In the beginning of 2007, the idea to establish a gas cartel in the manner of OPEC was brought to the table again. The proposition to the Secreatry of the Russian Security Council Igor Ivanov was presented in January by Ali Khamenei, the Supreme Leader of Iran. The idea to establish an institutional cover for gas producers is not new, and its main and first representative is the Russian President Putin. Already in 2002, he proposed the creation of an alliance of Central Asian gas producers to Saparmurat Niyazov, the President of Turkmenistan. However, the idea has not met positive response at that time.

Despite that the idea remains in the minds of the Russian politicians. According to a Financial Times article from November, 2006, there is a secret report of the NATO experts stating that Russia, Iran, Libya, Qatar, Algeria and the Central Asian states consider creation of a pricing cartel to increase their income by uniting the gas supplies to Europe and by uniting the liquefied natural gas (LNG) supplies to the world market. (1) (2) (3)

In relation to such statements, it is necessary to focus on the intensity of proposed cooperation, as the statements of the Iranian representative concerning the cartel are merely politically motivated with a low possibility of success; on the other hand, the memorandum of cooperation between Russia and Algeria is a practical step towards rapprochement of the two countries, which yet does not have to mean automatic institutional covering even if it does build certain basis for the future.  The problem of the supplies to Europe is the fact that their vast majority comes from three suppliers: state enterprises Gazprom, Statoil and Sonatrach. In this case an agreement between only two of them can be treated as a cartel agreement; however, this follows from the specific character of the supplies to Europe.

At the end of the year Russia and Algeria signed a memorandum of understanding, which includes prospects of bilateral mining and energy cooperation. They also signed contracts on bilateral fields development, cooperation in power generating, energy effeciency and energy saving.

Russia and Algeria are ideal partners, because they do not compete on the European market directly, but their deliveries – either via pipelines or LNG – cover most of Europe. Their deliveries are divided geographically: Algeria supplies gas mainly to Southern Europe, Russian supplies are directed mainly to Central and Nothern Europe. If the cooperation begins, it will be restricted to join geological exploration at first. Gazprom also hopes for Algerian help to enter southern European markets – Spain, Portugal and southern Italy. In exchange, it can offer Northern Europe, where Gazprom has traditionally held strong positions. This could be done in the form of goods exchange operations, when Gazprom would supply gas under Sonatrach’s contract in the north and receive the same amount of gas for its supply in the south. This will inevitably require coordination in marketing and price setting. (4)

As for the idea of the cartel, the questions emerging as consequential ones are the questions of technical and political significance, as well as of efficiency for individual countries and their mining companies.

Natural gas market is not dynamic, global and liquid (5) as oil market. A cartel can exist efficiently in an environment of total liquidity, therefore also OPEC is able to manipulate the market mainly by means of decreasing mining quotas, although their fulfillemnt is questionable – however, this is not a subject of the research. Russia as a dominant player in the potentional cartel would not be interested in stating mining quotas, which would primarily restrict them. For Russia, this kind of development would be profitable only in case if they were not able to fulfill the international contracts due to lack of gas, so by limiting the production or export they would not lose their face in the eyes of customers. Despite the fact that long-term prospects of mining are not very positive for Gazprom, since the demand increases more strongly than adding new mining capacities, this scenario is rather improbable.

Gas market is also based on long-term contracts with an appendix „take or pay”, where the price of gas is already settled. Even the LNG supplies, more elastic than gas pipelines, are so far settled as long-term contracts, which is to be changed in the future, when the number of terminals, suppliers and customers increases.

Recently, the strongest initiator of the cartel has been Iran. Its supplies are the second largest in the world, but only a minimal part is exported to Turkey, which does not essentially need the gas anyway. Therefore its contribution to the cartel would be questionable. Saudi Arabia is in a similar situation, because it does not export any amount of gas. That is why at present the cartel would not be beneficial for Gazprom from the economic point of view, as the countries do not compete it on the European market. (6)

Political reasons for the creation of the cartel are not positive either. Due to its nuclear program, the UN imposed sanctions on Iran and from the point of view of Russia the country is their biggest potentional rival on the EU market. The EU wants ot get to Iran`s supplies, and therefore tries to assert the pipeline routes that they could link up in the future. Russia far-sightedly supports the Iranian nuclear ambitions: Russian exporters profit from that on the one hand,  on the other it keeps the sanctions preventing development of gas activities of the country. From this point of view, Russia is not such an ally of Teheran as it seems to be. (7) Still the fact is, that Iranian gas will sooner or later enter the European market

The EU tries to achieve a liquid gas market in the manner of oil trade that would include spot trade, swap operations (8) and an end to long-term contracts. It also endeavours in joint policy, where the Union would speak unisono. There is business logic hidden under those propositions, but it creates the basis for creation of the cartel of suppliers.

This course is not positive for Russia, which on the contrary wants bilateral agreements with individual countries and calls for keeping lon-term contracts. In case of assertion of short-term contracts, the pricing cartel would be beneficial for Russia; but only with the countries that are important players on the EU market.

