded mainly in the Far East) – reflect the levels of density and sulfur content.
Gas prices on the other hand are mostly pegged to oil prices. Furthermore, given the high costs of trading natural gas, prices are usually locked in long-term bilateral contracts (20 years or longer) with a take-or-pay clause. This means that buyers are obligated to pay for the gas whether they take it or not. This rigidity of gas pricing leaves little room for GECF to try to influence gas production and prices.
Third, volatility of oil prices and consumers' concern over alleged manipulation by producers have encouraged intensified efforts to reduce dependence on oil and rely increasingly on alternative sources of energy including nuclear power and renewables. Since the early 1970s oil has been largely replaced by alternative sources of energy in the residential, commercial, and manufacturing sectors. In transportation, however, oil still maintains its primacy. Despite impressive technological innovations, airplanes and most cars still run on petroleum products. This oil primacy in transportation is a fundamental advantage for OPEC. High oil prices might force consumers to fly and drive less, but they still have to travel. Largely, there is no substitute for oil in transportation.
Natural gas is used mainly to generate electricity. It faces competition from coal, hydroelectric power and nuclear power. Gas is readily substitutable by these other fuels. A higher elasticity of demand is translated into reduced market power of the GECF. 2
To sum up, the high cost of transporting gas, the lack of a global spot natural gas market, and competition from other fuels have all placed limits on the evolution of GECF into a Gas OPEC. In the last few years, however, the fast-growing importance of liquefied natural gas (LNG) has introduced new dynamics to the natural gas industry and markets. Theoretically, LNG offers the potential to transform natural gas markets from regional to global. In recent years, technological improvements have led to reduced costs of liquefying, transporting, and re-gasifying LNG. This increased liquidity in the natural gas industry has promoted the emergence of a spot LNG market similar to that which has emerged in the oil market over the last few decades.
Despite this growing flexibility in natural gas markets, the vast majority of LNG is still traded through long-term contracts due to the substantial capital commitment. In short, LNG provides promising potential to alter the dynamics of gas markets. Such change, however, will take some time to materialize.
Geopolitics Of Natural Gas: Russia, Iran, And Qatar
Russia holds the world's largest natural gas reserves and is the world's largest producer and exporter. In addition, Russia has the advantage that it lies between two of the world's largest energy consuming regions: Europe to the west and East Asia to its east. Gazprom, Russia's state-run gas monopoly and the largest gas company in the world, controls the bulk of the country's production. Given these advantages, no effective gas organization can work without the active participation of Russia.
Moscow has participated in GECF meetings and hosted the December 2008 meeting. However, Russian officials have been sending conflicting signals on their country's stance on the potential evolution of GECF into a Gas OPEC. Since 2002, former President and current Prime Minister Vladimir Putin has expressed different opinions on Gas OPEC. He has said, “We do not intend to set up a cartel, but I think it is right to coordinate our activities.” The Russian leader has also stated, “We do not reject the idea of creating a gas cartel. But this initiative requires more study.” He has also called the creation of a Gas OPEC “an interesting idea. We will think about it.”
These conflicting statements suggest that Russian leaders are still formulating their stance on Gas OPEC. Moscow's position on OPEC, however, indicates that Russian leaders prefer to adopt an independent energy policy without limiting their choices by joining a collective grouping. Despite being the world's second-largest oil producer and exporter, Russia has never joined OPEC. It has been able to benefit more from being outside OPEC and responding to oil supply and demand circumstances on its own rather than as part of a group.
Iran holds the world's second largest natural gas reserves, after Russia. Its most significant gas development scheme is the offshore South Pars field, which was discovered in 1990 and is one of the largest in the world. The Islamic Republic also enjoys a strategic location close to Asian fast-growing economies. The Iranian authority is implementing a 25-phase plan to develop South Pars. The official goal, according to Deputy Minister of Petroleum Reza Kasaizadeh, is “to achieve 8-10% of the world's gas trade within 20 years.” Iran seeks to become a major gas exporter to Europe and Asia.
