COMMENT: Washington expresses concern about post-Doha gas cartel

By bne IntelliNews April 12, 2007

Ariel Cohen in Washington -

Washington decision-makers are concerned. They see Russia cultivating and then leading a new gas cartel - steadily, stealthily, and under the innocuous-sounding name of the Gas Exporting Countries' Forum (GECF). The GECF took a step towards its unannounced launch at the recent meeting in Doha, Qatar, on April 9 despite the opposition of Azerbaijan, Canada, the Netherlands, and Norway.

This forum was created in 2001 by Algeria, Brunei, Indonesia, Iran, Malaysia, Nigeria, Oman, Qatar, Russia and Turkmenistan. The cartel is the brainchild of some of the world's least democratic countries: Iran, Qatar, Hugo Chavez's Venezuela – hardly America's fan club.

A cartel in the making?

The cartel is inspired by those who stand to benefit most from its future geopolitical muscle: Russia and Iran, and specifically President Vladimir Putin and Iran's Supreme Leader Ayatollah Ali Khamenei. Speaking to the Russian National Security Council's Secretary Igor Ivanov on January 29, Khamenei called for the creation of an OPEC-like gas cooperation organization.

Even if they will never get to the point where they can control prices, GECF principals are maximizing their geo-strategic influence, especially with smaller Eurasian producers, such as Turkmenistan, and with transit countries.

The Russian approach is particularly noteworthy. Moscow is playing a complex and sophisticated game, one that is likely to maximize its advantages as the leading gas producer with the largest reserves on the planet.

Russia plays the long game

First, Russia's approach is gradualist. Viktor Khristenko, Russia's vice premier in charge of energy, rejected the idea just days before President Putin called a gas OPEC "an interesting idea" during his February 2007 visit to Qatar. Khristenko in Doha said that "we have not, do not have, and will not have the goal of organizing an alliance against anyone."

Russia looks reasonable. The immediate price-regulating function of the emerging cartel is supported by those Latin American countries who want to dispense with market principles: Venezuela, Bolivia and Argentina. With Iran and Venezuela (supported by Bolivia and Argentina) applying their OPEC-honed instincts to gas and demanding price regulation, Russia can afford to stand aside and let others do the talking. Nevertheless, an unnamed "high ranking member of the Russian delegation" to Doha told RIA Novosti that "as the gas market undergoes globalization, certainly such [a gas cartel] will appear and is necessary."

Second, the Washington Kremlin-watchers believe that Russia's approach is stealthy. Instead of proclaiming the cartel prematurely and spooking consumer countries, it is steadfastly putting the component parts into place. In Doha, Russia initiated the creation of a High Level Group that will "research" the pricing of gas and develop methodologies towards commonly accepted gas pricing models. Russia will conveniently staff this group.

Third, and most importantly, a cartel by any other name is still a cartel. Energy economists point out that members of the GECF have agreed to discuss dividing up the consumer markets between them, particularly in Europe, where Russia and Algeria are major players. For example, if Russia agrees not to challenge Algeria's position in Spain, Algeria will stay clear of Germany. This will clearly challenge the EU's energy liberalization and gas deregulation policy, which is scheduled to take full effect on July 1.

The group members plan to "reach strategic understandings" on export volumes; schedules of deliveries; the construction of new pipelines; and coordinate start-ups and production schedules. To continue their work, members will gather for their next annual meeting in Moscow, and plan to develop a permanent secretariat. To many in Washington, this sounds like a cartel in the making.

Washington energy experts are split over whether the Doha summit has created a real long-term threat to the consumer's energy well-being. However, the politicians and geo-strategists have fallen for the Russian ruse.

Oil is a global commodity, while natural gas is not. Or at least not while it is piped, and its prices are defined up to 15-20 years in advance through long-term contracts. However, liquefied natural gas (LNG) is rapidly becoming a worldwide, shipped commodity. By 2010 the LNG share of the world's total gas consumption will double. Thus, price gouging through production quota manipulation may come faster than many experts think.

Muted reaction

The Bush Administration barely reacted to the Doha meeting. Ileana Ros-Lehtinen, the Ranking Member of the House Foreign Affairs Committee fired an angry letter to the Secretary of State Condoleeza Rice that the establishment of a gas-OPEC would be a "major and long-term threat to the world energy supply" that the US should "vigorously oppose." Privately, officials express grave concern.

There are some immediate steps the US could undertake. It can open its vast natural gas resources on- and offshore for further exploration and production, and encourage its neighbours in Canada, Mexico and the Caribbean to do the same.

Finally, the Bush Administration could try to develop a clear global policy to limit cartelization of the gas markets. The National Security Council and National Economic Council would take the lead in developing this policy. The US can invite its allies and other major energy consumers, such as China and India, to coordinate policies through the International Energy Agency. Without buyer solidarity translated into action, energy consumers and economic growth will suffer worldwide.

Ariel Cohen, Ph.D., is Senior Research Fellow in Russian and Eurasian Studies and International Energy Security at the Sarah and Douglas Allison Center of the Davis Institute for International Studies at the Heritage Foundation.

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