Will Russia create a gas cartel?
The media has hyped the idea of a new gas
OPEC which could menace the European Union
with the spectre of even higher prices for
natural gas. This speculation has little to
do with reality however.
Rhetoric Currently Exceeds Reality
“Europe, the U.S., and Asia should be doing
everything possible to prepare for the
possible future of a natural gas cartel.
Gazprom is already actively engaged in
anti-competitive policies to pre-empt,
disaggregate, and coordinate the energy
market.” This warning from Robert Amsterdam,
a former legal counsel to Yukos, is an
example of a recent trend in the Western
media portraying the threat of a gas cartel
led by Russia as the next step in Russia’s
attempt to control energy flows to Europe.
This interpretation is exaggerated.
To be sure, the rhetoric of the Russian
leadership with regard to the possibility of
a gas cartel has not helped to ease Europe’s
fears. At the end of 2006, Vladimir Putin
responded publicly to Iranian President
Mahmoud Ahmadinejad’s proposal that a gas
OPEC was “an interesting idea and we will
think about it.” In January 2007, a deal
between Algeria (the second largest supplier
of natural gas to Europe) and Russia to
boost energy cooperation seemed to confirm
to the already suspicious Europeans that
Russia was up to something that meant bad
news. During his visit to Qatar in February
2007, Putin reiterated that “we do not
reject the idea of creating a gas cartel.”
Moreover, the Kremlin leader announced that
Russia would send a high-level delegation to
the Gas Exporting Countries Forum (GECF)
meeting in Doha on April 9, 2007, where the
issue of creating a gas cartel has been
formally put on the agenda.
All these developments feed into the Western
view of an increasingly aggressive Russia
trying to use energy as a weapon against
Europe by creating a gas-OPEC. The reality,
however, is more complex. Several senior
Russian officials described the idea of a
cartel as ludicrous. A Kremlin spokesman
said there was “no substance at all” to this
claim, and that Russia’s main approach to
energy policy remained “interdependence of
producers and consumers.” Minister of Energy
Viktor Khristenko commented that there were
no objective grounds to create a gas cartel.
Indeed, the consensus among energy experts
is that such a cartel is simply not feasible
for a variety of reasons related to the
structure of the gas market and the
irreconcilable interests of some of the
major players. Of course, from the point of
view of Europe, the net result of these
conflicting signals is a big question mark
about what the Russians are up to. In this
context, the talks at the
GECF meeting in Doha will be watched
carefully.
Obstacles to a Gas Cartel
The GECF was created in 2001 in Teheran and
it has been described as a potential
institutional framework that will slowly
evolve into some kind of producers cartel.
However, in its six years of existence, the
GECF has not been able to produce any
significant agenda. It has functioned
essentially as an informal discussion
platform, and its organization has been
frequently chaotic, as illustrated by the
collapse of the Venezuelan presidency in
2006.
The heterogeneous membership of the
organization has played a large role in the
lack of clarity about the objectives and the
functioning of the organization. It brings
together LNG exporters focused on the
Atlantic Basin (Algeria, Nigeria, Libya, and
Egypt) and the Pacific Basin (Indonesia,
Malaysia, and Brunei), as well as large
pipeline exporters such as Russia. Other
major pipeline players, like Canada, are not
part of the forum, while Norway only has
observer status. Iran, one of its most
active members, is not yet an exporter of
any significance, despite its future
potential.
Another important reason why experts doubt
the success of a gas OPEC is related to the
structure of the world gas market, which is
actually not a single market like the one
for oil, but a series of regional markets.
Those who argue that establishing a cartel
is indeed a possibility generally point to
the high concentration of gas reserves in a
small set of countries. Taken together, the
top five countries by size of reserves
(Russia, Iran, Qatar, Saudi Arabia and the
UAE) control 62 percent of the world’s total
reserves. Additionally, the seven largest
exporters account for 80 percent of world
gas trade, a very high level of
concentration. But these figures also mean
that a cartel excluding one of these
countries, such as Russia (which accounts
for 30 percent of world exports), would not
wield extensive market control. This fact is
important since many analysts agree that at
least in the medium-run, Russia’s interests
diverge from those of other major exporters,
particularly Qatar’s. Russia historically
has relied on long-term contracts to deliver
gas via pipeline to European markets.
