Supply-side reflections from Russia on energy security in the natural gas market.
Natural gas producers are seeking new measures to adopt these changes while also preserving their existing interests. For this purpose, they have come together under the umbrella of the Gas Exporting Countries Forum (GECF). Yet, not all of them share a similar vision of the future.
This became more obvious than before during the second summit of the GECF, which was held on July 1st in Moscow. The divergence between these countries' expectations exhibit differing dynamics, but there also exists a niche for cooperation and the exchange of future projections in order to achieve a more predictable market.
The GECF assumed a formal structure when it first convened in Moscow in 2008. Today, it includes 13 member states and four non-member observer states. In the preceding five years, the market has experienced profound developments and as a result the summit was quite lively. Nevertheless, the takeaway from the summit is that there are still significant barriers to these gas exporting countries acting together as a cartel.
What is the GECF and How Effective is it?
The Forum is rather loose when compared to the Organization of the Petroleum Exporting Countries (OPEC); it is essentially a platform where views are exchanged. The members of the Forum are the United Arab Emirates, Bolivia, Algeria, Equatorial Guinea, Iran, Qatar, Libya, Egypt, Nigeria, Oman, Russia, Trinidad and Tobago, and Venezuela. Iraq, Kazakhstan, the Netherlands, and Norway all have observer status. Member states own 70 percent of the world's natural gas reserves and account for 85 percent of Liquefied Natural Gas (LNG) production and 38 percent of pipeline-based trade. Of these countries, Iran, Qatar, and Russia stand out, as they together own 49 percent of the world's natural gas reserves. Considering these numbers, the fact that the GCEF brings the most important gas trading countries together in one platform makes it greatly important, even in spite of its lax structure.
The aims of the GECF are to "support the sovereign rights of member countries over their natural gas resources and their abilities to independently plan and manage the sustainable, efficient, and environmentally conscious development, use and conservation of natural gas resources for the benefit of their peoples". (1) Given these priorities, rather than becoming a structure in which member states act together, the Forum today is more of a platform for sharing experiences and predictions.
Russian President Vladimir Putin's statements at the recent meeting clearly indicate that the member states have no intention of becoming a cartel. (2) Until common denominators are developed within this already nonbinding structure, acting in unison remains out of the question. Certain political and economic discrepancies will also have to be overcome. Nonetheless, the statements of representatives at the second summit do not bode well for a cooperative atmosphere.
Examining the priorities of producer countries in light of the current state of the natural gas market brings the obstacles to such an atmosphere into focus. The most prominent issue is that the actors in the natural gas market follow different strategies depending on national characteristics. For instance, as representative cases we may observe the discrepancy between policies of Russia and Qatar.
Revenues extracted from Russian energy reserves, natural gas reserves in particular, constitute one of the main development strategies of Vladimir Putin. (3) For this purpose, converting Russia's Gazprom into an important actor, in both a political and economic sense, has been debated for an extended period of time and the policies implemented after 2000 coincide with this strategy.
It is no secret that Moscow uses energy as a political instrument, but it also sees energy as a means of balancing its budget, which covers a population of more than 140 million. Moscow therefore favors long-term naturalgas agreements and prefers to establish trade relations through pipelines. This form of trade provides a degree of predictability for Russian fiscal policy in the long run.
In fact, this preference is also evident in the data of the BP Statistical Review. In 2012, Russia exported about 93 percent of its natural gas via pipelines and only 7 percent as LNG. This proportion is in stark contrast to that of fellow Forum member Qatar, another heavyweight producer with a small population. Qatar is located in the Gulf and has no direct access to big consumers like Europe or the U.S. via pipelines. In 2012, 85 percent of Qatar's natural gas exports were in the form of LNG, with the rest exported via pipelines.
Looking at the data of other Forum states reveal similar disparities. The main reasons for the disparities between members stem from geographical and historical considerations. For Qatar, these circumstantial differences place the importance of developments in the spot market equal to that of long-term agreements. For Russia, they prompt the protection of long-term interests and the conditions of competition in the existing structure. Moreover, Gazprom's problems in the market can directly affect the internal balances in Russia-despite its demographic and geographic size--as the company's revenue plays an important role in subsidizing the country's social policies. Due to its geography and population, Qatar is better equipped to deal with fluctuations in the market.
In natural gas agreements, market oil prices are taken as an important indicator in determining the final price. This provides some basis of predictability for both the producer and the consumer. However, in the last decade, oil prices' tendency to rise has created considerable pressure in consumer markets. This pressure shapes consumer habits and has carried over into the natural gas trade.
