Dear Wealth Daily Reader,
Barring some unexpected twist, you can stop holding your breath over rumors of a "gas OPEC" . . . for now.
During the next two days, leading natural gas countries are meeting in Doha, Qatar. These countries control roughly 70% of the world’s natural gas reserves. But the Gas Exporting Countries Forum (GCEF) insists the meeting is only to strengthen cooperation among gas exporting countries and their relationships with consumers.
So far the GCEF has established a group of experts to figure out just how to give the organization more power. This involves examining natural gas pricing and infrastructures.
The underlying issue at Doha, however, was the creation of a natural gas cartel. The big five–Russia, Iran, Qatar, Algeria and Venezuela–have stirred the global community over the past few months.
In January, Iran fueled the rumors of a more powerful gas organization. Talk abounded about this meeting in Doha.
But late last week, Russia’s energy minister dismissed any possibility of such an organization being formed. Russia alone holds about 25% of global natural gas reserves, so the truth is that any cartel-like group is impossible without its participation.
If they decide not to form a gas cartel, though, it won’t be too surprising. There are a number of obstacles involved–one of the biggest being that natural gas trades in long-term contracts–sometimes up to 25 years.
The two leading supporters of a gas cartel are Iran and Venezuela. But neither of them is considered a gas exporter, despite their holding a fairly large amount of reserves that can be developed.
Also, the natural gas market is very different from the oil market. With oil, producers can fill up their tankers anywhere and ship the contents across the globe.
Natural gas is much different. It has to be transported via pipeline, making markets more regional. For example, the U.S. doesn’t need to fear a gas cartel controlling prices simply because we receive ninety percent of our imports from Canada. But I’ll get to our situation in a second.
Europe would be the main loser from a gas cartel. Remember, almost forty percent of their natural gas imports come from Algeria and Russia. The power to hike prices would be devastating to Europe . . . and the EU has already voiced opposition.
On March 26, 2007, EU Energy Commissioner Andris Piebalgs cautioned against such an organization. Piebalgs threatened that if a "gas OPEC" did form, he would urge the EU to pursue nuclear power to meet its energy needs. He insisted that such an organization is not in the best interests of natural gas producers.
Piebalgs threw down the gauntlet, saying, "To be fair, gas could be replaced. It’s not a good choice for the European Union because natural gas is very clean as a fossil fuel, but it could be replaced by other means such as coal or lignite or by nuclear."
Although the gas cartel won’t form today or tomorrow in Doha, there is a good chance we’ll see one in the future.
The answer lies in the development of liquefied natural gas (LNG).
LNG is just natural gas cooled into a liquid form. The liquid gas can then be transported by tanker to available terminals. This will allow gas to be traded on the global market. But a lot of development needs to happen first. LNG terminals are extremely expensive. That means investors may want the security that longer-term contracts provide.
So does liquefied natural gas really have a chance of growing?
The U.S. Energy Information Agency (EIA) predicted that LNG imports will increase by thirty-four percent in 2007, followed by a thirty-eight percent increase next year.
And so far they’ve been right. On April 6, 2007, the U.S. imported record volumes of LNG. Furthermore, LNG exports from Egypt doubled to 318 MMcf/d in the first quarter of 2007, accounting for about fifteen percent of the total U.S. LNG supply.
The bottom line is that the formation of a gas cartel may not happen in the next day or so. But don’t be surprised if it comes up within the next decade–when there’s a more suitable environment for gas producing countries.
Remember, it took OPEC a few years to gain control of the oil markets, and the GCEF is just a preliminary step toward a "gas OPEC."
Until next time,