Gazprom has often indicated that long-term
contracts are its preferred option in order
to sustain the massive infrastructure
investments needed to bring Russian reserves
to market. Russian policy-makers continue to
stress the importance of security of demand
and deem a continued reliance on pipelines
and long term contracts as the most
effective way to achieve this goal.
Qatar is in a distinctly different position,
being the world’s largest LNG exporter. The
Qataris made significant investments in
developing LNG technologies and know-how,
and they have little incentive to enter into
a formal alliance with Russia, which is
almost exclusively oriented towards a
continental pipeline market.
Like Qatar, Algeria has relatively
well-developed LNG production, but also has
significant pipeline exports to Europe.
However, Algerian reserves, albeit
significant, do not match those of Qatar,
and, in the long run, the Algerians may have
an interest in gaining access to the Russian
fields.
Most experts agree that a potential gas
cartel would only be possible if a truly
global market for natural gas developed.
Such a development can only take place if
LNG plays a much larger role relative to
pipeline delivery. Otherwise, prices will
continue to be based on the specific
features of each market, preventing any
possibility for agreement. Currently, LNG
trade accounts for less than 10 percent of
global gas trade. Given the costs involved
in developing the infrastructure to support
a global LNG market, the possibility that a
real world market based on LNG will emerge
is a distant prospect at best. Moreover, if
Russia - which is years behind countries
like Qatar and Algeria in terms of LNG
technology - resists the trend because of
its continued focus on pipelines and
long-term contracts, the market might well
remain fragmented for a long time.
The size of investments in gas projects is
also likely to be an important consideration
in setting up capacity control mechanisms in
a potential cartel. Indeed, a key condition
in effectively controlling world prices is
the ability to regulate capacity expansion
and enforce quotas. Maintaining such
oversight is likely to prove extremely
challenging because the costs of gas
development projects are enormous, and it
will be very difficult for any producer
artificially to slow down capacity expansion
and restrain production given the massive
opportunity costs involved. In the oil
market, Saudi Arabia traditionally plays the
role of swing producer by maintaining spare
capacity, but it is unclear how this could
be achieved with gas. Russia, which given
the size of its reserves has often been
described as a good candidate for the role
of swing producer, is unlikely to have any
real incentive to play this role.
Unlike Saudi Arabia, Russia has a very large
population and rising domestic gas demand.
It would be politically damaging for any
leader to maintain costly spare capacity
under such conditions. Gas storage is very
expensive and creates an additional obstacle
to establishing spare capacity.
A further obstacle to creating an effective
cartel is that unlike oil, gas has to
compete against other types of resources.
While petroleum cannot - at the moment - be
replaced with other sources of energy in the
transportation sector, gas in electricity
and heating has to compete with alternative
sources, such as oil, coal, hydro, and
nuclear. As a result, producers have to be
more careful about the risk of losing their
market if price setting mechanisms seem
unreliable to the consumer.
Other forms of producers agreements
If a real “gas-OPEC” is unlikely, one has to
accept that other types of producers
agreements short of a formal alliance might
emerge, at least with regard to certain
regional markets. For example, LNG-exporters
might have a real interest in working out
production control agreements. LNG is traded
separately on different regional markets,
and prices are set in relation to different
competing energy sources. Exporters in the
Atlantic Basin in particular, may find it
easier to establish common rules to
cartelize this specific market, where
spot-trading is expanding more rapidly than
on other markets and where cooperation among
the main players may be easier to achieve
because of convergent interests.