The Russian strategy is more successful, its most apparent demonstrations are the Nord Stream gas pipeline agreed with Germany and the plan to extend the Blue Stream gas pipeline, where Hungary plays the main role. A natural reaction to the creation of joint strategy of customers is the effort to coordinate producers. The Russian side proceeds from this point of view and thus it legitimizes their considerations of the cartel. The Nabucco project, suggested by the EU, fits into the concept of diversification of import routes as well as of gas suppliers, it is aimed directly against exessive dependance on Russia and – from the Russian point of view – treated against Gazprom.

Thus at the end of 2006 and in the beginning of 2007, events occured that revealed the Russian strategy towards customers, especially towards the EU. The strategy includes three main elements – disturbing the consensus within the EU, gaining influence over the key countries and preventing further enlargement of the EU and NATO. (9)

In the concept fits also the contract concerning construction of the Burgas – Alexandroupolis pipeline, which will bypass the Bosporus and Dardanelles straits, weaken the position of Turkey and in which the Russian side will have the majority – 51 %. The primary targets of the Russian policy become Bulgaria and Hungary, and Gazprom gains influence on the energy infrastructure also in Greece.

In exchange for supporting the Blue Stream gas pipeline extension, Hungary was promised to become a European hub of its and Caspian supplies to Europe. Further benefits follow from this position, especially financial profits, because it automatically means construction of underground tanks in the country, some of which are already owned by Gazprom. Hungary prefers the Russian project despite the fact that the EU as well as the USA strongly support the Nabucco project. Russia is trying to prevent transport of Caspian raw materials through the countries it does not control. By extending the Blue Stream gas pipeline it will put off construction of the Trans-Caspian gas pipeline, which would transport gas from Kazakhstan and Turkmenistan to Azerbaijan and further to Turkish Erzurum, because also Caspian gas would be transported via the Russian route. (10)

Russia is also active and successful in gaining mining concessions in cooperation with local companies in Central Asian countries; Russia subsequently agrees on a price profitable for the countries to buy gas, and thus it decreases space for trasport via alternative routes outside the Russian territory. (11)

The development apparent in the EU and related to the future appearance of the energy sector is correct. However, its success elicits and in the future will further elicit  anti-reactions as a call for coordination of the gas miners. The cartel is an impracticable idea in the near future. In the next few years European supplies can be in a certain way influenced by the cooperation of Algeria and Russia, which is so far fresh, thus we should wait for actual steps. By means of its realization Gazprom can more easily reach also the countries in Africa, where a Libyan company is already active in geological exploration and mining. Here it will soon run into the interests of China, which initiates projects to ensure its energy needs in this very region.  Rather than focusing on the cartel, in the future Russia will focus more on the Central Asian countries, whose production is seen by the EU as its future complementary source and which Kremel will try to gain stronger control over so they do not compete with Russia, but to use them for its own profit.

The gas producing countries already have their platform on which they meet. It resembles rather informal meetings, where the participating states only exchange their experience. The nearest meeting takes place in April 2007 in Qatar and it will be the outcome of the meeting to tell us more about the future efforts to create an institutional framework covering natural gas producers.

2.) Tomberg, I.: Gas OPEC: economic advantages and political drawbacks, 01.02.2007, RIA Novosti, http://en.rian.ru/analysis/20070201/60049415.html

3.) Reuters,: NATO report says Russia aims to form a gas cartel, http://www.iht.com/articles/2006/11/14/news/nato.php

4.) Tomberg, I.: Cartel ideology in gas sector feeds on consumer fear, 26.01.2007, RIA Novosti, http://en.rian.ru/analysis/20070126/59735451.html

5.) Here liquidity means absence of spot and swap operations, as well as small amount of terminals able to process the LNG gas transported in tankers from any geographical region. As for oil, these dificulties have already  been overcome: oil products exchange is established, swap operations  function and a number of ports are able to accept large capacity tankers.

6.) Energy jihad, 30.01.2007, http://www.kommersant.com/p737992/r_1/Iran_Gas_OPEC/

7.) Bower, D.: Who needs a gas cartel? http://www.russiaprofile.org/page.php?pageid=International&articleid=1359

8.) Spot trading represents the meeting points of natural gas offer and
demand; based on this, equilibrium market price is settled. These spots are  hubs, in Europe e.g. Zeebrugge, Bunde and TTF in the Netherlands. Swap  operations are based on exchanging volume of supplies between suppliers  (e.g. swap operations between Gazprom and Sonatrach would allow to deliver  Algerian gas under Russian contract to Spain and Russian gas under Algerian  contract to Poland).

9.) Bugajski, J.: Influence far abroad, 23.03.2007, The Moscow Times, http://www.themoscowtimes.com/stories/2007/03/23/006.html

10.) Cohen, A.: Diplomacy by other means, 22.03.2007, http://www.russiaprofile.org/page.php?pageid=Business&articleid=
Diplomacy_by_Other_Means_1174658160

11.) Gas relief, 29.05.2006, http://www.kommersant.com/page.asp?idr=529&id=677269