Global ′gas cartel′ is a long way off, experts say | Business| Economy and finance news from a German perspective | DW | 17.11.2011
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Global 'gas cartel' is a long way off, experts say

The world's top natural gas exporters met for a key meeting this week, amid speculation that major producers of the commodity could resort to price-setting tactics and supply controls.

Flame from a gas stove

The price of natural gas is still pegged to the price of oil

At the first-ever summit by the Gas Exporting Countries Forum, the main items on the agenda were prices and a common approach to the natural gas market.

Yet since GECF was founded a decade ago, some nations have raised fears that it could become the next OPEC. The Organization of Petroleum Exporting Countries made major waves in global markets during the 1970s by agreeing to set oil prices and control output.

With gas poised to play an increasingly critical role in tomorrow's energy market, there are growing concerns that the GECF could try to follow that example - effectively creating a global gas cartel.

GECF - whose 12 members include the world's two top gas producers, Russia and Iran - controls more than 70 percent of the world's natural gas reserves and accounts for 40 percent of global consumption.

In the run-up to this week's meeting, Qatar's energy minister Mohammed Bin Saleh Al-Sada downplayed worries that GECF had plans to control the gas market, saying member states wanted fair prices.

A liquefied natural gas tanker unloads cargo in Massachusetts, US

A small amount of liquefied natural gas is sold on spot markets

Framework lacking

Many experts say GECF is in no position to set higher prices, even if it wanted to.

Energy specialist Claudia Kemfert of the German Institute for Economic Research (DIW) said the organization had other issues to think about, including the potential for new pipelines and expansion of the all-important European gas market.

Producers must also address the effects of a gas surplus, as the United States uses special extraction methods to win gas from unconventional sources.

Moreover, the current gas market is ill-suited for attempts to sway prices. Kurt Oswald from global management consulting firm A.T. Kearney pointed to key structural deficiencies in the market.

"A requirement for a gas cartel would be a working global commercial market, or at least strong regional commercial markets," he told Deutsche Welle.

Only 2.5 percent of liquefied natural gas, or LNG, is traded on spot markets. The vast majority of supplies is sold through long-term contracts between buyers and sellers who negotiate costs based on the price of oil.

Some of these contracts are valid for 20 to 30 years, meaning they are unaffected by short-term price swings.

Meanwhile, not all members of GECF share the same interests. Some producers have a stake in both gas and oil - something Oswald said would limit the forum's impact, at least for now.

"Because the gas price is tied to the price of oil, it is already influenced by OPEC," he said.

OPEC headquarters in Vienna

OPEC has an indirect influence on the price of natural gas

Oil peg under pressure

Natural gas prices are pegged to petroleum but some experts, including DIW's Claudia Kemfert, say that system makes increasingly little sense.

"The oil price is subject to completely different laws of the market and shortages, and as a result it's much higher than the price of gas," she said.

The market itself has also been undergoing major changes, particularly over the past two years. Amid the natural gas boom in the United States, the country has gone from gas importer to gas exporter.

That shift also has a major impact on supply, with prices dropping as the gas surplus grows.

A study by A.T. Kearney shows the price of gas sold on spot markets has fallen below the oil-pegged price set out in long-term supply contracts, making it cheaper by half.

"More and more customers want out of the contracts and are canceling them," Kemfer told Deutsche Welle.

Gas-exporting countries have adopted a defensive strategy, she said, when instead they should drop the oil price-peg and allow the markets to dictate a fair value for gas.

The Gazprom logo

Russia is a key gas exporter - as is the United States

Tomorrow's market

Some experts believe opening up the gas market could be the best way for producers to secure better prices long-term.

"If the oil price-peg continues to crumble, some day gas-exporting countries could think about whether they want to develop a common strategy to dictate the price of gas, or at least be able to influence it," Kemfert said.

Abandoning the tie to petroleum prices and opening up the gas market is a scenario with real potential, according to Oswald. At that point, the forum would be in a position to influence gas prices.

But those changes will take time: Oswald said a more influential version of GEFC is 10 years off, "but after that, there could definitely be developments in this direction."

Author: Insa Wrede / arp
Editor: John Blau

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