The recent announcement by 15 gas-exporting states, including six of the world's top 10, revealing that they are to form a permanent organization intended to stabilize prices and monitor markets does not indicate that an OPEC-style gas cartel is any closer to becoming a reality. Still, Europe cannot afford to sit on its hands forever.
The Forum of Gas Exporting Countries (FGEC) should be viewed as a political vehicle in the present context given that the practical implementation of price-fixing measures is not possible in the current climate. This is the case for both structural and political reasons. In structural terms, the most important issue is that gas is not traded on a global market in the same way that oil is. Less than 15% of global gas demand is met through imported supplies, compared with around 60% of oil. There is no single worldwide gas market as yet, only regional markets with their own prices (albeit prices which informally track oil indexes).
Consequently, there is very little scope for prices to be influenced by external supply-side policies. Furthermore, most of the gas which is imported is done so via pipeline and this is priced according to long-term Gas Purchase Agreements (GPAs). This is true even of LNG supplies, where GPAs account for around 90% of trade. The practical upshot of this is that the global gas spot market is too small to be of any significance. Without a spot market, producers cannot hope to influence prices.
Political risk
The situation does not look set to change dramatically in the coming years. Despite extensive media coverage of growing LNG capacity, less than 20 million tonnes of new capacity were sanctioned in the last year in both the Atlantic and the Pacific basins, reflecting growing difficulties in signing off final investment decisions. This is due in no small part to the fact that operating in many of the gas producing countries entails serious political risks. Iran, Russia, Equatorial Guinea, Bolivia and Venezuela hardly present the most enticing institutional climates.
This, in turn, feeds into problems of cheating. OPEC (the Organization of the Petroleum Exporting Countries) itself struggles to keep its members from exceeding their output quota - the task would be far more difficult to achieve with gasPEC on account of the somewhat unstable nature of many of the regimes and also the spread of reserves across a high number of members. Even if gasPEC were able to police itself responsibly, there are still too many countries outside of the club whose reserves, although small proportionate to the FGEC members, are still enough to maintain elasticity of supply at the fringe.
The large spread also means there is no 'swing producer' among the FGEC. Although Russia, Iran and Qatar account for around 55% of the world's known reserves, no single state could dominate a potential gasPEC in the same way that Saudi Arabia does within OPEC, implying difficulties in decision-making. This situation also looks to remain unchanged for the near term: Russia and Iran both have large populations whose increasing domestic demand will limit excess capacity capabilities. Although Qatar could theoretically become the swing producer on account of its high reserve to population ratio, Doha has recently placed a moratorium on further export project developments in response to increased demand from the domestic petrochemical sector.
A stitch in time...
Why then should the EU move to act? The simple answer is that the situation will have changed by 2030. For one there will be fewer producers around the fringe offering alternative cushioning. In particular, Norway's and the North Sea's potential to meet European demand indigenously will be greatly reduced by then. Moreover, the political obstacles to co-operation between gas producers which exist today are largely a function of luck as opposed to planning. Given that Russia and Algeria are projected to account for 60% of Europe's supply in two decade's time, the potential for encirclement will be greatly enhanced. Moscow's naked ambitions for controlling Caspian supplies to Europe, and Gazprom's aggressive acquisition of upstream assets in North and West African states, reveals the weight which the Kremlin attaches to such geopolitical logic.
European leaders' course of action is clear. Empty statements proclaiming a vacant desire to diversify supply sources, or form a 'buyer's cartel', lack credibility and distract from the real solution: integration and liberalization of EU gas markets. A single EU gas market is simple to achieve and will bring stronger leverage than bilateral negotiations. The European Commission understands this but, unfortunately, individual governments seem less convinced. As is so often the way with EU politics, the biggest obstacle to meeting member states' objectives is intransigence among member states themselves.