Sam's Exchange: The Gas Gang

Russia, Iran and Qatar: What could these disparate entities possibly have in common? Gas, of course, and lots of it. Lots and lots and lots, actually, as these three countries between them account for more than 50% of the world’s estimated gas reserves.

Russia, Iran and Qatar: What could these disparate entities possibly have in common? Gas, of course, and lots of it. Lots and lots and lots, actually, as these three countries between them account for more than 50% of the world’s estimated gas reserves. They are also the main troika in the Gas Exporting Countries Forum (GECF), of which there are 11 members. This particular ‘gas gang’ was set up in Iran in 2001, given a charter in Moscow in 2008 and a headquarters domiciled in Doha, Qatar, in 2009. The idea underpinning this gang is that increased demand for liquefied natural gas (LNG) would drive supply-side efficiencies, value-added co-operation between producer nations, and that new markets would deliver increased energy security and price stability. This said, the GECF is experiencing its first real test of character: will its individual members turn their backs on each other, and attempt to steal unilateral market share, or will they embrace economic and political interdependence and create a market that is equitably divided and better for all?

The emergence of the GECF was a natural response by LNG producers to drive the supply-side efficiencies required to meet increasing demand. However, the price of LNG took a battering in 2009 and 2010. The surge of Shale Gas (a black or dark brown shale containing hydrocarbons that yield petroleum by distillation) on offer in the USA, has meant that LNG supplies to that country have been diverted to Europe, and crashed the market there. The biggest loser has been Russia’s state-owned gas behemoth, Gazprom, and the biggest diverter of LNG to Europe has been Qatar. Iran is being kept on the bench by USA-driven economic sanctions. Although India and China are the most notable drivers of energy demand growth around the globe at the moment, producer nations must manage and co-ordinate their supply of LNG if they want price stability and control. In other words, Russia, Iran and Qatar must develop much greater political and economic interdependency if the GECF is to be successful in providing price stability and energy security for suppliers and consumers.

So, are there simmering tensions between the main protagonists  – Russia  and Qatar - or will the collapse in the price of LNG ignite the flame of success, and herald a new era of co-operation between Russia and the Middle East?  Sheikh Hamad bin Khalifa Al-Thani, the Emir of Qatar, travelled to Moscow in early November of this year to meet with Russia’s president, Dmitry Medvedev, its prime minister, Vladimir Putin, and senior officials from Gazprom. Russia has lost some of its grip on the European gas market over the last 18 months as a result of Qatar diverting US supply to Europe, and the prospect of a slow recovery in the industrialised nations means that LNG prices are not likely to rebound any time soon. So, in fact, decreased demand seems to be driving greater co-operation between producer nations, and is about to provide the first real test for the gas gang.

The recent price swings in LNG, mostly to the downside, have made market conditions for suppliers very difficult, and unpredictable, to say the least. Gas exporting countries have to switch from competition over gas markets to an alignment of their export strategies. Is this what Russia and Qatar discussed in early November in Moscow? Gazprom is reportedly looking into the potential of co-operation with Qatar in the latter’s offshore gas fields, while Russia and Qatar may team up and work together in Europe and Asia Pacific.

So what about Iran? It cannot, and should not, be ignored in this gas complex. Whatever Russia and Qatar might agree with regard to price and co-operation, they will have to include Iran at some level, for no other reason than Iran has enough gas to spoil any price or export co-ordination that Russia and Qatar might affect. Perhaps even more important, though, is the geo-political ramifications of the new gas market paradigm. In this respect, the deal that has been struck could not be clearer: Moscow provides Tehran political support in the UN over its right to continue with its nuclear programme, while Tehran is highly pro-active in helping Russia to expand its influence over gas supply from the Caspian. If Gazprom can pull gas supply in the broader Caspian region into its sphere of influence, then Russia could sit at the nexus of a key supply pool for both Europe and Asia. The gas market is new, and developing, and whilst price discovery has historically been linked to oil, this link is now beginning to break. Despite the near-term likelihood of low gas prices, the potential for gas powered electricity from North Africa to Europe, increasing demand from India and China, and consumers diversifying their energy sources into LNG to gain greater energy security, mean that the LNG market will continue to grow. Unless this growth occurs with supply side co-ordination, though, LNG price stability and energy security will be hard to achieve.

Where does the USA sit in this complex? It tends not to like cartel-like organisations and the GECF, with its potential for supply side co-ordination, and its stated desire of stabilising global gas prices, could be accused of behaving remarkably like a cartel. Far from thumbing its nose, however, the USA is looking for a pass to this new forum, in the hope of helping to achieve price stability. After all, it was the USA that sparked the collapse in LNG prices over the last 18 months with its supply of Shale Gas into its own domestic market. The problem with Shale gas, however, is that it is less environmentally friendly than LNG to produce, and more expensive.

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Global Markets are anything but integrated. What if we had a paradigm shift in the way we think, the way we actually do business with each other, between nations. Balanced global trade can only occur if we have transparent, accessible, efficient markets, with standardized contracts and on a standardized platform of global exchange. We are on the cusp of achieving this, although most people cannot see it. Sam’s Exchange aims to give its readers a clearer view and a platform for discussion. Markets, trade and economics are in fact nothing more than the result of our thoughts and actions expressed in numbers, not the reverse.

Sam Barden is CEO of SBI Markets General Trading LLC, a Dubai-registered trading and advisory company. Barden, 39, has worked in the global financial markets for more than 17 years in Europe, Russia and the Middle East. He has advised and executed strategic transactions for both the government and private sector, in particular in energy and commodity markets, advising various energy producing nations on their strategic market developments and interaction. He holds a degree in economics and finance from Victoria University, Melbourne, Australia.

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