11:37 GMT26 February 2020
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    Gas OPEC: economic advantages and political drawbacks

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    MOSCOW. (Igor Tomberg for RIA Novosti) - At the meeting with Secretary of the Russian Security Council Igor Ivanov in Tehran over the past weekend, Iran's supreme leader Ayatollah Ali Khamenei said: "Our countries could set up an OPEC-type organization on gas cooperation."

    Judging from the initial response, the majority of analysts think that this proposal is rooted in politics rather than economics.

    This is not the first time the idea has been put forward. Iranian President Mahmoud Ahmadinejad offered to Russian President Vladimir Putin at their meeting in Shanghai in June 2006 to establish what he described as cooperation "in fixing gas prices, and major flows in the interests of global stability."

    Indicatively, the same idea was discussed during the recent Algerian visit of Viktor Khristenko, Minister of Industry and Energy: Algeria and Qatar could join the two countries. The resources of this potential cartel are very impressive - they account for more than 30% of the world's gas production, and their aggregate proven reserves exceed 60% of the total, which is comparable to OPEC's respective share in the global oil reserves - about 68%. The would-be cartel could include other members as well.

    The excerpts of a confidential analytical report by NATO economic experts, published by The Financial Times last November, include Algeria, Qatar, Libya, Russia, Central Asian countries, and Iran into OPEC's gas counterpart. The list could be extended - Mauritania, Mali, and some Central African nations could also become part of it. Gazprom showed great interest in these countries during Khristenko's official visit.

    In 2006, the appeals for a gas OPEC became stronger. The main reason was discontent with the European Union's energy policy. Its advocates see EU strategy as an attempt to set up an association of consumer countries aimed at driving a wedge into the ranks of gas producers in line with the divide-and-rule principle. In other words, the goal is to let the consumers dictate prices to the producers.

    Judging by the number and tone of publications in the media, and interviews by politicians and experts, the idea of a gas OPEC is gaining a foothold in Russia as well. With different degrees of caution, it was supported by a number of State Duma deputies and Senators (Vladimir Medinsky, Viktor Orlov, Alexei Mitrofanov, and Gennady Seleznyov). The opinion they all share is that a gas alliance of producers is a sound idea, and Russia will profit from it. The bulk of experts polled by the media agree.

    The official authorities have the opposite position. During his Algerian visit, Khristenko said that Russia and Algeria were against this idea. "We should not move towards a cartel agreement," the minister said.

    For the time being, the Russian Government has not given any response to the latest Iranian proposal, which is understandable. Any clear-cut answer by the Kremlin is bound to directly influence the global geopolitical alignment of forces, something it does not seem to be ready for. For this reason, the authorities have limited their reaction to an interview by an anonymous official from the Ministry of Trade and Economic Development to RIA Novosti. It was clear from what he said that the ministry considered even a discussion of the idea premature.

    The ministry's objections are based on the fact that OPEC has quotas for oil production, and this is something Russia does not need for gas. Gas production in Russia rests on potentialities of deposits and on the quickly growing demand for gas at home and abroad. Moreover, Gazprom is bound by long-tern export contracts, and they are its natural lodestar. As for OPEC, it was established in 1960 to coordinate the policy of oil producers in their clash with the U.S. and other Western countries.

    In this case, the ministry's position coincides with Gazprom's view, which already accounts for a quarter of the European gas market, and half of import supplies. A formal alliance with other suppliers is the last thing Gazprom needs today. But this is today, when it still has enough gas to honor its long-term contracts and meet the growing external demand, although it already has to limit supplies to the RAO UES, the Russian electricity monopoly.

    Gazprom's production is clearly lagging behind the growing demand. Under the circumstances, export quotas would not only help save face if there is not enough gas for exports, but also keep export profits at the same level with higher (or high) prices. Gas quotas promote rather than impede the development of the gas market in conditions of uncontrolled consumption. They are good for the global energy balance.

    Interestingly, all politicians and analysts are trying hard to take the cartel idea of a gas OPEC out of its political context. It is clear that Khamenei's proposal is more political than economic. There is a risk that in a bid to restore its waning popularity, the George W. Bush Administration will still decide to deal pinpoint strikes at Iran's real or invented nuclear facilities. This compels Iran to go all-out in a bid to find potential allies, and prove that it has levers of influence on industrialized countries.

    Clearly, Russia's cartel with Iran and Algeria would be an undisguised challenge to the West, and not only in the energy sphere. However, in perspective this alliance is quite possible. For the time being, long-term contracts are crucial in the world gas market, and most of them involve transportation through pipelines. But trade in liquefied natural gas (LNG) is skyrocketing. The LNG consumption is growing 3.5 times faster than that of pipeline-transported gas (7.7% a year against 2.2%). A clash of interests on the market between sellers and buyers may encourage consolidation of major gas exporters, all the more so since the LNG and oil markets have an identical structure. The EU is fully aware of this.

    Some big Western companies are beginning to consolidate their positions in countries that can potentially become cartel members, ignoring political considerations, even the threat of America's anger.

    On January 29, 2007, the European oil giants Royal Dutch Shell and Repsol YPF sighed a tentative agreement with the Iranian government to develop Persian Gulf gas deposits. Under the agreements, the UK-Dutch concern, and the Spanish company will build an LNG plant and a port terminal for the South Pars deposit in southern Iran. The plant will have a capacity of three billion cubic meters of gas a year. Shell estimates the project at $4.3 billion dollars. Iranian national oil company NIOC believes the costs may reach five to six billion dollars.

    Returning to the question of Moscow's attitude to Iran's proposal, we should bear in mind that Russian President Vladimir Putin was the first to voice the idea of a gas OPEC. At the meeting with Turkmen President Saparmurat Niyazov in 2002, he offered Central Asian countries to create what he called a "Eurasian gas alliance" together with Russia. But at that time, Putin's suggestion did not meet with support of the proposed cartel's members, Turkmenistan above all.

    Much has changed since then, including the gas correlation on post-Soviet territory. However, if Russia is to consider different versions of gas producers' alliances in the face of increasing consumer solidarity, it should start with its neighbors - Central Asian nations. The political will of potential members is the only missing instrument for translating the idea into reality, although in bilateral discussions, Central Asian leaders always talk about it.

    Interest in this subject on the part of Iran, Algeria, and other Islamic countries may encourage Turkmenistan, Kazakhstan, and Uzbekistan to revive dialogue with Russia. Clearly, today Russia will have to share some of its monopoly, and possibly profits, on the Western markets with the future allies. But this turn of events may have its own advantages - guaranteed gas supplies, and a farewell to the tiresome competition for markets and top prices.

    In mid February, Vladimir Putin will visit Saudi Arabia, Jordan, and Qatar. In April major gas producers and exporters - gas OPEC potential members - will meet in Qatar to discuss concerted efforts. The idea of a gas cartel will probably become institutional at this meeting.

    Igor Tomberg, Ph. D. (Economics), is a senior research fellow at the Center for Energy Studies of the Institute of World Economy and International Relations, Russian Academy of Sciences.

    The opinions expressed in this article are those of the author and may not necessarily represent the opinions of the editorial board

    The views and opinions expressed in the article do not necessarily reflect those of Sputnik.

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