Russian moves spark 'gas OPEC' fears
By Sergei Blagov in Moscow for ISN
Security Watch (10/07/06) Despite subsequent denials, recent calls by some Russian officials to create an OPEC-like gas producers' grouping - a reference to the world's oil cartel and its history of politically motivated supply cut-offs - are an ominous sign for European energy supply security. The "gas OPEC" idea was floated in the wake of a price dispute between Moscow and Ukraine that briefly disrupted gas supplies to the EU last January, highlighting Europe's vulnerability to foreign energy providers. As non-Russian EU gas imports come from few sources, the potential creation of a non-Western gas cartel would have serious repercussions for gas supplies to Europe. Russian officials have been increasingly critical of European energy policies and the EU Energy Charter. Notably, Valery Yazev - chairman of the State Duma's (Russia's lower house of parliament) energy committee and head of the Russian Gas Association - has called for the formation of a gas producers' cartel along the lines of the oil market's OPEC. At a May energy conference in Berlin, Yazev accused European bureaucrats of "provoking gas producers to take actions in response." "Acting mainly in isolation, gas suppliers have lost out in the negotiation process, which has been dominated by consumers acting in coordination, as a cartel," Yazev told the Berlin conference. Subsequently, the world's top gas producers, with Russia in the lead, could "create a gas suppliers' alliance that will be more effective and influential than OPEC," Yazev said, criticizing what he called the "monopolies" in the downstream European gas sector, saying those players were "squeezing out suppliers from the gas market." Yazev added that exporting countries could "set up a coordinated transit structure with countries owning trunk gas pipelines that will be more efficient than the EU Energy Charter." A formal or informal cartel?Last month, Gazprom spokesman Sergei Kupriyanov declined to comment on the possible creation of a gas cartel, calling it "a very delicate matter." However, Russian gas executives indeed have moved to pressure Europe on the issue. Gazprom CEO Alexei Miller recently told a group of European diplomats in Moscow that blocking Gazprom's acquisition plans in Europe "would not bring good results." Following negative reactions from consumers, however, Russia wasted little time denying any cartel ambitions in an attempt to allay fears of plan to either squeeze supplies or prices. Russian Foreign Minister Sergei Lavrov said on 20 June that Moscow and Tehran had "no plans to create a 'gas OPEC'." Lavrov's denials followed Tehran's proposal that Iran and Russia establish a joint natural gas venture. "There won't be a cartel, though cooperation between governments that produce and export energy resources, including gas, will increase," Lavrov said. However, talk of a gas cartel resurfaced after last month's summit of the Shanghai Cooperation Organization (SCO) - a six-member group that includes China, Russia and Central Asian states - during which Russian President Vladimir Putin's proposal to set up an energy club within the SCO was discussed. Iranian President Mahmoud Ahmadinejad, whose country has observer status in the SCO, told the Shanghai summit that energy coordination among SCO nations could help "prevent the threats of domineering powers and their aggressive interference in global affairs." He also said Russian-Iranian energy cooperation "could be even more productive if we cooperated in pricing gas and forming the main gas routes." Putin not only advocated the idea of an SCO "energy club," but also said he supported joint Russian-Iranian energy projects. However, he quickly dismissed suggestions of a formal gas cartel and shrugged off claims that a gas joint venture with Iran could amount to an OPEC-style grouping. "OPEC is a cartel, while we will establish a joint venture to coordinate our efforts in third countries and work together on some deposits in both countries," Putin said. "There is no talk of a 'gas OPEC'." But Putin told journalists in Shanghai on 16 June that Russian gas giant Gazprom was prepared to contribute financing and technology to the construction of a gas pipeline from Iran to India via Pakistan. "Such a project would be quite profitable and realistic," Putin said, adding that Turkmenistan also supported the program. The pipeline, together with an upgraded pipeline between Turkmenistan and Iran, could create a vast interconnecting Eurasian network with Gazprom at its center. Subsequently, Gazprom set about intensifying contacts with potential Iranian partners. On 26 June, Gazprom CEO Miller met with Iranian Deputy Oil Minister Hadi Nedjad-Hoisseinian to discuss possible oil and gas production and transit ventures. According to a Gazprom statement, the two sides had reached agreement "on concrete measures to intensify work on promising projects." "The two sides decided to explore the possibility of creating a Russian-Iranian joint venture" in gas transit, refining, and sales, the statement said. The mere possibility of a new non-Western energy alliance has sparked talk of an "OPEC with bombs." The combined gas reserves of Russia, Central Asian states and Iran amount to more than 50 percent of the world's total, although the figure is just 20 percent for oil. At 48 trillion cubic meters, Russia has the world's largest gas reserves - 27 percent of the world's total. An expanded SCO, which could include Iran, is expected to control a large part of the world's gas reserves and nuclear arsenal. Inroads into North AfricaIn the meantime, Gazprom was actively pursued expanded cooperation with major gas producers outside the SCO, notably Algeria - the second largest supplier of gas to Europe. In March, Algeria granted Russian companies an access to its oil and gas fields. The two countries said they were moving towards joint efforts in the exploration, production, and marketing of Algerian gas. Gazprom has undertaken a project with Algeriaâs state-run gas company, Sonatrach, under which the latter would fulfill Russian contracts to deliver natural gas to France. Also in March, President Putin offered to cancel Algeriaâs US$4.7 billion debt to Russia, while Algeria agreed to purchase advanced Russian jet fighters, air defense systems, and other weapons in a deal worth US$7.5 billion. Algeria is the largest producer of natural gas in OPEC and through Sonatrach is the most important supplier of gas and liquefied natural gas to southern Europe. Algeria has an estimated 160.5 trillion cubic feet of proven natural gas reserves, the eighth largest in the world, and 11.4 billion barrels of proven oil reserves. Algeria already exports 95 percent of its gas to Europe and is one of the continent's three main suppliers, along with Russia and Norway. Gazprom also is eyeing projects in Libya. On 28 June, Gazprom and Libya's National Oil Corporation (NOC) said they are considering gas and oil cooperation, including production, transit and refining, following talks in Moscow between Gazprom deputy CEO Medvedev and NOC head Shukri Mohammed Ghanem. Both sides also discussed possible Gazprom investments in Libya's energy sector. Increased energy cooperation between Russia and Algeria, the two largest suppliers of natural gas to Europe, have raised fears in Europe that the two could form a gas cartel to control prices. European concernsGazprom's inroads into Algeria and Libya,l and the January supply cutoffs have prompted European leaders to begin looking to North Africa as an alternative gas source. Russia, which delivers up to 80 percent of its gas to Europe via pipelines across Ukraine, suffered a blow to its reputation as a reliable supplier as a result of the argument with Ukraine. The US and others have accused Moscow of using energy sales to reward friends and blackmail independent-minded former members of the Soviet bloc, though Moscow has also sought to increase gas prices among its close friends in the region. Ukraine imports most of its gas from Russia and clashes frequently with its vast neighbor on prices. In January, the two engaged in a price row that culminated in a brief cut-off of gas supplies to Europe, before Kiev accepted a nearly twofold increase in prices. In late June, Ukrainian prime minister-designate Yulija Tymoshenko called for a major review of the gas deal with Russia. In response, Gazprom said that "Ukrainian threats" were paving the way for a "new gas crisis" for Europe. On 20 June, Gazprom's Medvedev voiced concerns, tongue in cheek, that Ukraine was unprepared for the upcoming winter, arguing that Ukrainian companies were pumping too little gas into underground storage. Medvedev also reiterated warnings that Ukraine's siphoning of Russian gas from pipelines across its territory could lead to supply shortages for Western Europe. The feasibility of a 'gas OPEC'The possibility of creating a gas cartel has been under discussion for quite some time. The Gas Exporting Countries Forum (GECF) - a loosely defined grouping of the world's largest gas producing nations accounting for around 73 percent of global gas reserves and 41 percent of global production - has pledged to represent and promote its members mutual interests. Since its formation in 2001, the issue of the formation of a gas cartel has featured in the forum's discussions, but the loose grouping with no headquarters, budget or staff is yet to deliver on its pledges. Separately, in the early years of this decade, Russia floated the idea of a grouping of Central Eurasian gas-producers. However, the plan brought no results, mainly due to disagreements between potential member states, notably Russia and Turkmenistan, over gas prices and transit terms. Theoretically, "gas