Russia: Algeria Deal Revives Talk Of Gas Cartel

Demand for gas in Russia is rapidly rising (Courtesy Photo) Is Russia -- the world's leading producer of natural gas -- preparing to create a gas equivalent of the Organization of Petroleum Exporting Countries (OPEC)? The possibility of such a cartel has been discussed by Russian policymakers for years. But a "memorandum of understanding" signed between Russia and Algeria on August 4, which significantly calls for coordinated gas prices, could perhaps be a move in this direction.

PRAGUE, August 14, 2006 (RFE/RL) -- The idea of a gas OPEC was first floated by Russian President Vladimir Putin in 2002. The idea was supported by Kazakh President Nursultan Nazarbaev, but was then shelved -- but not forgotten.

It was revived by Gazprom board member Aleksandr Medvedev in May when he threatened that Russia would create "an alliance of gas suppliers that will be more influential than OPEC" if Russia did not get its way in energy negotiations with Europe.

Today, with natural-gas prices high worldwide, a gas cartel is looking like a more realistic prospect.

Algeria, with the world's eighth-largest gas reserves, might readily embrace the idea, as might Iran and Qatar -- which have the world's second- and third-largest gas reserves, respectively. Turkmenistan, Kazakhstan, and Uzbekistan could also join.

The implications of creating a gas cartel could be far-reaching.

If a cartel were to coordinate gas prices it could, over time, limit Europe's ability to shop for cheaper gas and ensure its dependency on an organization controlled by Moscow. Europe presently buys gas from Norway, Russia, and Algeria.

Such an arrangement could be disastrous for the West if a major confrontation were to arise between supplier and consumer nations.

Quasi-Cartel

A little-known quasi-cartel already exists. The Gas Exporting Countries' Forum (GECF), which first met in Tehran in May 2001, consists of 15 gas-producing nations. It collectively controls 73 percent of the world's natural-gas reserves and 41 percent of production. Algeria was one of the founding members of GECF, along with Iran and Russia.

Thus far, the GECF is more talking shop than organization. It has no staff and no headquarters and it has not attempted to set prices. But with the signing of the Russian-Algerian agreement, it might be only a matter of time before this organization becomes more prominent.

Wrench In The Gas Works

Two factors that could delay the evolution of the GECF into a gas OPEC are the rapidly increasing Russian domestic demand for gas and Russian gas monopoly Gazprom's shortage of cash.

Gazprom's shortage of funds has meant it has failed to invest in greater geological explorations and develop new fields, raising fears that in a decade Russia will be forced to lower exports in order to meet rising domestic demand.

Proposals to boost domestic rates for communal service sparked this Moscow protest in April (epa)

Russian consumers are Gazprom's biggest customers, but they pay the lowest prices -- around $47 per 1,000 cubic meters.

The Russian government, fearing consumer backlash, has been reluctant to raise prices. And therein lies the dilemma. The Putin administration has been kind to Gazprom. It has given the company the exclusive right to sell gas to foreign customers and forced other Russian producers to sell Gazprom its gas for low prices, which Gazprom then resells in Europe at much higher rates. But, by keeping domestic consumer prices down, it is preventing Gazprom from being profitable in its largest market.

A cartel might demand that Russia sells gas to its own consumers at set prices, a move the Putin government would probably balk at. And a cartel could also demand greater transparency in the Russian gas business -- something that would likely irritate the Kremlin.

Depleting Gas Reserves

The situation is further complicated by the rapid depletion of gas reserves worldwide -- particularly in the United States, the world's largest consumer of natural gas. According to BP's 2005 reserves-to-production ratio, which predicts the number of years estimated reserves will last at current levels of production, U.S. gas reserves will be depleted in nearly 10 years.

In the not-so-distant future, the United States will need to rely on imported liquefied natural gas (LNG) from distant producers to satisfy its thirst for energy.

Assuming that a gas cartel will be formed by 2015 and that the United States maintains current levels of energy consumption, the country could well find itself at the mercy of two cartels, OPEC and the gas producers.

With other countries' gas reserves also depleting, worldwide demand for imported gas could skyrocket in the next five to 10 years, resulting in stiff competition on the gas market.

A gas cartel could conceivably benefit consumers by bringing stability into the market, but it could also hold consumers hostage by threatening boycotts and price gouging.