Plan for ‘gas Opec’ could tighten Prime Minister Vladimir Putin’s grip on Europe’s gas supplies.
The Russian national anthem blared over the loudspeakers as dozens of oilmen and officials braved the freezing cold to watch the tanker come in, celebrating the launch of year-round oil production from Sakhalin-2, the largest oil and gas project in the world.
They congratulated themselves and stared out to the sea with pride.
Yet this month’s event will be dwarfed by one to come early next year, when the sprawling plant on the tip of Russia’s Far Eastern island of Sakhalin begins producing liquefied natural gas, or LNG, a relatively new form of energy.
The advent of LNG may one day allow gas exporting countries, who gathered in Moscow last week to create a new organisation, to act as a cartel along the lines of Opec, holding sway over prices and supply, and thus consumers around the world.
Today, most natural gas is pumped through pipelines. Storage is difficult and the price of gas is linked to the price of oil.
Producers, like Russia’s Gazprom, set prices within decades-long contracts, typically lasting 25 years.
LNG changes all that. To make LNG, the gas is frozen into a liquid form, allowing it to be stored in tanks and shipped around the world, just like oil. And priced just like oil, too.
So far, most members of the Gas Exporting Countries Forum, an informal grouping that was transformed into a proper organisation at a meeting in Moscow this week, deny any ambition to create a Gas OPEC.
The meeting itself was confused. Energy ministers from a dozen countries, accounting for around 60 per cent of the world’s gas export supply gathered at a grand Moscow hotel, presided over by Vladimir Putin, the Russian prime minister.
They agreed to set up a headquarters in Doha, Qatar the world’s main producer of LNG and start the search for a secretary general.
They also claimed to adopt a charter, but no signing ceremony was held and no details released.
The loudest grumbles on price setting came from the energy ministers of Iran and Venezuela. Venezuela does not export any gas yet. While Iran probably possesses the world’s second largest reserves, its wholly inefficient industry, starved of foreign investment and outside technical help by the sanctions imposed over its nuclear programme, make it a net importer of gas.
Meanwhile, energy ministers from Arab countries spent a lot of time arguing that action must first be taken to boost the oil price, urging Russia to join OPEC in production cuts.
The whole gathering seemed like much ado about nothing a token event designed to stir fears in the West rather than set up an organised group with a focused mission.
Yet that it is what many said when OPEC was first formed in the mid-1960s.
The Organisation of Petroleum Exporting Countries functioned haphazardly for years, before consolidating and showing its strength during the Yom Kippur War of 1973, when Saudi Arabia led an oil embargo on the West, imposed in retaliation for its support for Israel. This caused the oil price to quadruple and created serious shortages.
Fear over a “Gas OPEC” in the West stems largely from the fact that Russia has a record of using its energy exports as a political tool.
It is currently embroiled in a payment dispute with Ukraine, and has warned it will shut off the gas if Kiev fails to pay a bill for $2 billion by Dec 31. Because Ukraine is the conduit for gas supplies to Europe, other countries could be affected if the situation is not resolved.
This dispute, which has become an annual occurrence, largely comes down to money. But the first such spat came after Ukraine ushered in a Western-leaning government during the Orange Revolution in 2004. Gazprom, Russia’s state energy giant, sharply raised the price of its gas exports to Ukraine. Kiev was unable to pay and supplies were promptly cut off in midwinter, a step that also reduced the flow of gas to Europe, most of which travels through pipelines that cross Ukraine.
No-one is quite certain what happened earlier this year, when Russian oil supplies to the Czech Republic suddenly dropped the day after Prague agreed to host a radar station as part of America’s missile defence programme. Russia cited technical reasons. The Czech government was not so sure.
Now that oil prices have dropped below $50 a barrel, from a peak of $147 in mid-July, and gas prices have been brought down accordingly, producers have an interest in acting together, said Jonathan Stern, the head of gas research at the Oxford Institute for Energy Studies.
If the price falls even further, he said the “operating costs of these countries start to be threatened, and we would start to hear some people saying the current pricing mechanism is not appropriate”.
Mr Putin himself warned at the Moscow meeting that the world would not enjoy cheap gas for much longer. But the use of LNG of the kind that will be produced at Sakhalin-2 will make a gas cartel most feasible.
So far, LNG production only makes up around 10 per cent of the world’s gas supply, mainly in Asia, but also in North America, Britain and Spain. When Sakhalin-2 is up and running, that proportion will immediately rise to 16 per cent.
Many wondered what exactly was at stake in 2006, when Sakhalin-2 operator RoyalDutch Shell became the target of a state campaign accusing the project of massive environmental violations. At the time, the project was the only major one in Russia not to include a local partner. The environmental allegations disappeared once Gazprom bought a majority stake in December 2006.
Many thought it was just another case of resource nationalism, as the oil price continued its climb to record highs. But the Kremlin will also have registered the strategic importance of LNG.