OPEC" member nations could include Russia, Iran, Algeria, Libya, Turkmenistan, Kazakhstan and Uzbekistan. Such a cartel would have the ability to drive European gas prices up with even a moderate supply limitation. However, such a cartel's potentially highly diverse membership is understood to inevitably entail difficulties in reaching consensus on output issues, notably on the divisive issue of gas output quotas. Therefore, a formal "gas OPEC" largely is seen as non-viable plan. Furthermore, actual attempts by gas producers to form a gas cartel could entail resistance from the gas consuming nations, including the creation of a formal grouping or retaliatory trade sanctions from the EU. Russia already has made such accusations, lashing out at Europe for creating a consumers' "energy NATO," which would dictate terms to gas suppliers. Last February, Poland proposed establishing an alliance that would act in concert to respond to energy crises, with NATO serving as the basis of such an alliance. Russian officials have been wary of Polish President Lech Kaczynski's plan to hold a summit on energy security issues with Ukraine, Kazakhstan, and Azerbaijan, without inviting Russia. Kaczynski's initiatives aim at "undermining Europe's stability of energy supplies," head of the Duma's committee on international affairs, Konstantin Kosachev, warned on 23 June. "The very idea of holding such a forum without Russia shows that Poland is not learning any lessons from the gas crisis," he said. Gazprom's global visionStill, regardless of the feasibility of a "gas OPEC," Gazprom has pledged to expand outside Russia on its own, in a pursuit of what it has described as global market leadership. Gazprom aims at becoming a leader of global oil and gas markets, Gazprom's Miller told the company's annual shareholders meeting on 30 June. Gazprom already supplies one-quarter of the EU's gas, a figure predicted to rise in the next 10-15 years - and it controls nearly one-third of the world's gas resources. Gazprom is exploring hydrocarbon reserves in Uzbekistan, Tajikistan, Kyrgyzstan, as well as India, Iran, Libya, Algeria, Venezuela and Vietnam. The company aims at creating commercially viable chains outside Russia, from extraction to sales. Gazprom would also institutionalize its overseas businesses in line with "universally accepted world practice," Miller said. Gazprom's expansion strategy is firmly based on its vast gas reserves, 29 trillion cubic meters of gas and 1.36 billion tons of oil, according to Miller. In 2005, Gazprom pumped 548 billion cubic meters (bcm) of gas or up by 2.8 bcm year-on-year, he said. Within the past five years, Gazprom annual gas output has increased by 36 bcm. Meanwhile, China still remains an area of particular interest to Gazprom, and the company is looking for ways to reach gas consumers in China, Medvedev said on 22 June, adding that Gazprom was holding talks with major Chinese companies on acquisitions of Chinese gas-distribution companies or on establishing joint ventures in gas retail sector. In March, Gazprom and China's National Petroleum Corporation signed an agreement on gas supplies from Russia to China, via the western route, the "Altai pipeline," based on vast gas reserves in Western Siberia. At the second stage, Gazprom also plans to deliver gas via an eastern route. Gas supplies via both routes are expected to total 68 bcm/year eventually, with first shipments due in 2011. However, Gazprom conceded that Europe remained its main export market. In 2005, Gazprom supplied more than a quarter of European gas demand: 156 bcm of gas to Europe or up by 2.9 bcm y-o-y, Miller said on 30 June. However, the Gazprom CEO pledged to expand to new markets. "We have all capabilities to honor our commitments to Europe and simultaneously develop promising cooperation with companies in Asia-Pacific and North America," he said. Gazprom's expansion plans are understood to be based on strong macroeconomic fundamentals. Natural gas is expected to continue expanding its role in energy markets in the coming decades, and Russia is to play an increasingly important part in this scenario, according to the Cambridge Energy Research Associates (CERA). "There is a re-think on energy security, in which Russia has a dominant role," and the G8 meeting this week in the Russian city of St Petersburg "will be much more about gas than oil," the CERA predicted. Dr Sergei Blagov currently works as a Moscow-based independent journalist, researcher and consultant. His articles were published by a number of publications worldwide, including The Asian Wall Street Journal, Germanyâs Deutsche Press Agentuur (DPA) news agency, the Far Eastern Economic Review, and The Daily Deal, the New York-based daily. Complete archives at http://www.sitbot.net/ Please let us stay on topic and be civil. OM
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