The “Gas OPEC” Comes To Life

Courtesy of Stratfor (subscription required), analysis of the recent decision by eleven natural gas exporters to join together to form a cartel.  As the article notes:

“…Leonid Bokhanovsky, a long-time executive at Russian energy construction firm Stroytransgaz, was selected to be the first secretary-general of the Gas Exporting Countries Forum (known colloquially as the “Gas OPEC”). The selection formally launches GECF’s existence. GECF members include Algeria, Bolivia, Egypt, Equatorial Guinea, Iran, Libya, Nigeria, Qatar, Russia, Trinidad and Tobago, and Venezuela. The group intends to coordinate development plans and in general drive natural gas prices higher.

The year 2009 has not been kind to natural gas producers. Natural gas is used in a wide variety of industries ranging from chemical production to agriculture to electricity generation, all of which have experienced declines in the recent global recession. Lower demand has led to sharply lower prices in most cases, with U.S. and European natural gas prices dropping by three-fifths. Additionally, most natural gas exporters fear they are about to lose large portions of their market shares as new technologies that have boosted output in declining regions — most notably fracing in the United States — have begun to mature.

None of this means that a natural gas cartel can gain ground.

First, most GECF members are wholly dependent upon foreign investment for their natural gas industries — Equatorial Guinea, Qatar and Trinidad and Tobago come to mind — and are very unlikely to actually take steps to hurt their customers. Additionally, Iran and Venezuela are actually net importers of natural gas, and a successful natural gas cartel would hurt them greatly.

Second, natural gas is not transported — or priced — like oil. It is a gas (as opposed to a solid or liquid) and as such cannot simply be poured into a container and sent to market. It has to be shipped and distributed via multi-billion dollar dedicated pipeline infrastructures that require years to construct. And because the infrastructure is so tightly linked to the market, natural gas prices almost exclusively are priced only within that network, not via the global market as oil is. For the most part, U.S. natural gas prices have nothing in common with European or Japanese prices — in fact, they are quite often separated by a factor of four or more.

Oil embargoes have a chance of working because reducing the total volume of oil means that someone will have to go without. But most natural gas producers can only affect very specific markets: those that they are linked via pipeline networks. This does not mean that natural gas producers lack pricing power, but it does mean that a coalition of producers cannot achieve anything that a single producer could not do alone. For example, if Bolivia wants to charge Argentina more for natural gas, joining forces with Iran is of no help at all.

Chart - GCEF Members and Output

There are only two kinds of natural gas cartels that could actually exhibit some sort of price control on consumers. The first would be a much smaller grouping of producers who jointly control a single market. For example, Algeria and Norway cooperating with Russia would nearly dominate the European natural gas market. This does not require the current membership of GEFC, but instead simply an informal meeting of the relevant countries.

The second sort of cartel that would work would be a coalition of liquefied natural gas (LNG) producers. LNG technology avoids the pipeline restriction on natural gas transport by using specialized facilities to cool it until it becomes a liquid. At that point the LNG can be loaded into specialized tankers for shipment to specialized receiving terminals anywhere in the world. Because LNG is normally a supplemental energy source, LNG is priced based on the fundamentals of the destination market.

If enough of the world’s LNG producers were to join forces, they could impose a global price on the liquefied portion of the natural gas trade — approximately 8 percent of the total — which would break the currently inviolable link between LNG prices and destination market prices. In this, the current membership of GECF faces three obstacles: only six of the 11 produce appreciable volumes of LNG, collectively they control only half the global LNG market, and not one of them has the technology to build LNG facilities itself. Cooling a flammable gas into liquid form is as capital- and technology-intensive as it sounds. Investment into LNG facilities requires not simply attractive investment conditions, but also long-term contracts. Keeping those investments flowing and those facilities operational requires partnering with customers, not plotting against them.”

This entry was posted on Friday, December 11th, 2009 at 10:46 am and is filed under Uncategorized.  You can follow any responses to this entry through the RSS 2.0 feed.  Both comments and pings are currently closed. 

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