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Azerbaijan Facing Pressure from the Gas Cartel: The Heritage Foundation Analyst Ariel Cohen

Oil&Gas Materials 4 November 2008 11:51 (UTC +04:00)

Azerbaijan, Baku, 4 November / Trend / Ariel Cohen, political expert, Senior Research Fellow at The Heritage Foundation ( USA), specially for Trend :

Caspian gas producers will come under the increasing pressure from the troika of the founders of the natural gas cartel which has emerged stealthily and steadily over the last seven years. The governments in Baku, Ashgabat, Astana and Tashkent- the four smaller Eurasian gas exporters -- need to coordinate their policy to keep their sovereignty in the face of the growing clout by Moscow and Teheran. Western Europe and the United States need to support the Caspian gas countries' quest for independence and self-determination in the energy sphere.

On October 21 in Tehran, the Gas Exporting Countries' Forum (GECF) agreed to form a cartel. Besides Russia, Iran and Qatar, its members include Algeria, Bolivia, Brunei, Venezuela, Egypt, Indonesia, Libya, Malaysia, Nigeria, United Arab Emirates, Oman, Trinidad and Tobago, and Equatorial Guinea, say that they intend to form a yet-unnamed group to "coordinate gas policy."

The Group of Three (the "troika") will meet quarterly to coordinate and exercise control over close to two-thirds of the world's gas reserves and a quarter of all gas production. To compare, the Organization of Petroleum Exporting Countries (OPEC) controls more than three-quarters of the world's oil reserves but only 40 percent of global production.

Iran has the second largest gas reserves in the world after Russia and the second largest petroleum reserves in the world after Saudi Arabia.

Russia prefers to coordinate energy policies with Tehran rather than compete. The two countries recognize that together they control roughly 20 percent of the world's oil reserves and about half of global gas reserves, an immense geo-economic clout.

The United States should create a global coalition of energy consumers to oppose oil and gas cartels and to bring market principles to the natural gas industry. The U.S. Congress should also liberalize regulations to allow energy exploration in the Arctic, in the Rocky Mountains, and along the Pacific and Atlantic continental shelves, where natural gas is abundant, and expand cooperative gas ties with Canada.

Russia's Global Gas Strategy

In the tight global energy market, Russia clearly appreciates the economic and political bargaining power that its vast energy resources provide, as it is attempting to control energy exports from the New Independent States, such as Azerbaijan, Kazakhstan, Turkmenistan, and Uzbekistan. Russia also has strengthened its ties to Iran, Venezuela, Libya, and other major energy exporters. Recently, Moscow also launched a charm offensive on OPEC.

Thus, Russia is playing a complex and sophisticated game, one that is likely to maximize its advantage as the leading gas producer with the largest reserves on the planet as well as the largest oil exporter.

First, Russia's approach was gradualist. Moscow was never openly enthusiastic about a gas cartel but waited for an opportunity to launch one. Viktor Khristenko, Russia's former vice premier in charge of energy, rejected the idea just days before Putin called a gas OPEC "an interesting idea" during his February 2007 visit to Qatar. This past April at the Doha, Qatar, GECF meeting, Khristenko said, "We have not, do not have, and will not have the goal of organizing an alliance against anyone." This past week, however, Alexei Miller, chairman of Gazprom, announced the forming of "a big gas troika."

Careful examination of the official announcement after the Doha summit and media reports revealed that there was reason for concern last spring. Those concerns were validated on October 21 following the troika announcement.

Second, Russia's approach was stealthy. Instead of announcing the cartel prematurely and spooking consumer countries, it quietly put the component parts into place. At Doha, Russia initiated the creation of a "high level group" that will "research" the pricing of gas and develop methodologies using commonly accepted gas pricing models. Conveniently, Russia would staff this group. The recent announcement is significant as Gazprom would essentially become a market maker in the liquid natural gas (LNG) market and will define gas prices in Europe.

Third, until the Tehran declaration, Russia was able to appear reasonable. The price-regulating function of the GECF was supported by those Latin American countries that want to dispense with market principles, including competition, in the gas trade: Venezuela, Bolivia, and Argentina. Today, Iran (along with Venezuela) is applying its OPEC-honed instincts to the natural gas sector, demanding production cuts and price regulation. Nevertheless, Putin is credited with the idea of launching a cartel, and an unnamed high-ranking member of the Russian delegation to Doha told RIA Novosti in 2007 that as the gas market undergoes globalization , an organization such as a gas cartel will appear and is necessary.

When the new group was announced on October 21, Russian officials allowed Iran's petroleum minister, Gholamhossein Nozari, to call the agreement a "gas OPEC" without using such language themselves.

Fourth, and most importantly, a cartel by any other name is still a cartel. At the Doha meeting, members of the GECF agreed to discuss dividing the consumer markets between them, particularly in Europe, where Russia and Algeria are already major players and Iran may join in the next decade. For example, if Russia agrees not to challenge Algeria's position in Spain, Algeria will steer clear of Germany, where Gazprom is the major player. This will clearly challenge the European Union's energy liberalization and gas deregulation policy, which took effect on July 1.

The smaller Caspian gas producers need to step up their consultations with the European consumers and Washington in order to expand policy coordination on this strategic issue.

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