Another idea proposed by Vladimir Putin is
more straightforward bilateral coordination
on energy projects. In this respect,
Russia’s current deal with Algeria might
have a particular significance. The
agreement provides for a swap of upstream
assets between Sonatrach and Gazprom, as
well as possibilities for Gazprom to play a
role in the distribution and marketing of
Algerian gas to Europe. The source of
potential worry for Europe, which views
Algeria as an important component of its
diversification strategy in gas imports, is
not so much the creation of a full-fl edged
gas cartel. It is, rather, the fact that
Algeria has a large outstanding debt to
Russia related to recent large weapons
purchases, which may weaken its ability to
push ahead with projects that are not in
Russia’s interest. Indeed, Algeria’s
bilateral agreements in the economic and
military spheres taken together put Russia
in a position where it might be able to
exert significant influence in order to
prevent projects that compete with its own
plans. Russia has a history of such
practices: one example is the agreement
between Russia and Turkmenistan, which
allows Russia to purchase virtually all
Turkmen gas until 2028 at a comparatively
high price, in effect preventing the
construction of any infrastructure projects
linking Turkmenistan more closely to China.
Such practices are common commercial
behavior, but they may not always be in
Europe’s interest if competing projects were
designed to build a more diversified supply.
Putin’s idea that Qatar and Russia should
cooperate more closely to ensure they will
not be competing for markets seems rather
unlikely to be realized. Qatar is planning
to increase LNG exports not only to the US,
but also to Europe in the near future. These
intentions play well into Europe’s strategy
of import diversification, and the Europeans
will be willing to pay high prices to
achieve this objective. Furthermore, any
agreement between Russia and Qatar would
undermine the two sides ability to compete
for the best and most advantageous prices in
this lucrative market.
In this case, competition seems inevitable.
Both Russia and Iran have raised the
possibility of collaboration, but the
political obstacles are significant. As long
as the nuclear issue is not resolved, Russia
will not engage in serious collaboration in
the energy sector because doing so would
provoke a major dispute with Europe, its
main consumer, and because emboldening Iran
is not necessarily in Russia’s interest
either. In the medium run, it is not clear
that the two countries would really have an
interest in cooperation since they are
likely to compete for the same markets. It
seems unlikely that a country like Iran,
which has an enormous potential for future
exports to Europe that are not reflected in
current sales, would want to agree on market
shares at this point. On the Russian side,
there are no incentives to help a competitor
emerge from its current state of isolation.
Russia’s Risky Strategy
While several Russian Duma members claim
that a gas alliance would boost Russian
interests, a closer look at Putin’s
declarations reveals a much more prudent
approach. His cautious language demonstrates
a clear realization that it is not in the
interest
of Russia to create an organization that
will push its customers to diversify away
from natural gas. Indeed, as noted above,
natural gas competes against other sources
of energy for most of its end-uses. The
emergence of an organization like OPEC for
gas could well tip the balance in favor of
other sources for many consumers..
In this light, one may wonder why the
Kremlin has frayed European nerves by
repeatedly discussing the possibility of a
gas OPEC only to contradict itself in
subsequent statements. The answer might well
be that it is a purely tactical move. One
hypothesis is that by convincing many
Europeans that a gas OPEC is a realistic
threat, Putin can gain a valuable bargaining
chip. Even if he realizes a gas OPEC is
never going to happen, maybe Europeans,
blinded by fear, do not. The next step is to
ask for something in return for dropping the
idea of a gas cartel. The Europeans may
allow Gazprom to make controversial
acquisitions in the European distribution
markets for instance, if in return they
receive assurances from Putin that a gas
cartel will not be formed. Or they may be
much more careful when it comes to placing
U.S. missiles close to Russia’s borders. The
irony being of course, that experts (and
maybe Russian officials too) have long
understood that a gas cartel was not
something that really made any sense.
Russia has embarked on a risky strategy, and
it may well backfire. In March, the
Europeans agreed for the first time on
common targets for bio-fuels, renewable
energy technologies and carbon emission
reductions, objectives that will decrease
Russian andd
European interdependence and reduce Russia’s
ability to achieve demand security. This new
consensus among the Europeans certainly is a
consequence of the recent threatening
discourse Russia has adopted.
About the author: Matteo Fachinotti works on
energy security issues at the Center for
Security Studies, ETH Zurich. He holds an
M.A. in Security Studies from the School of
Foreign Service, Georgetown University.
This article was prepared by the Russian and
Eurasian Security (RES) Network, a global
initiative by leading academic institutes,
think tanks, NGOs, and media organizations.
It provides the framework for studies on
security-related developments in Russia and
Eurasiaa
