Russian gas cartel talks in Tehran unnerve the West

Officials from Russia’s gas monopoly Gazprom, the world’s largest gas producer, met counterparts from Iran and Qatar on October 21 to discuss setting up a natural gas cartel, similar to the oil-based Organization of Petroleum Exporting Countries (OPEC). The notion of a gas cartel was brought up in January 2007 by Iran’s supreme leader, Ayatollah Ali Khamenei, but it is now gaining momentum and may require just a few more meetings before an accord is finalised. Iran, Russia and Qatar account for nearly a third of the world’s natural gas exporters.

After meeting with Qatar’s Oil Minister Abdullah bin Hamad Al- Attiyah and Gazprom Chairman Alexei Miller, Iran’s Petroleum Minister Gholamhossein Nozari said: “The meetings went well and big decisions were made, and the groundwork was laid for the creation of a technical committee.” “There is a demand to form this Gas- OPEC and there is a consensus to set up Gas-OPEC.” The European Commission has opposed the creation of a gas cartel that would try to control prices. The EU relies on Russia for about 20 percent of its natural gas imports. High gas prices have helped Gazprom, post record profits. Most of Gazprom’s profits came from Europe, where it has a quarter of the market and prices are pegged to crude oil. Gas producers such as Russia, Iran, Qatar and Venezuela have been talking for some time about a Gas-OPEC.

Miller told reporters after the meeting that the committee’s activities would lead to ventures in exploration, refining and the sale of natural gas. “Demand for gas worldwide is increasing and it is natural that we should increase our skills” in the development of gas fields, Miller said. “We want to create a just market for both gas consumers and producers,” he added. Miller said the group’s next meeting would be held in three to four months in Doha, followed by another meeting in Moscow. “The next meeting will be held at the ministerial level,” Miller said, adding that “Gazprom will have a fixed presence at upcoming meetings.” Miller said in a statement later that the three countries should meet every quarter.

Gas producers need to work together because of the “huge” costs of developing new fields and building pipelines, Russian Energy Minister Sergei Shmatko told German business leaders this month. Analysts have said that a gas cartel similar to OPEC wouldn’t be possible to function in terms of a gas market since, apart from LNG, gas transportation is very rigid and subject to long-term contracts. Chris Weafer, chief strategist at UralSib investment bank in Moscow, told New Europe on October 22 that Russia strongly believes in developing a short of a Gas-OPEC type of structure especially in cooperating in developing new technologies for LNG, particularly in sharing costs and creating joint ventures, allowing Gazprom to extend its global role. “They see it very much as a forum for having a joint approach to developing technologies and sharing costs and generally developing the LNG business. Everybody is running shy from any notions that this could be a price-setting mechanism and I think undoubtedly for quite a long-time it will not because it will be too small,” Weafer said.

But if one looks at the history of OPEC itself, when it was formed in Baghdad in 1960, it was reasonably irrelevant, but it became very relevant in 1973, Weafer said, referring to Yom Kippur oil crisis when the members of the cartel announced an oil embargo in response to the US decision to re-supply the Israeli military during the war. “I suppose that’s what the West fears. With the organisation starting with a fairly sensible strategy of working together to develop the LNG business globally, the fear is that at some point it might change to a price-setting mechanism just as OPEC did as a result of the war in 1973 and obviously the rest is history,” Weafer said. A strengthening of economic ties between Tehran and Moscow could also be a source of concern for Washington, which is leading efforts to isolate Tehran and pressure Iran into abandoning its controversial nuclear programme.

Moscow already has several key contracts with Tehran, including its assistance in building the Bushehr nuclear plant. As well as having a plethora of natural gas, Iran also has large quantities of oil and has threatened to block the strategic Strait of Hurmuz if attacked, a move that could hamper global oil supplies, leading to skyrocketing prices. The talks about forming a gas cartel came a day before Russia announced it will cooperate with OPEC in maintaining stable oil prices in the global market. Russian President Dmitry Medvedev on October 22 told OPEC Secretary-General Abdalla Salem el-Badri, during their meeting in Moscow that interaction with the oil cartel was a “key area of Russia’s energy policy aimed at maintaining stable and predictable prices.”

El-Badri said he did not ask Russia to cut oil exports, but welcomed Moscow’s plan to set up oil reserves to influence global prices. The idea of an oil production reserve was aired by Igor Sechin, Russia’s energy tsar and deputy prime minister, at an international energy forum in Moscow on October 22. “Reserves are necessary in volumes large enough to reach efficient pricing parameters,” he said, adding export duties on oil were also being discussed. Weafer said that creating an oil production reserve in Russia is not feasible. “I think that a very long-term ambition. At the moment Russia is looking at the slowdown in its current rate of production,” he said. Even though the slowdown was less than one percent this year, because of falling oil prices, funding and financial problems, Russian oil production could fall more in the next couple of years.