The Gas Cartel Troika

On October 21, with oil prices falling below $69 a barrel on fears of a world-wide recession, three countries possessing over 50 percent of the World’s natural gas reserves agreed to the creation of a semi cartel known as the “Gas Troika.”

Meeting in Tehran, Russia, Iran, and Qatar agreed to hold regular meetings in order to discuss “key issues of gas market development,” according to a statement by Alexei Miller, the head of Russia’s state-owned gas monopoly Gazprom (Moscow Times, October 22). "We have a common vision of the goals of the forum and the need to transform it into a permanent organization as quickly as possible to serve the goals of stable and reliable energy supplies in the world," the statement said.

Some gas analysts were quick to point out that Gazprom stood to gain the most in such a “Troika” and therefore agreed to a more or less permanent cartel-like arrangement. With oil prices collapsing; Gazprom’s debt increasing, and refinancing part of its debt looming on the horizon, Miller and the Kremlin are worried that world gas prices will drop in 2009 and Gazprom as well as the Russian budget will be caught in an ever-tightening vise.

In 2008 Gazprom’s profit was a record $30 billion. If oil remains at $70 a barrel in 2009, the gas monopoly’s profits will shrink by $3 to $17 billion, Mikhail Korchemkin, head of East European Gas Analysis, told the daily Kommersant on October 22. Such a scenario could have a devastating impact given that Gazprom accounts for over 20 percent of the Russian budget.

But can a cartel influence the price of gas? Iran has the world’s second largest gas reserves but is a relatively minor exporter, selling primarily to Turkey. Qatar deals mostly in LNG, the price of which is not linked to pipeline supplied gas. If Qatar were to limit sales to prop up prices, its customers would soon turn to Algeria, Nigeria, and other major LNG producers, Korchemkin wrote in Vedomosti on October 21.

Russia would also be unable to cut back on gas production in order to maintain high prices without endangering its long term (10 to 30 year) contracts with European customers.

It is also no secret that the main proponent of a “Gas OPEC” has been Iran. During the Tehran meeting, Iranian Oil Minister Qolam Hosein Nozari told a press conference that "There is a demand to form this gas OPEC and there is a consensus to set up a gas OPEC." Miller, however, avoided using the term “gas OPEC” and stressed that the “Troika” would review projects such as exploration, refining, and sales. In the past Gazprom has played down the notion of a gas cartel calling the idea “not feasible,” although Vladimir Putin had called it “interesting.”

Iran apparently would like to force its more politicized views on its “Troika” partners in order to pressure Europeans to invest in its gas industry. Earlier this year, the French energy giant Total withdrew from an agreement to develop the giant South Pars gas field. By waving the red flag of a cartel, the Iranians could well be hoping to scare the Europeans into breaking with the United States on the question of the UN boycott.

If crude oil prices continue to fall in 2009, the biggest winners in the former Soviet Union will be Ukraine and Belarus. Ukraine is presently faced with paying up to $350 per 1,000 cubic meters for Central Asian gas. If gas prices collapse in mid-2009, the price for Ukraine (depending on how the contract is formulated) could fall to about $200 per 1,000 cubic meters.

It appears that the recently created “Gas Troika” is more of a toothless pipe dream than a cartel, which will not help save Gazprom from the consequences of a world-wide recession. Gazprom and its affiliated companies have $55 billion in outstanding bonds and loans. The company announced plans earlier this year to spend some $30 billion to develop new gas fields in order to maintain production as output from its mature fields in Western Siberia steadily decreases and domestic consumption increases.

If the credit markets continue tightening and demand for gas in Europe slackens off, Gazprom might not have to invest $30 billion into new fields, but it could well take a major hit on sharply decreased revenue. A “Gas Troika” will not come to Russia’s rescue, and Putin’s gas weapon might lose much of its former clout.