By Ed Blanche
ENERGY MINISTERS OP the member states of the Gas Exporting Countries Forum (GECF), which produce around 60% of the world's gas exports, decided when they met in Qatar in April to set up a high-level committee to study pricing policies and other issues. [...] following the Doha meeting it is clearly seeking a more formalised structure and closer coordination between gas producing states on output and pricing at a time when gas demand is growing while future oil supplies become problematical.
Last month The Middle East discussed the early mixed messages emerging from the Gas Exporting Countries Forum in Doha, on the idea of a gas producers' cartel. In this issue ED BLANCHE puts flesh on the bones of the idea that has led to considerable international anxiety and, in some cases, vehement opposition to the scheme that could reshape the global energy market.
ENERGY MINISTERS OP the member states of the Gas Exporting Countries Forum (GECF), which produce around 60% of the world's gas exports, decided when they met in Qatar in April to set up a high-level committee to study pricing policies and other issues.
The decision did not meet with universal approval; in fact some of the delegates gathered at Doha's Ritz Hotel saw this as a move towards the creation of a cartel similar to the Organisation of Petroleum Exporting Countries (Opec).
The committee, headed by Russian energy minister, Viktor Khristenko, is expected to deliver its report at the forum's next meeting, scheduled for Moscow in 2008. Khristenko has said that the committee would not be involved in deciding whether a gas cartel would be established. But Chakib Khelil, the energy minister for Algeria, one of the major gas producers, said that in the long term, the forum was moving towards an international gas producers' alliance.
"The process up to now has been indexed to oil," Khelil said. "The world has changed. Now we have lots of things that people didn't talk about five years ago." UAE minister, Mohammed bin Dhaen Al Hamli, cautioned that "the time of cheap gas is a matter of the past".
The 16-member GECF, established in Tehran in 2001, includes major gas exporters like Russia, Qatar, Nigeria and Algeria, as well as future exporters like Venezuela and Iran. Russian President Vladimir Putin first endorsed the idea of a gas alliance in 2002 and has championed the concept ever since. So far the GECF has been a fairly informal grouping. But following the Doha meeting it is clearly seeking a more formalised structure and closer coordination between gas producing states on output and pricing at a time when gas demand is growing while future oil supplies become problematical.
This falls short of setting up an international gas producers' alliance, but according to the International Institute for Strategic Studies (IISS) in London, the Doha meeting took the forum "a step closer" to the formation of such an organisation. "The decision to set up an expert panel to study pricing and related issues may be interpreted as an initial reconnaissance move towards changing the structure of the world's gas trade," the IISS declared.
During a landmark visit to Saudi Arabia and Qatar earlier this year, Putin discussed the idea of a gas alliance with the Gulf rulers. Sheikh Hamed bin Khalifa Al Thani, the emir of Qatar, which has the world's biggest gas field, dismisses the prospect of an Opec-style cartel, but says he and Putin want more cooperation among competing gas producers in their dealings with the gas-consuming countries.
Spearheaded by Russia, the mooted alliance could include Turkmenistan, Kazakhstan and Uzbekistan, possibly with Libya and Algeria, Europe's second largest gas supplier, and some Gulf states signing on. Venezuela and Iran, both adversaries of the US, are staunch supporters of such an organisation which would give them economic clout, while thumbing their noses at the Americans.
Not all the gas producers favour the idea and it remains to be seen whether the forum members will have the political will to form a cartel in the face of growing hostility from their customers - or whether the Russian-led bloc will break away to establish an alliance on its own.
Analysts agree that the gas market remains quite different from the oil market. They say a "gas Opee" would be difficult to set up because gas does not have a global market as oil does. Gas is generally not traded on the open market - as oil is - and most contracts are long-term deals in which prices are set well in advance. At present gas is largely transported through pipelines, which has restricted the growth of the gas market.
But demand for gas, including Liquefied Natural Gas (LNG) that is frozen so it can be transported by sea, is growing and this could change the pattern of production, transportation and pricing. The Paris-based International Energy Agency (IEA) predicts the demand for gas will grow by an annual average 2% until 2030, compared to 1.3% for oil.
Demand for LNG, which is largely used for electricity generation, is expected to go up by 10-12% a year, from 6.9% in 2005, with the number of customers rising from 13 countries to 22 within 20 years, limited primarily by the cost of technology and infrastructure.
The major gas importing countries, particularly in Europe, which depend on Russian and Algerian gas, strongly oppose an alliance, particularly if it involves cooperation on pricing and production.
Western consumers fear an Opec-like gas cartel will only lead to higher prices and the Europeans quail at the prospect of Russia securing increased power in the energy market. The Americans fervently oppose the formation of a gas cartel. Vice-President Dick Cheney accuses Moscow of using its energy resources as a foreign policy weapon.
Still, the prospect of an international gas producers' alliance emerging cannot be dismissed. "Russian, Iranian and Qatari denials of such plans can be interpreted as a series of declarations aimed at easing US and European concerns over the eventual creation of a 'gas Opee'," according to an April analysis by the Power and Interest News Report, an independent international affairs think-tank. "In spite of such denials, Russia, Iran, Qatar and Venezuela and the other GECF members are evaluating the pros and cons of setting up the gas cartel."
