A Gas OPEC?

Scope The Gas commodity market Gas exporting Countries Forum (GECF) Viability of a Gas OPEC

The Gas Commodity Market Gas is not oil.

Figure 1. World Energy use by fuel source 2010 (EIA website)

Gas currently accounts for around 20% of world energy use (oil accounts for a third more at 33%), according to the International Energy Agency.1 The US and Russia were the top producers in 2009 with around 20% of world production, followed by Canada and Iran at 5% each, then Norway, China and Qatar at around 3%.2 Recent advances in technology have the potential to unlock huge new deposits of shale gas something energy companies have always known about but have only recently had the power to exploit. Scale of this gas revolution is such that gas prices have crashed by almost 60% in the last 18 months ending the longstanding link with oil prices. Most important point to note here is that the US has 490tn ft of this unconventional gas, equivalent to half of Qatars proven gas reserves. Gas is sold and regulated by long term contracts, due to the high cost of infrastructure required to get it from producer to consumer. The majority of gas supply infrastructure is also fixed in the form of pipelines. This limits options for both suppliers AND consumers. For example, the China-Turkmenistan pipeline finished in Dec 2010, cost $57bn to construct - a substantial investment for China which will require long term cooperation to recoup the initial investment. However, producers are also at the mercy of their customers. In April 2009 an explosion in the Turkmen-Russian gas pipeline and subsequent conflict between the two parties caused a halt in gas supply from Central Asia for over 10 months this was estimated to cost Turkmenistan around $1bn a month.

1 2

IEA Key Stats 2010. IEA Key Stats 2010.

The advent of new high capacity LNG tankers will increase the share of gas supplied by ship, which is more flexible, but the EIA still estimates that pipelines will remain important (existing infrastructure and the high cost of LNG tankers). Qatar is currently the only country that exports gas outside its immediate region. For the most part suppliers sell to countries in their immediate neighborhoods. Russia Europe, US supplies itself, Australia/Indonesia supply the SE Asian region etc. The Gas Exporting Countries Forum (GECF) a price-fixing cartel al la OPEC? The organization with the potential to become a price-fixing cartel in the manner of OPEC is the GECF, or Gas Exporting Countries Forum. Current members include Algeria, Bolivia, Egypt, Equatorial Guinea, Iran, Libya, Malaysia, Nigeria, Qatar, Russia, Trinidad & Tobago and Venezuela. Kazakstan, Norway and the Netherlands as observers.3 Together these producers hold around 57% of conventional gas reserves. But Canada, Australia and the US who are important producers are not members. At present the body is only consultative like OPEC in the beginning, there has been some talk of developing the body into a more powerful organization that can control production quotas and prices, but this has not yet materialized and most analysts predict that it will not. Viability of a Gas OPEC The nature of the gas commodity market is not conducive to cartelization and changes in the gas market in the last several years, i.e. the shale gas revolution has made the prospect of a fully-fledged Gas Cartel even more unlikely. Key gas producers not interested in joining any form of Cartel o US, Canada, Australia The current gas glut and oversupply - suppliers have little power over prices. o Largely due to the shale gas revolution. o But major producers have less capacity to up production, al la Saudis with oil. Long-term/regional focus of the market o Gas is sold and regulated by long-term contracts o Supply infrastructure is largely fixed in the form of pipelines, and requires substantial investment, consequently there is less flexibility between suppliers and customers. Sponsors are also more likely to concentrate on long-term contract performance to recoup investment than advancing interests of other cartel members. o Gas is also marketed and consumed on a largely regional basis (US is self sufficent, Russia supplies Europe, SE Asia supplies itself also.Qatar the only supplier with global reach at present.) Cultural and geographical diversity of gas producing states also makes consensus in a body like the GECF less likely

GECF website

o In contrast, OPEC producers largely concentrated in ME, interests of largest gas producers (Russia, Canada, Iran) significantly different. But cooperation short of a cartel may be possible division of world market into spheres of influence, coordination of new supply routes ect. May result in tighter supplies and higher prices for those in Europe likely to remain most vulnerable to any games. Potential Issues Growth of oil prices may precipitate more of a move to gas? Giving gas suppliers more power in the market. Cooperation short of a Cartel - coordination Development of tankers more mobile supply??

A Gas OPEC The Economist, Print edition February 7 2007, also available at http://www.economist.com/node/8655645 Global Legal Group, Gas Regulation 2008, A practical guide to cross-border Gas Regulation workhttp://www.iclg.co.uk/khadmin/Publications/pdf/1778.pdf