The recent meeting of the Gas Exporting Countries Forum (GECF) has again reignited fears that the organization will emerge as a gas OPEC. These fears have been further fuelled by plans to set up a price formula working group. However, according to independent market analyst Datamonitor (DTM.L), the ability of the GECF to emerge as a gas OPEC, at least in the short to medium term, remains limited.
Loosely defined grouping
During the recent meeting of the Gas Exporting Countries Forum (GECF), a loosely defined grouping of major gas producing nations, fears again emerged among consuming nations that the organization will evolve into a gas version of OPEC. These fears have been further enhanced by renewed rhetoric among some members that they are setting up a working group to examine price formula issues.
The GECF is an informally structured grouping of some of the world's leading gas producers, aimed at representing and promoting their collective interests. While membership has fluctuated since the group's formation in 2001, it currently consists of Algeria, Bolivia, Brunei, Egypt, Indonesia, Iran, Libya, Malaysia, Nigeria, Norway (although only as an observer), Oman, Qatar, Russia, Trinidad & Tobago, the United Arab Emirates and Venezuela. Together, these countries account for 73% of the world's gas reserves and 42% of production.
However, now, and at all of the meetings of the GECF held since its inauguration, the fears among gas-consuming nations of imminent cartelization or being held to ransom by gas-producing nations are both premature and an overreaction.
Disparate membership and differing goals
There are a multitude of reasons why the GECF is unlikely to evolve into a cartel, ranging from the existence of long-term rather than spot contracts in the gas market, through to the regional rather than global nature of the gas market, says Datamonitor energy and utilities director of research and analysis Andrew Hill. "One of the key factors conspiring against cartelization is the nature of the GECF organization and its disparate membership, both of which make cartelization a highly unlikely development."
Even if the GECF emerges as a formalized cartel, along the lines of that seen in the oil markets with OPEC, its ability to have any sustained or meaningful impact upon price remains minimal. As with OPEC, the disparate nature and agendas of its members will lead to major difficulties in agreeing production strategies and output quotas. Big producers such as Russia, which accounts for 22% of global gas production and 51% of GECF production, are unlikely to have sufficient motivation to hold back supply to boost prices because they make money on volume rather than on price. Similarly, Qatar has 14% of the world's gas reserves and 20% of those within the GECF. With a reserves to production ratio of over 800 years and an already well developed economy, Qatar has the luxury of being able to take a long-term strategic view to profit maximisation and its gas industry development rather than seeking short term profits, Hill says.
Conversely, smaller producers such as Libya and Bolivia are likely to be motivated more by keeping volumes low and prices high, to maximize short term returns from their smaller reserves bases.
"Without the agreement and cooperation of the bigger producers, the smaller members of the GECF would be unable to influence prices by controlling supply," Hill says.
The renewed pricing formula initiative should also not cause undue concern to consuming nations. Previous attempts to create a pricing formula have all been fruitless, and there is little to suggest that the renewed efforts currently being spearheaded by Russia will be successful.
Sensitivities among gas-consuming nations driven by the GECF meetings are again largely unfounded, Hill says. "Until market dynamics radically change, existing long-term supply contracts have expired and the elusive cohesion among GECF members is found, gas-consuming nations need not be overly concerned about the impact of what is likely to remain a debating forum rather than a cartel in waiting," he says. - Source: Datamonitor plc (DTM.L)
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