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. Last Updated: 07/27/2016

Debunking the Myth of a Looming Gas OPEC

When President Vladimir Putin said in response to a question at his annual news conference last week that the idea of a gas OPEC was "interesting," commentators around the world speculated about whether such a cartel could be around the corner.

Yet natural gas -- 90 percent of which is still exported through land-crossing pipelines under contracts that run 20 years or longer -- simply does not lend itself to the type of spot market necessary for a cartel to thrive, analysts say.

Putin is likely to discuss the issue during a three-day visit, beginning Sunday, to Saudi Arabia, Qatar and Jordan. Much of the speculation has centered on his talks in Qatar, the world's largest producer of liquefied natural gas, or LNG.

"A gas form of OPEC does not make a great deal of sense," said Ben Hollins, an analyst at energy consultancy Wood MacKenzie. "Oil and gas are traded in quite different ways."

Beyond that, analysts say, the time is neither right for gas producers to convene a cartel nor would it necessarily be in Russia's interests to join one.

"Cartels prosper when prices are low," said Jonathan Stern, head of gas research at the Oxford Institute and an expert on Russia. "When prices are high, cartels are weak because anyone can pretty much do what they like."

Russia, which has never taken any serious steps toward joining the Organization of Petroleum Exporting Countries, has profited from high oil prices hovering at between $50 and $60 per barrel while avoiding the obligations that being part of a cartel would bring, Stern noted.

Russia is by far the biggest producer of oil outside OPEC and last summer surpassed Saudi Arabia as the world's largest producer.

But its real strength lies in its reserves of natural gas, which at 28 percent of known global reserves are by far the largest. Iran comes in second with 16 percent, but with U.S.-led sanctions inhibiting much meaningful economic development or trade, it hardly exports any of that.

And most gas-producing countries already belong to a largely unknown producers' group, the Gas Exporting Countries Forum, or GECF. The group was founded in 2001 and its dozen members account for about 70 percent of global natural gas reserves. But the group has proved ineffectual -- meeting only sporadically and lacking key players such as Canada and Norway, analysts said. The group is due to meet in Doha in April.

Increased talk of a gas OPEC stems more from fear than anything else, analysts said.

"OPEC is an emotive term," said Stephen O'Sullivan, an oil and gas analyst at Deutsche UFG.

The idea of a gas OPEC conjures up images in Western capitals of consumers at the mercy of all-powerful producers, an axis of Middle Eastern and Russian interests capable of bringing consumers to their knees with a turn of the tap.

Europe began raising fears of a gas producers' cartel in the wake of Russia's dispute with Ukraine last year, when Russia shut off the gas to its neighbor to force it to accept a higher price. With 80 percent of the Russian gas exports to Europe passing through pipelines in Ukraine, European supply dipped sharply and officials across the continent began to wonder aloud about Russia's ability to be a reliable supplier. Those concerns were echoed during a similar dispute with Belarus last month.

Fears of a gas OPEC were also revived when Russia and Algeria, which provides about 10 percent of Europe's gas and is a founding member of the GECF, signed an energy-cooperation deal last month.

Yet several top Russian officials have said they would not be interested in forming or joining a gas cartel.

Industry and Energy Minister Viktor Khristenko this week called the idea "the product of a feverish fantasy."

Mikhail Margelov, chairman of the Foreign Affairs Committee in the Federation Council, also said this week: "It's extremely important for Russia to have the freedom to maneuver, so we are unlikely to join an OPEC for gas."

And Putin, in his annual news conference, said that while he would seek to continue coordinating actions between gas-producing countries, a formal cartel was not in the cards.

Other major players in the natural gas market -- and those with more experience with LNG -- have also come out against a cartel. Algeria, Qatar and Indonesia have all reacted coolly to the idea. The loudest calls for a gas OPEC, notably, have come from Iran.

With few international partners and an increasingly antagonistic relationship with Europe over its nuclear weapons program, the country could profit most from a formal grouping and the stoking of Western fears, analysts said.

Joseph Stanislaw, a senior energy adviser to Deloitte & Touche and co-founder of Cambridge Energy Research Associates, said the producers could cooperate in ways that did not involve fixing prices or controlling output, the typical actions of a cartel.

"The purpose could be to collect information and data, like a trade organization, which would be good for the market and for themselves," Stanislav said.

"Russia, Algeria and Iran have one thing in common -- reserves of natural gas. But they have very different political objectives, economic structures and different potential export markets," he said. "To move from the trade association concept to a price-controlling organization is a hard step to jump to."

And that is likely to remain true when LNG becomes a serious player in the gas market within the coming decade, he said.

LNG, natural gas that is cooled until it turns into a liquid form that can be shipped on tankers around the globe, is still tied to long-term contracts because of the capital commitment involved.

In Russia, Shell's flagship LNG project, Sakhalin-2, has already faced a cost overrun that doubled costs to $20 billion. Project operators must sign long-term supply contracts to get the funding to build the plants in the first place.

Yet Deutsche UFG's O'Sullivan noted that before OPEC became a major player during the 1973 Middle East crisis, the oil market was also dominated by bilateral, long-term contracts, as the gas market is today.

"Everyone thinks gas is regional and oil is global, but that is changing," he said, particularly because of the growth of LNG. "And they say that governments rely on long-term supply contracts, but that's what they said about the oil market before '73."