Natural Gas Cartel to Face Major Obstacles in Curbing Supply

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Efforts by natural gas exporting countries to create an OPEC-style cartel are unlikely to be successful in controlling market supply and boosting prices,Oxford Analytica suggests in this guest post.

The tenth Gas Exporting Countries Forum (GECF) ministerial meeting took place in Oran on April 19. The organisation, for which parallels with OPEC are unavoidable, consists of Algeria, Bolivia, Egypt, Equatorial Guinea, Iran, Libya, Nigeria, Qatar, Russia, Trinidad and Tobago and Venezuela. Norway and Kazakhstan attend as observers. Together, the full members hold about 69% of proven global natural gas reserves.

In advance of the Oran meeting, Algeria signalled it would propose to GECF members that, for the first time, they take action to curb natural gas supply to international markets, with the explicit intention of raising spot market prices:

  • Although market participants previously discussed the possibility of a gas cartel-like initiative, this is the first time an exporter explicitly has proposed such a measure.
  • The Algerian proposal reflects concerns over the rising cost of developing the country’s remaining reserves. Therefore, Algiers has a more immediate interest than other GECF members in raising natural gas spot market prices.
  • While Russia and Qatar indicated they would be unlikely to support such an initiative, the fact that the proposal was made indicates that cartel action has moved up the Forum’s agenda, even if some members are not yet ready to implement it.
  • This suggests the GECF is beginning to think of itself more as an organisation resembling OPEC.

The GECF executive committee reached consensus on acting to support gas prices, but no agreement on how to do it. Ministers then agreed that the Forum should aim to maintain parity with oil prices through indexation, with Russia in particular stressing the importance of long-term contracts. They also reached an accord to prevent competition between types of gas, a reference to liquefied natural gas (LNG) competing with pipeline gas.

Competition for market share is likely to prove an important factor limiting GECF ambitions. For instance, GECF action to raise gas prices would have no impact on the self-contained US market, and might encourage US and Canadian ambitions to export LNG. Proven US gas reserves are on an upward trend and there is spare productive capacity.

Market support? The extent to which gas is sold on long-term contracts, and inflexibility of pipeline gas delivery destination, are barriers to controlling gas supply to international markets. GECF members are reluctant to cut long-term contract volumes because this would tarnish their reputations as reliable suppliers; damage relations with foreign investors in their domestic upstreams; and cut volumes for what currently are by far the most lucrative contracts.

However, reducing spot LNG supply could increase what they and non-GECF members receive for spot cargoes and reduce the incentive to arbitrage between long-term contracts and spot cargoes. GECF capacity to do this is considerable if members act in concert. Together, the GECF controls nearly 70% of proven global gas reserves and 80% of LNG liquefaction capacity.

Group heavyweights. As with Saudi Arabia in OPEC, those with excess capacity, which if withdrawn would have more than localised impact, would be key players in any gas cartel:

  • While Algeria is the proposer, Qatar, with its huge LNG capacity, needs to be brought on board for the GECF to be successful. However, Qatar has significant international oil company participation in its LNG business, and fears that restricting output might damage future investment prospects.
  • Indonesian LNG already is underperforming, so Malaysia, Nigeria and Algeria, at least, also would be required to form a cohesive LNG grouping.
  • Russian support would be critical, as it would have to agree to curtail spot pipeline sales, or at least not undermine fellow GECF members acting in the LNG market.