Baltimore, MD--Despite some obvious complications, it appears that a “gas OPEC” will formed in a matter of weeks. Yet the effect of a natural gas cartel doesn’t pose any short term threat, and it raises the question, “Why bother?”
At the end January, we talked about the quiet whisperings of a natural gas organization similar to OPEC. We concluded that any gas cartel would be a failure from the beginning.
But let me get to the doom and gloom a little later.
Apparently the notion of forming a “gas OPEC” has become a reality for Russia, Iran, Qatar, Venezuela, and Algeria. As Russian President Vladimir Putin put it, “A gas OPEC is an interesting idea. We will think about it.” He immediately followed up with this statement, “We are not going to set up a cartel. But it would be correct to co-ordinate our activities with an eye to the solution of the main goal of unconditionally and securely supplying the main consumers of energy resources.”
Interesting . . . a gas OPEC that isn’t a cartel? What it really comes down to is that Putin wants the ability to squeeze more power, control and money out of the energy dependent EU.
The five countries have announced that they will be discussing the formation of the “gas OPEC” in Doha on April 9, 2007. That is the next meeting of the Gas-Exporting Countries Forum (GECF). The GECF’s 15 members hold more than 70 percent of the world’s natural gas reserves, making up roughly 40 percent of global production. But if you want an idea of how big Iran, Russia, Qatar, Venezuela, and Algeria are in the natural gas world--they make up approximately 60 percent of the world’s proven natural gas reserves!
Rumors are flying that those countries have already reached final agreements about the new cartel’s formation, and that April 9 is the announcement date.
So what does the idea of an OPEC-like organization portend?
Just remember back in 1973, when OPEC enacted an oil embargo against the U.S. and Western Europe. The crisis that ensued was spectacular. In approximately six months, the price of a barrel of oil jumped over 500%!
That kind of overwhelming control would be coveted by Bush’s two favorite people--Iranian president Mahmoud Ahmadinejad and Venezuelan leader Hugo Chavez.
Deep Impact or Empty Threats?
The force of a “gas OPEC” would be directed at the U.S. and the EU. Together, they make up 40 percent of the world’s natural gas consumption. But the natural gas market is still regional. Unlike oil, which can be delivered via tanker, natural gas must be sent through a system of pipelines. That’s why the cartel’s impact is different for the U.S. and the EU.
Initial effects of a gas cartel would be worrisome to the EU. This is because they receive almost a third of their natural gas from Russia alone. And EU leaders have vehemently opposed any endeavors by Russia to form a “gas OPEC.”
The EU imports 40 percent of its total natural gas demand. Some countries, like Greece, Finland, Bulgaria and Lithuania, rely on Russia for over 95 percent of their imports.
The ability to control gas prices would almost certainly be exploited by Putin, who has already shown his willingness to shut off energy supplies to neighbors if his demands aren’t met.
The U.S., however, is a slightly different story. The new gas cartel is going to affect the U.S. over a long-term period rather than immediately. The reason is that the U.S. imports nearly all of its natural gas from Canada. But seasoned Energy and Capital readers know that peak gas is going to change the natural gas game (specifically in North America) over the next five to ten years.
Natural gas production in the U.S. is also under heavy fire from peak gas. Let’s consider this from a statistical viewpoint. Over the last five years, the number of natural gas drilling rigs has exploded from about 600 in 2002 to more than 1,300 in 2006. This should give us a huge increase in production, right?
Think again.
Quite the opposite has occurred--production has become stagnant and declined over the last few years. And the EIA’s projected outlook to 2030 predicts a gloomy future. Take a look for yourself:
Considering our government’s statements about stopping our addiction to oil, I certainly hope natural gas isn’t in their future energy playbook!
Control over the North American natural gas market could potentially threaten the U.S. in about ten years or so.
Cartel Complications
But don’t go running for the hills just yet though. Even if the “gas OPEC” is formed, they have some serious obstacles to cross before they begin their tyranny over the natural gas consumers of the world.
Natural gas still operates under long-term contracts. Last week, we discussed the possible emergence of liquefied natural gas on the spot market. But unless it becomes a major player, we shouldn’t expect it to take over for ten to fifteen years (if it can overcome the obstacles we talked about).
Even the mighty Gazprom has expressed its hesitance to create a “gas OPEC.” Their sentiment was related in last week’s press release: “Establishing a gas OPEC is impossible because of different structuring of oil and gas business.” The impossibility stems from the fact that natural gas contracts are still traded over a fifteen- to twenty-year period.
Unfortunately for Gazprom, any CEOs reluctant to move in accord with Putin’s demands can be dealt with in the usual fashion--with a hefty prison sentence.
Until next time,
Keith Kohl
GAS Price at posting:
0.0¢ Sentiment: Buy Disclosure: Not Held
