Natural Gas Cartel Triumbirate of Russia, Qatar and Iran

Natural gas cartel would fail in bid for OPEC-like impact
Deborah Yedlin, Calgary Herald
Published: Wednesday, October 22, 2008

It's not enough that oil prices are subject to the vague inner workings of the Organization of Petroleum Exporting countries, but if things go according to plan, a natural gas-focused organization is in the process of being established.

Key energy officials from Qatar, Russia and Iran met Tuesday to discuss this very subject. This is significant because these countries are the three largest in the world in terms of natural gas reserves.

The obvious question from this news is what impact could it have on natural gas markets, especially in North America.

To understand how it might unfold, a few facts need to be established.

The first is that natural gas has yet to become a global commodity, though it is slowly headed in that direction.

This means that any fears about an initiative like a natural gas cartel involving Russia and any number of producers based in the Middle East delaying the development of North American natural gas initiatives such as the Mackenzie Valley pipeline or the Alaska pipeline are unfounded.

And there are a good number of reasons for this.

Let's start with the fact that a global market for natural gas is tied to the development of liquefied natural gas capabilities around the world -- whether it's liquefaction or regasification. Those facilities, in addition to the tankers needed to transport the LNG, are not exactly cheap.

As Tristone Capital's Chris Theal points out, the only way the so-called LNG trains are built is if they are tied to 20-year contracts; without those long-term contracts, the financing doesn't happen.

"There is a structural aspect to LNG markets that doesn't exist with crude oil, which trades on the spot or forward-month basis. LNG, on the other hand, is underpinned by 20-year pricing agreements," said Theal, Tristone's managing director of research.

Companies with unallocated capacity have the ability to play off markets that happen to be willing to pay more for natural gas at certain times of the year, but that happens to be a small percentage of the global market.

Moreover, the delivery capacity of oil far outstrips that of natural gas.

"An LNG tanker landing on the U.S. East Coast will have a cargo valued at about $20 million while an oil tanker can carry as much as one million barrels and be valued at $200 million," says Bob Skinner, the former director of the Oxford Energy Institute based in Oxford, England.

The countries importing LNG are those which lack any meaningful resources of their own; in other words, they have no choice.

As it stands today, three countries -- Japan, South Korea and Spain -- account for half of the 25 billion cubic feet of LNG produced every day. Of that

25 bcf, less than one billion cubic feet made it to North American shores last year, largely due to the success encountered by natural gas drilling in the shale plays in the U.S. southwest and Theal expects that trend will continue until 2013.

"Continued growth in LNG demand, coupled with willingness for many emerging players to pay crude (oil) equivalent prices, we anticipate that markets outside the U.S. will absorb 80 to 85 per cent of undedicated supply in 2009 and 2010," he wrote in a recently published research report.

Moreover, the biggest supplier of LNG today is Qatar and expectations are that it will continue to dominate the market. Iran and Russia on the other hand, while having big reserves, are not players in that world. At least not yet.

FirstEnergy's Martin King, who covers commodities for the investment firm, says Iran is not relevant at all in the LNG world, nor does it have well-developed markets that it supplies via pipeline.

Russia, on the other hand, is a major supplier to Europe in terms of natural gas delivered via pipeline, with about 95 per cent of its exports destined for western European countries. It also is the key supplier of natural gas to former Soviet bloc countries. Because of its reliance on Russia, with Germany being most dependent, Europe has long been looking for ways to diversify its natural gas sources but has been criticized for not moving fast enough; a natural gas cartel would only heighten the anxiety.

Part of Iran's challenge is that many western-based countries which were interested in developing its natural gas resources have packed their bags and left because of the country's opaque nuclear agenda. Until this is resolved, Iran will remain a peripheral player in the natural gas world, regardless of whether there is a cartel or not.

At this point, from a North American context, whether this initiative moves ahead and is formally established makes no difference to natural gas markets on this side of the Atlantic.

The way things appear to be progressing, according to Skinner, is that natural gas will eventually become a global commodity, but not in the same way that crude oil is today.

"We'll have a global natural gas market with regional elements," he said.

That means any initiative to control the supply and price of natural gas, along the lines of what the Russia, Qatar, Iran triumvirate is proposing will never succeed on a global scale.

"The long-term nature of LNG limits the ability of a natural gas consortium to act like the OPEC oil cartel," said Theal.

And, as the world awaits the outcome of Friday's emergency meeting among OPEC members to address the drop in oil prices, one thing is clear: another cartel manipulating energy prices is the last thing the world needs.