Going Nowhere – Russia is Unlikely to Unite with the Middle East in a GOPEC

About a year ago, the international media buzzed with talk about the idea of countries such as Russia, Algeria and Iran forming a cartel for natural gas along the lines of the Organization of Petroleum Exporting Countries (OPEC).

To people in the West with long memories, this threat of a so-called gas OPEC, or GOPEC, conjured up visions of the early 1970s, when the Arab countries put pressure on the West in retaliation for its support of Israel by increasing oil prices by some 400 percent, ushering in an era of stagflation in the developed economies.

So it was hardly surprising that the United States, various European countries, the EU and NATO were quick to point out that GOPEC was a bad idea with major implications for energy security.

The fears were compounded by the “gas wars,” during which Russia cut off supplies to Ukraine for non-payment, causing gas shortages in the European Union, as well as signs of a “resurgent Russia” exemplified by Moscow’s increasingly assertive foreign policy, particularly in the Middle East.

But although people like Russian President Vladimir Putin and Iranian Supreme Leader Ayatollah Ali Khamenei were among the most vocal advocates of GOPEC, it can hardly play a major role in Russia’s Middle East policy.

In fact, the risk GOPEC poses to energy security in the shortand medium-terms has more to do with Western fears based on a false analogy with OPEC, even though Russia and the Middle Eastern countries of Iran, Iraq and Qatar do indeed hold much of the world’s natural gas reserves.

Despite Putin’s statement that GOPEC was “worth considering,” Russian Minister of Industry and Energy Viktor Khristenko expressed his doubts about the viability of such an organization, as did other ministers and experts from the gas-producing countries themselves.

And at the April 2007 meeting in Doha of the Gas Exporting Countries Forum (GECF)—an organization that was set up in 2000 and is seen by many as a forerunner of GOPEC—Russia itself refused to push for a formal organization.

Instead, under Russia’s initiative, a permanent high-level secretariat was set up at Doha to research gas pricing and develop methodologies using widely used gas pricing models.

The failure to establish GOPEC as a formal organization is one reason why the topic has almost disappeared from the headlines. But a more fundamental important reason lies in the very different nature of the oil and gas markets.

GOPEC vs. OPEC

Today, OPEC claims that its member countries “coordinate their oil production policies in order to help stabilize the oil market and to help oil producers achieve a reasonable rate of return on their investments. This policy is also designed to ensure that oil consumers continue to receive stable supplies of oil.”

In other words, sellers also need buyers, and countries using cutting gas supplies or increasing prices for political reasons could well repeat the sad experience of OPEC. In the global recession that followed the oil sanctions of the early 1970s, it was the rest of the world that suffered most as the price of commodities fell and the Western manufactured goods and services they wanted became increasingly expensive due to inflation—a long-term trend that has in any event been observable since the 19th century.

The history of OPEC has also shown that “deal breakers” are all too frequent. Saudi Arabia has not always been willing to follow other members in reducing production to increase prices, while countries often exceed their quotas.

In any event, there is no spot market in gas, which is normally supplied on long-term contracts, often lasting 25 to 30 years, making the market much more rigid than that for oil. Any spot market in gas would also have to be very liquid for sellers to exercise real control over export prices and volumes.

And whereas the oil market is global, gas is much more regional and local, and is fragmented between middlemen operating gas infrastructure, large state and privately-owned utilities, national governments and large final consumers. Each of these searches for the best deal it can get from numerous available options.

The fragmented nature of the gas market means that deal breaking would be much more common, rendering a potential GOPEC very ineffective as individual members pursue their own commercial, and perhaps political, interests.

An indication of this is the relationship between Russia and Algeria. Gazprom was unable to acquire a stake in Sonatrach, the Algerian state-owned natural gas monopoly, during President Putin’s visit in March 2006, which was cut short as a result and lasted only six hours as opposed to the scheduled two days.

Gazprom signed memoranda of understanding with Algeria in 2006 and 2007, but Russia and Algeria do not have any other ready export markets besides the European Union. Other options, such as exporting gas to East Asia, for example, will not be viable for years simply because the infrastructure does not yet exist. Besides, both Russia and Algeria need Western money and technology to develop their own economies, and Europe will remain Russia’s best customer for a long time to come.

In addition, Algeria and Russia have different foreign policy aims towards the EU, which will always limit the potential for cooperation through a GOPEC.

Similar arguments apply to Iran, which seems far keener on pointless anti-Western rhetoric than its own economic and social development and is, therefore, more interested in GOPEC.

So while Russia might indulge in anti-Western rhetoric now and again, it has not pushed for the formation of GOPEC, at least publicly, and in contrast to the Soviet Union, does not offer Middle Eastern countries a real competing anti-Western ideology.

Today Russia’s foreign policy, including towards the Middle East, is based more on commercial interests, which explains to a large extent its energy cooperation with Israel, as well as military cooperation with Syria, for example.

Over the long term, the creation of GOPEC could become more likely as the situation changes and the gas market undergoes globalization. But this depends to a great extent on liquid natural gas (LNG), which can be traded and shipped more like oil in supertankers. But even if LNG’s share of global gas consumption tripled from present levels, it would still only be about 21 percent of world gas output—far below the share held by OPEC at various times.

Even if GOPEC does emerge at some point, its impact on the West is likely to be less serious than many think. The lesson from OPEC is that even if a gas cartel does emerge, it is likely to be torn by internal divisions as countries pursue their own interests, whether in the commercial or foreign policy sphere, making coordination and concerted action difficult, if not impossible.

Special to Russia Profile, an online and monthly print magazine dedicated to Russia and published jointly by RIA-Novosti and Independent Media, Moscow.

Ian Pryde is the president of Eurasia Strategy & Communications, a Moscow-based consulting firm.

 

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