Creation of an OPEC-like Group of Natural Gas Exporters

Natural gas is an important source of energy
(Photo from: knowledge.allianz.com)

By Antonia Dimou

The notion by Russia, Iran and Qatar to create an OPEC-like group of natural gas exporters, which appeared recently in certain columns of the international press, is not new. The idea was first raised by Iran's Supreme Leader, Ayatollah Ali Khamenei in January 2007, and was enhanced three months later on April 2007 when then Russian President Vladimir Putin and Qatar's Emir, Sheik Hamad bin Khalifa Al Thani, announced they would jointly explore the creation of a cartel to represent the interests of producer countries in controlling the global market.

A pipeline and requisite infrastructure to connect countries in the Gulf to areas of consumption either in the Far East or Europe is an option very regularly introduced in discussions in the context of various economic forums as a means to foster long-term development and growth. According to this option, natural gas is the most realistic substitute for oil, but successfully making the substitution depends on transport and the addition of many more pipelines.

It is undoubted that Russia, Iran, and Qatar have more than half of today's natural gas reserves. While Russia is a leading natural gas exporter, Qatar mainly exports liquefied natural gas, and Iran is actually a gas importer due to lack of development of its gas fields. This reality makes the notion of creating an OPEC-like mechanism difficult to sustain.

The question that has to be answered is; “Why is that?”

First, unlike oil, which is traded on an exchange that constantly updates the market price based on supply and demand, gas is sold under tight contracts that allow buyers to lock in prices for at least up to 25 years. That said, a cartel would likely have little impact.

Second, pipeline infrastructure requires high-cost investment, which usually makes long-term contracts necessary. Iran is under economic sanctions and no international investment exceeding a certain amount is permitted, and thus companies that do not comply with the sanctions’ provisions are fined.

Third, liquified natural gas could be traded as a commodity similar to oil, but at some other point and not in the instant future.

Based on the above, the conclusion that can safely be reached is that the recent announcement by Russia, Iran and Qatar to form an OPEC-like cartel has no permanent and immediate character but rather seems to be a pure political commitment to create something in the future.

* Reproduced by Middle East Observer, Issue 2 Vol. 1, April-May 2010