Putin stated at the Forum on July 1st that he was worried about two issues related to the long-term natural gas trade. (4) The first issue is that the "take-or-pay" principle has recently faced certain legal challenges; and the second issue related to problems with long-term contracts being indexed to the U.S. dollar. Therefore, the rulings against Gazprom in the arbitration opened in Europe are disturbing for Moscow, the latest example being the case in which Gazprom lost to RWE. As a result, Gazprom, which suffered a loss of $1.3 billion, must revise its agreements by determining gas prices according to market prices. This development is an important blow to Russia's dominance over price determination.
Although member states reached a consensus about the oil-indexed prices in the Forum, the sustainability of this consensus depends on developments in the coming period. The U.S. shale gas revolution, which has been pushing Middle Eastern LNG into Russian-dominated markets, and long-term expectations of the U.S. becoming an important exporter have the potential to change the price-supply balance. In other words, expansion on the supply side will result in a more competitive market. It appears nearly impossible for Russia--which considers natural gas to be a political instrument and an important source of income for its budget--not to be affected.
Russia Tries to Adapt to the New Dynamics
Natural gas prices, which had steadily climbed along with oil prices in the last decade, have stabilized in the last couple years' time. One of the reasons for this relate to the new dynamics brought about by the 2008 financial crisis. On the other hand, with the incremental liberalization of the market in the European Union, Russia has begun to lose some ground on pricesetting in the European market--the most important market from Russia's perspective. In 2008, as a result of the increased competition in the market, Gazprom's market value fell from $360 billion to $78 billion. (5) All of these developments have already begun to worry Russia. As a result of these developments, Gazprom's monopoly over natural gas exports became a matter of controversy in Russia. To this end, "Russian lawmakers voted to end state-controlled OAO Gazprom's monopoly on exports of liquefied natural gas as competitors plan to build plants to produce the chilled fuel." (6)
The new change means that in a short period of time the Russian companies Rosneft and Novatek might begin competing with the Russian giant Gazprom in the international market. Led by one of Putin's closest allies, Igor Sechin, Rosneft's new strategy is to actively play its LNG card in the coming period. Consequently, we may soon see this company taking on an active and influential role in the Asia-Pacific and Mediterranean natural gas markets. Allowing competition in the natural gas market, Russia's new strategy resembles that of the Chinese, which formed a multilayered structure of global scale with its energy conglomerates SINOPEC, CNPC, and CNOOC.
In a sector traditionally shaped by individual actors on the supply side, we are witnessing a sea of change in which concerns about demand security are beginning to be voiced. While the emerging legal and economic dynamics on the demand side are worrying supply-side countries, they also necessitate new strategies. In this respect, not only should the shale gas revolution in the United States be followed closely, but so should the developments in the LNG sector as well.
*The Turkish version of this article was first published in the September 2013 issue of USAK's monthly journal, 'Analist'.
Hasan Selim OZERTEM (*)
(*) Director of the Center for Energy Security at USAK.
(1) GECF Mission, (http://www.gecf.org/aboutus/mission).
(2) Alexander Kolyandr, "Putin: No Plans to Create Gas Cartel", Wall Street Journal, 1 July 2013, (http://online.wsj.com/article/BT-CO-20130701-706596.html).
(3) Marshall I. Goldman, Putin, Power and the New Russia: Petrostate, (New York: Oxford University Press, 2008), p. 97.
(4) Vladimir Putin, "Speech at the Second Summit of Gas Exporting Countries Forum", President of Russia, 1 July 2013, (http://eng.kremlin.ru/transcripts/5665).
(5) Alexei Anishchuk & Katya Golubkova, "Putin Pushes Russian Agenda at Global Gas Summit", Reuters, 1 July 2013, (http://www.voanews.com/content/putin-pushes-russian-agenda-at-global-gas-summit/1693129.html).
(6) Jake Rudnitsky, "Gazprom Set to Lose LNG Export Monopoly as Lawmakers Pass Bill", Bloomberg, 22 November 2013, (http://www.bloomberg.com/news/2013-1122/gazprom-set-to-lose-lng-export-monopoly-as-lawmakers-pass-bill.html).
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|Author:||Ozertem, Hasan Selim|
|Publication:||USAK Yearbook of Politics and International Relations|
|Date:||Jan 1, 2013|
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