Energy cartels, after all, are not just about economics, as Opee has proved more than once since the early 1970s. There are geopolitical imperatives as well. Opposition to the creation of a gas cartel centres largely around one factor: Russia.
The Financial Times noted: "Russia's stance has much to do with the role its energy resources can play in reviving its geopolitical might. Iran perhaps sees a chance to lead an energy cartel in which it does not play second fiddle to rival Saudi Arabia."
There are fears that Moscow, with its influence in the energy market steadily growing, will seek to use its vast oil and gas reserves as a geopolitical tool to dominate the European and Asian energy markets. Consumers are already looking at greater use of alternative energy sources, such as nuclear power.
Gazprom, Russia's powerful gas monopoly which controls about one-quarter of the world's gas production and reserves, wants higher prices for its gas and it has been using its leverage as the only, or principal, supplier to get its hands on a share of other countries' domestic pipeline networks, such as those in Italy, France and Germany, and the feeder lines to the West.
Russia supplies all of the gas imported by Finland, Slovakia and other Eastern European states, 44% of Germany's and one-quarter of the gas imported by Italy and France.
These countries have resisted any arrangements that would put their major energy companies under the control of a state-owned titan like Gazprom, especially since Russia has imposed strict limits on foreign acquisitions within its borders. "Putin has told the Europeans that Russia's strategy is only aimed at enhancing their mutual energy security, but it's really all about expanding Russian power," Michael Lelyveld, a senior analyst on Russia at the Washington consultancy PFC Energy, told The Washington Post after a display of Russian muscle-flexing.
In January, Gazprom bulldozed Belarus into a deal heavily weighted in Moscow's favour by cutting off gas supplies for three days in the dead of winter, hitting not only its independent-minded neighbour but the European Union as well. German commentator Walter Mayr called it "sledgehammer diplomacy".
That episode in January amply illustrated the way in which Gazprom, which is now moving into the oil sector as well, is operating as an arm of the Kremlin. Under that deal, Belarus, a former Soviet republic that is dependent on Russian gas, agreed to pay more than twice the price for gas for its 10m people and - to avoid paying even heftier prices - agreed to sell Gazprom a 50% interest in its gas pipeline network.
These terms were similar to those Gazprom has been extracting from other former Soviet republics, such as Georgia and Ukraine. While those two lean heavily to the West, and thus might be considered unfriendly by Moscow, Belarus has remained staunchly pro-Russia.
State-owned Gazprom, currently valued at around $262bn, is now Russia's No. 1 company which, over the last three years, spurred by the extraordinary steps the Kremlin has taken to expand it, has overtaken such energy giants as Shell and BP to become the world's second ranking company after ExxonMobil of the US. The West sees this, and Putin's drive to restore Moscow's power, as an ominous sign of where a gas cartel could go.
Russia denies using its energy resources as a political weapon. But Lilia Shevtsova, a Russia expert with the Carnegie Centre in Moscow, says that "Gazprom is the core of the Russian state, and it expresses the will of the Kremlin". Since it answers only to its political masters, it's "not a normal company ... it operates like an intelligence agency".
Europe is striving to reduce its dependence on Russian gas, but there are few options available. Despite Europe's concerns, it is likely to rely on Russia for years to come. Gazprom needs Europe too, as a secure and stable partner that uses its energy.
But the Russian energy giant is increasingly looking eastwards to energy-hungry Asia, and has threatened to step up efforts to transport gas to the US as well as Asia if European governments seek to limit Gazprom's expansion westwards. None of this bodes well for a gas cartel dominated by Russia and its allies.
In 2006, US Secretary of State Condoleezza Rice warned Greece and Turkey, longtime US allies even if they are regional rivals, against allowing Russia to obtain a monopoly over Europe's gas supply after Gazprom tried to buy a stake in a Greek-Turkish pipeline. The Americans wanted to hook that pipeline into the $2.5bn, 1,750km gas and oil pipeline running from Azerbaijan to Turkey through Georgia.
The US sees that as an alternative route for energy supplies to Europe that at the same time cuts the Russians out of the energy bonanza in the Caspian Sea, where the Soviet Union once held sway. This US effort to freeze Russia out of the Caspian bonanza in what used to be Moscow's backyard is a key source of friction in the emerging confrontation between Washington and a resurgent Moscow.
After Putin's visit to the Gulf in February, Abdelaziz Sager, chairman of the Gulf Research Centre in Dubai, wrote in the Qatari daily The Peninsula that Russia and the Gulf Cooperation Council (GCC) states, once ideological adversaries, have found a common interest in energy, arms sales and fighting terrorism.
"The altered focus takes place in a milieu where the Gulf countries are signalling their keenness to keep all geopolitical options open, reviewing the utility of the United States as the sole security guarantor and contemplating a collective security mechanism that involved a host of international players," Sager wrote.