Despite its potential and ambition, Tehran currently is not a major gas exporter. Its status on the world gas stage does not reflect its massive reserves. Several factors have restrained Iran's influence. Iran has one of the largest populations in the Middle East (about 70mn). This large population consumes a substantial proportion of the country's gas production. Iranian authority also tries to substitute oil for gas in order to free up more crude for export. Iran's oil fields are the oldest in the Middle East and some of them are close to maturity. A large volume of gas is reinjected in the oil fields to increase pressure and production. Finally, for the last several years Tehran has been involved in a confrontation with major powers, led by the US, over its nuclear program. Since the 1979 Islamic Revolution Iran has been under different types of American economic sanctions, and in the last few years the United Nations Security Council imposed three waves of sanctions. These sanctions have complicated Iran's efforts to finance development of its massive gas deposits.
Against this background, Tehran has taken the lead in establishing the GECF and calling for its transformation into a Gas OPEC. Such a formal grouping can further improve relations with Russia and add pressure on Western powers.
On the other side of the Gulf, Qatar has taken a very different position on the formation of a Gas OPEC than the one adopted by Tehran. The emirate holds the world's third largest gas reserves behind Russia and Iran. Most of its natural gas is located in the massive offshore North Field, a geological extension of Iran's South Pars. In 2006 Qatar surpassed Indonesia to become the largest exporter of LNG in the world.
Qatar is well placed to play a major role in natural gas policy and markets. Though substantially below those of Russia, Qatar's reserves are very high relative to its population size and the need to maintain output to generate adequate revenue is not as urgent as in the case of Russia. Furthermore, Qatar's heavy reliance on LNG cargoes to export its natural gas gives it more flexibility than Russia, which exclusively relies on pipelines.
Despite these geological and commercial advantages, Qatar has no reason to wield its increased energy power against the EU and the US. Doha hosts US military bases and troops in the Gulf and enjoys close ties with Washington, Brussels and several international oil companies. Accordingly, Qatari leaders have taken a cautious stance on the evolution of GECF into a Gas OPEC. The country's Amir, Shaikh Hamad bin Khalifa Al Thani expressed his doubts about “creating a cartel designed to influence natural gas markets in a similar way to that in which OPEC controls crude oil markets.” Mr 'Attiyah expressed similar sentiments: “Forming a gas cartel would be difficult, but it cannot be ruled out.”
Conclusion
Since its founding in 2001 parallels have been drawn between GCEF and OPEC. Gas producers have asserted that they do not intend to create a cartel to fix prices, while consumers have voiced their suspicion. The fundamental differences between gas and oil markets as well as the seemingly conflicting interests of gas producers suggest that GECF is not likely to evolve into a Gas OPEC, at least in the near future. Still, it would not be impossible for the forum to be more proactive in regulating how natural gas is traded, collecting data, coordinating policies, and consolidating cooperation between its members. The changing dynamics of natural gas markets, away from regionalism and closer to a global market (similar to oil), is likely to add more leverage to any gas producers group.
Notes
1. Bassam Fattouh, ‘The Dynamics of Crude Oil Price Differentials', Oxford Institute for Energy Studies, January 2008 (www.oxfordenergy.org).
2. Peter R Hartley, Kenneth B Medlock III, and Jill E Nesbitt, ‘A Global Market for Natural Gas? Prospects to 2035', James A Baker III Institute for Public Policy, Rice University, May 2004 (www.bakerinstitute.org).
Middle East Economic Survey-MEES, VOL. LII, No 2 , 12-Jan -2009
Gawdat Bahgat is professor of political science and director of the Center for Middle Eastern Studies at Indiana University of Pennsylvania. He is the author of The Gulf Monarchies: New Economic and Political Realities (1997), The Future of the Gulf (1997), The Persian Gulf at the Dawn of the New Millennium (1999), American Oil Diplomacy in the Persian Gulf and the Caspian Sea (2003), and Israel and the Persian Gulf (2005). He has also published numerous articles on the Persian Gulf and the Caspian Sea in scholarly journals. His work has been translated into Arabic, Russian, German, and Italian.
Petroleumworld does not necessarily share these views.
Editor's
note: This article was originally published by Middle East Economic Survey-MEES, VOL. LII, No 2 , 12-Jan -2009. Petroleumworld reprint this article in the interest of our readers.
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