Free Preview of Members-Only Content
To view the requested intelligence, you must be a Stratfor.com member.
Iranian Supreme Leader Ayatollah Ali Khamenei proposed Jan. 29 that Russia and Iran join forces to form a natural gas cartel similar to the Organization of the Petroleum Exporting Countries (OPEC). According to Khamenei's logic, the two states control half of the world's natural gas reserves, so organizing a new cartel would be a slam-dunk. Recent signs of cooperation between Russia and Algeria seemed to encourage thoughts that such a deal was in the works. But natural gas is an altogether different beast from oil -- and such a cartel simply is not in the cards.
The first and most significant reason natural gas cannot be cartelized is because it is illiquid -- both literally and figuratively. Natural gas is difficult to produce, store and transport. Unlike oil that can be put on a tanker and shipped anywhere in the world -- and then easily sold and resold -- natural gas is, well, a gas. It must be loaded into pipeline that goes from a specific buyer to a specific seller that lies along the pipeline route. Russian natural gas bound for Finland cannot suddenly be rerouted to Chile. Iranian crude oil can.
This all makes oil a more natural cartel commodity than natural gas. For example, should one country remove 10 percent of oil production from the world, bidding wars would start for control over the remaining 90 percent. However, should Canada reduce its natural gas output, its downstream consumers -- all in the United States -- would suffer a particularly acute panic attack, though the global market would barely notice.
There is, potentially, one exception to all this: liquefied natural gas (LNG). When natural gas is cooled to roughly minus 260 degrees, it becomes liquid -- literally and figuratively. Like oil, LNG can be pumped onto a tanker and sent wherever there is demand for it.
But two characteristics stop even LNG from being cartelized effectively. First, there is not a lot of LNG out there. Global LNG volumes total only about 6 percent to 7 percent of total natural gas use, so most LNG providers seek long-term contracts at fixed prices with specific consumers in order to ensure stability. Within the past five years this has loosened somewhat and there is now an LNG spot market, but it remains extremely small. The only countries that would be unduly impacted by an LNG cartel would be those whose natural gas comes almost exclusively in the form of LNG: Japan, South Korea and Taiwan. (China uses LNG as well, but natural gas only comprises about 4 percent of its energy needs, and only about 15 percent of that comes from LNG.)
Second, the LNG producers are not interested in forming a cartel. Safely cooling a potentially explosive gaseous material down to minus 260 degrees and shipping it across the planet is as difficult and expensive as it sounds. Liquefaction facilities cost several billion dollars each and are complex to operate. No energy company in the developing world has yet demonstrated the financial or technological ability to build one itself, and no developed world energy firm would seriously considering putting one in a country with a history of treating investors badly.
The world's LNG powers are not Russia, Venezuela, Iran or even Saudi Arabia, kingpin of OPEC. None of these countries has even a single LNG facility. (Russia does have one under construction, but only because originally it offered different terms -- which it recently changed -- to the developing foreign consortium.)
| Stratfor Members, please log in at the top left hand corner |
