Gas exporters are trapped between dreams and reality

The GECF wants to raise gas prices, but faces a number of obstacles.

Energy ministers made two contradictory decisions at Oran, Algeria last Monday. The Gas Exporting Countries Forum (GECF) dropped an Algerian proposal to cut gas exports in a bid to support prices, but its 11 members also agreed gas prices were unfairly cheap and should be linked to the cost of oil. In order to raise prices above market levels, the GECF would have to restrict output. That is why its two announcements are so contradictory. Current US gas prices are about US$4 per million British thermal units (BTUs), but the energy-equivalent amount of oil would cost about $13 per million BTUs.

Markets are neither fair nor unfair. Current gas prices reflect supply and demand: gas is abundant, demand for it weak and substitutes easily available. The conditions for a successful gas cartel do not exist. The GECF states and many observers have confused their ownership of 73 per cent of global gas reserves with market power. Any effective cartel needs a high market share and an ability to deter new competitors. The GECF has only 42 per cent of global production and it also faces major alternative suppliers.

So an oil-equivalent price is a fantasy. Of all countries, Algeria should be wary of the dangers in reducing supply. From 1977 to 1983, it left the Transmed pipeline to Italy empty and stalled exports to the US over pricing disputes. Tarnishing Algeria as an unreliable supplier, this set its gas industry back by two decades. Russia similarly should beware of such behaviour. European attempts at diversification have been spurred by Moscow's interruption of supplies shipped through Ukraine. To triple prices would require severe production cuts but the GECF specifically ruled that out.

"This is not even on our radar screen," said Faisal al Suwaidi, the chief executive of Qatargas. "It's not something we will consider. If someone has to shut down I can assure you it will not be Qatar." And high prices encourage new gas supplies. Gas in the ground is abundant, quite conceivably more than 300 years worth at current consumption rates. The energy story of the decade is the boom in US production led by so-called unconventional gas from shale rocks. Alexander Medvedev, the deputy chief executive of Gazprom, clearly worried that a European repeat would further erode Russian export markets, described shale gas as dangerous.

New liquefied natural gas (LNG) exporters are emerging, from Angola and Yemen to Peru and Papua New Guinea. Australia, a large supplier to Asian markets, found enough gas last year to meet all Chinese demand for seven years. The Nabucco pipeline, Europe's alternative to Russian imports, has as major potential suppliers Azerbaijan, Turkmenistan and Iraq, none of them GECF members. The GECF faces competition even within its own ranks. Russia and Algeria are the incumbent suppliers to Europe, while Qatar is the new entrant. Qatar's huge reserves, which come with large volumes of valuable petroleum liquids, could be produced even at gas prices of zero.

Abdullah al Attiyah, the Qatari energy minister, has supported the calls for gas prices to be linked to oil, but this is probably political spin. The experienced minister knows that Qatar's interests lie in increasing its market share. Iran and Venezuela are among the most vocal GECF members but will be in the same position when and if they finally emerge as major exporters. And gas does not compete only with other gas. Oil, which is used mainly in transport, has today no effective substitute.

Gas is different. In its key market of electricity generation, half of new European capacity is renewable, mostly from the wind. Coal power, meanwhile, continues to grow rapidly in countries including China and India, while nuclear is also making a comeback. Gas costing $4 per million BTUs can out-compete these alternatives; gas at $13 cannot. Increased energy efficiency and sluggish economies will hold down demand growth in the mature markets of Europe and Japan, while North America is now largely self-sufficient.

If gas is to become the leading fossil fuel, it has to capture electricity generation in emerging Asian economies, but these countries cannot and will not pay very high prices. Rather than pursuing unreachable price goals, the GECF would do better to recognise realities. They have an almost inexhaustible supply of a cheap, clean fossil fuel, so their interest clearly lies in developing new markets, particularly by displacing coal and oil in Asian economies.

The high oil price makes it attractive to run vehicles on natural gas. Plants that make clean diesel and jet fuel from gas are coming on stream in Qatar and Nigeria. Building more of these expensive facilities would help to narrow the price differential, but the construction cost needs to be reduced by research and experience. Of course, promoting gas as a substitute for oil is complicated by the fact that six of the GECF members are OPEC members and a seventh, Russia, is a massive non-OPEC oil exporter.

Along with its contradictory pronouncements, this divergence in aims paints the GECF as a paper tiger rather than an effective cartel. If its members did manage to reduce output, they would be harming the long-term growth of the gas industry, and trading away their own future for doubtful short-run gains. Robin Mills is a Dubai-based energy economist and author of The Myth of the Oil Crisis [e-mail]