World natural gas production leaders were again sounding the alarm over the creation of an OPEC-style natural gas organization, as energy emissaries of Russia, Iran and Qatar emerged from a meeting in Tehran last Tuesday saying they were working on the framework for a group of gas-exporting nations. But industry veterans are questioning what kind of an organization would evolve and how successful it would be.

The three — Gazprom CEO Alexei Miller, Iranian Oil Minister Gholamhossein Nozari, and Qatari Oil Minister Abdullah bin Hamad al-Attiyah — said the organization would be open to other gas-exporting countries, according to various foreign news reports. The organization would explore ventures in exploration, development and marketing of natural gas. Further discussions are planned at the next meeting of the group’s foreign ministers.

Similar statements from producing countries last year sparked protests from gas consuming nations, including the United States, where the House of Representatives passed a nonbinding resolution opposing efforts by major natural gas exporting countries to form a cartel or other mechanism to manipulate the supply of natural gas and its price to the world market (see NGI, July 16, 2007).

“I find it odd that people are being so nervous” about threats of a world gas organization setting high natural gas prices. “Look at the response to high gas prices in the United States. Suddenly shale gas is a very, very interesting alternative. And shales are all over the world. If it works here it’s going to work in Europe; it’s going to work in China; it’s going to work everywhere,” Hess LNG CEO Gordon Shearer told NGI.

“It’s an interesting piece of news, but whether it has any legs is another matter,” said Steve Thumb, principal of Arlington, VA-based Energy Ventures Analysis Inc. “I don’t see it at all impacting the U.S” On the off chance it would, “it would be 10, 15 years into the future.”

Russia — the world’s largest gas exporter and gas reserves holder — “is clearly behind it,” Thumb said, and wants to use energy policy to dictate foreign policy. While a major exporter of liquefied natural gas and third largest gas reserves holder, Qatar has said it will not build any more liquefaction facilities. And “Iran is years away from exporting natural gas.” Iran has “lots of reserves,” but it doesn’t have the technology or foreign capital to produce them.

“I don’t see it evolving into a gas cartel that’s equivalent to OPEC,” said Robert Ebel, senior adviser of the energy and national security program at the Center for Strategic and International Studies in Washington, DC. “I don’t think it’s going to have any influence anywhere.” He believes that even the Russians recognize the difficulties of trying to form a gas cartel that’s similar to OPEC. “I think they’ll put a group together, but that’s as far as it will go…They’ll use it [the group] to find out what’s going on in the natural gas industry as a whole. This will give them a forum to meet and discuss issues,” Ebel said.

An OPEC-like cartel that would manage supply with an eye to world prices would be almost impossible to set up in the natural gas business, Shearer said. He pointed to key differences to the oil market, including the fact that most of the international gas trade operates under very long-term contracts. Besides that, liquefied natural gas (LNG), the only form of natural gas that could swing between regions, is a very small part of the world natural gas business which essentially operates in three separate markets.

“There is no worldwide clearing price for natural gas” as there is for oil, Shearer said. “It just doesn’t exist. There’s no such thing as a WTI or Brent for natural gas.” He pointed out that the main LNG market where about 70% of supply is directed is Asia, while Europeans, supplied mainly by pipelines, are dependent on LNG for only a fraction of their needs. North America also is a fractional consumer.

Nor is there a single dominant producer or major swing supplier of natural gas, a function performed by Saudi Arabia for the oil market. OPEC operates with a mechanism that allocates oil production, setting target prices and ranges.

Further, “it would be extraordinarily difficult tearing up and abrogating every long-term agreement,” that is the 15 to 20 year agreements that cover 85-90% of international gas trade. LNG contracts in the Far East, the majority for Japan, are tied to the “Japan crude cocktail,” which is the customs clearing price for crude oil in Japan. Contracts with China and India also are long term with special conditions attached, Shearer explained.

The vast majority of European long-term LNG contracts and pipeline contracts with Russia, Norway and Algeria are tied to oil product and Brent crude prices with a lagging mechanism that absorbs some of the volatility. Other European contracts are tied to the United Kingdom National Balancing Point (NBP), while U.S. prices revolve around the Henry Hub.

“I don’t know how you could have a cartel setting prices in that environment, particularly since the other huge difference is that the largest market, North America, is completely independent of anything else,” Shearer said in an interview with NGI.

“A little over 20% of the world’s natural gas moves in international trade,” Shearer estimated, “and of that 20% only 25% is LNG, which can swing between markets, so that means globally less than 10% of natural gas production can swing freely between regional markets, that is, assuming suppliers would be willing to breach their contracts with their end-users.”

Whether they could actually control world prices, the producing nations may have some cause for concern. The world supply of LNG is set to get a big boost within the next year with at least three major Middle East liquefaction projects going on-line in that time period, and some of that LNG could be coming to the United States.

As to the prospect of U.S.-bound LNG, “I was never as optimistic as all the people were five years ago, and I’m not as pessimistic as all the people seem to be now,” said Shearer, who also is CEO of the long-pending Weaver’s Cove project to build an LNG receiving terminal in Fall River, MA.

“I think there’s going to be LNG coming here simply because there’s a limit to LNG going elsewhere in the world. We’re in a very short-term crunch here exacerbated by a number of factors that are likely to mitigate over the next few years.” As they turn on the taps on the large new projects, “it will be interesting to see at this time next year what the debate is then with the world in surplus.”

He pointed out that other LNG-consuming countries don’t have the storage capacity that is available in the U.S. The increase in the world supply of LNG also doesn’t bode well for the proposals made by some in the industry to liquefy excess gas in the U.S. for export.

“I don’t think the U.S. with a $7 wellhead price is going to compete very well in the LNG market when its competitors have wellhead prices on the order of 50 cents to $2.00,” Shearer said. “And, it’s sad but true, the U.S. happens to be located farther away from all the main importing countries of the world than most of the competition. Transportation is a very high component of LNG pricing relative to oil. LNG is six to 10 times more expensive to ship around. It makes it a lot less fungible as a commodity.”

Shearer speculated that the announcement from the natural gas troika might have been politically motivated. “It sounds to me like a meeting where somebody wanted to broadcast something for political purposes or reaction more than anything else. Having a meeting in Iran right before a U.S. election with the Iranians feeling significant pressure from much, much lower oil prices, as in fact are the Russians. The Iranians presumably could be a little bit nervous about their domestic political environment if their economy’s getting crunched. So this may be more for consumption for the man in the street in Tehran than it is for anybody in the rest of the world.”

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