Question: What happens when you combine a ruthless former superpower with one of the Axis of Evil’s most dangerous members and the world’s largest producer of LNG? Good news is not the answer.
According to the BP Statistical Review of World Energy 2008, Russia Iran and Qatar control 60% of the world’s gas reserves. An OPEC-like cartel may not have the same influence on gas as on oil, due to reasons explained below, but the implications remain distressing.
Gazprom Deputy Chairman Alexei Miller said yesterday, ”We are united by the world’s largest gas reserves, [and] common strategic interests”. Those strategic interests in full:
- Gazprom supplies 25% of Europe’s natural gas through pipelines running West.
- Qatar sends megashipments of LNG to China via tankers.
- Iran has a prime location in the Middle East and substantial reserves but a lack of infrastructure.
Separately, each country has weaknesses. Europe wants to decrease its independence on Gazprom by attracting other suppliers, countries are hesitant to deal with Iran due to disapproval by America, and Qatar’s shipping partners require long term contracts to justify the high costs of LNG processing facilities.
Together, though!
With dwindling North Sea reserves, Europe will have few alternatives to importing from the big three. The Nabucco pipeline was considered the last alternative to Gazprom’s South Stream pipeline providing gas to Germany and Italy. Who was going to build Nabucco? Iran. Now the ‘G3′ may control both. Iran will have the influence and supply to override American ill will and Qatar will find more buyers as the costs of LNG facilities decrease from economies of scale. Combined, the G3 become a global supergroup with large supplies and the logistics to exploit them.
The European Commission has spoken out against the group, spokesman Ferran Tarradellas Espuny said ”The European commission feels that energy supplies have to be sold in a free market,”. The statement, though will intentioned, reeks of hypocrisy. The Common Agricultural Policy (CAP) takes up 62% of the European Union’s budget and serves to impose price protection, import tariffs and force quota’s on imported goods. Why energy must be sold in a free market while food is not is a question better left to bureaucrats.
However, hope is not lost. Even if G3 formed a cartel, their ability to influence prices globally would be limited due to transportation. Unlike oil, which can be shipped anywhere by tanker, Steve Mufson at the Washington Post explains that when large LNG facilities are built they’re done with long term contracts locked in. Thus prices are not as easily affected.
The pressure is on European and global leaders to prevent creation of an oligopoly. Negotiations should begin with G3 while oil and gas prices are low, giving producers less influence. Failing that, Mufson puts it best when he says: diversify, diversify, diversify.
