Algeria proposes gas cartel action – Ross McCraken of Platts Energy Economist examines whether the era of collective gas pricing could be upon us
Last month Algeria proposed restricting the supply of spot natural gas supplies in order to rebalance gas and LNG markets to a meeting of the Gas Exporting Countries Forum in Oran, western Algeria. Speaking after OPEC’s latest meeting in Vienna in March, Algerian Oil Minister Chakib Khelil asked: “What does OPEC do to raise the price of oil?” The GECF includes heavyweight gas powers Russia and Qatar, and has long been suspected of being a gas OPEC in waiting.
Khelil said: “If a decision is made, it has to be made by all countries. It is not [that] a country like Algeria is going to cut and somebody else takes the share of Algeria in the market. It has to be a common decision…by all member countries. All of them have to share in achieving the price objective they want to achieve.” Asked what he thought of as a fair price for gas, Khelil said: “The objective is…parity with oil.”
Gas Cartel
The GECF was set up in 2001 sparking immediate concerns that it would evolve into a gas cartel along the lines of OPEC. Up until now there have been few signs of concerted action, but the Algerian proposal would, if adopted, mark a step change in its role. The proposal alone represents a new degree of ambition.
The GECF has also decided to apply for UN recognition, according to a statement by Russia’s energy ministry. Turning the GECF into a recognized international organization was part of the work program for 2010 submitted by its Secretary-General Leonid Bokhanovsky at the third meeting of the forum’s Executive Council in March. The meeting in April, the ninth ministerial one since the GECF’s creation, is also due to address strategies for establishing a price mechanism for gas.
While a key reason that the gas market requires ‘rebalancing’ is the production of shale gas in the United States, the EU is heavily dependent on gas imports from countries like Russia and Algeria, and has diversified its supply sources through investment in LNG regasification capacity. Europe, and gas importing countries in Asia and Latin America, would be the main losers from an effective gas cartel.
Opponents
Unsurprisingly, the International Energy Agency is opposed to the idea. IEA executive director Nobuo Tanaka said “We are against any cartelization.” Tanaka also expressed doubt that gas production could be reined in as easily as crude output. “The current gas market is very competitive and there is lots of supply capacity coming up in the near future,” he said.
Creating a gas cartel in the current market situation “is probably very difficult,” the IEA chief added. While it was “quite natural” for gas producers to try to control prices, the effort would need “somebody [to] really, substantially, reduce production. Who will do that? That is the question,” said Tanaka. Wood Mackenzie Chairman David Morrison also said that gas cartelization was hard to achieve. A key “hurdle” was major gas and LNG producer Australia, which would not join in the effort, Morrison said.
However, OPEC was formed in response to weak oil prices and it is weak gas prices that has prompted Algeria’s proposal. In particular, it has been the disparity between cheap spot prices and higher oil-linked term gas that has worried producers. Buyers have maximized spot purchases over term contract volumes, leaving suppliers with a surplus, which, if dumped on the spot market, will only depress prices further.
The GECF members, which include Algeria, Bolivia, Brunei, Egypt, Equatorial Guinea, Indonesia, Iran, Libya, Malaysia, Nigeria, Qatar, Russia, Trinidad and Tobago, the UAE and Venezuela, control roughly two-thirds of the world’s gas reserves. Competing with non-cartelized producers is not a problem so long as a cartel can exercise control over the marginal (export) barrel.
OPEC, for example, only controls 40% of crude oil output. Any gas cartel would have to target the LNG spot market, as this is the only competitive market open to its influence. GECF members control about 80% of LNG liquefaction capacity. It is the emergence of non-oil indexed gas markets that makes a cartel both necessary from the producers’ point of view and indeed workable.
Qatar’s role, as the largest producer of LNG in the world, will prove critical, while Russia’s interests as predominantly a pipeline gas supplier, with only a small amount of LNG capacity, might be hard to accommodate. Qatar would have to take on the role of swing gas producer, similar to that played by Saudi Arabia for oil.
However, the real problem for any emergent cartel is that supporting higher prices for gas would stimulate non-cartelized production and dampen demand growth. The cost to the gas cartel would be a loss of market share. OPEC works because oil production in the main oil importing countries is on a downward trend, or cannot keep pace with demand growth. In other words, demand for imports is rising long-term. For gas, that is not the case in the US, even if it is in Asia, Europe and to a lesser extent Latin America. The question would be how far non-cartelized production could respond, given the promise of shale gas. The effect of a gas cartel could in fact be to improve importing nations’ security of supply. The GECF must decide whether there is an overall gain in terms of value from the higher price, lower volume scenario which an effective cartel would create.
About the Author
Ross McCracken is the editor of Platt’s Energy Economist. Platts is a leading global provider of energy and metals information and the world’s foremost source of benchmark price assessments in the physical energy markets. McCraken joined Platts in 1999 to run the European and West African crude desk. This article first appeared in the April edition of Platt’s Energy Economist.
