An Opec for Gas in the Pipeline

Michael Richardson (Visiting Senior Research Fellow at the Institute of Southeast Asian Studies in Singapore)

Demand for natural gas is rising rapidly in Asia and the west. The major producers of this low-polluting, increasingly valuable energy resource will meet in Qatar next month to discuss forming an alliance - possibly similar to the Opec oil producers' cartel.

Such talk worries established Asian gas importers like Japan and emerging mega users like China. They could face bigger bills in an international market in which exporters manage output to control prices.

Oil remains vital to the global economy, and the leading Asian economies are heavily dependent on its import to sustain growth. But, for an expanding swathe in Asia - from India through Singapore and Hong Kong to Taiwan, mainland China, Japan and South Korea - gas is now the energy of choice.

It is the cleanest-burning fossil fuel, producing fewer harmful pollutants and global-warming emissions than either oil or coal. Europe, too, is a big gas market. East Asia and Europe, two of the world's largest energy consuming regions, face a stark geopolitical reality: other parts of the globe - mainly the Middle East, Russia, Central Asia and West Africa - possess the bulk of the world's conventional fossil fuel resources.

The US, the biggest energy consumer of all, still gets most of its oil and gas from its own hemisphere, but its dependence on foreign oil and gas is rising, too.

The major gas producers and exporters in the Gas Exporting Countries Forum, meeting in Qatar next month, account for about 73 per cent of the world's known reserves and just over 40 per cent of production. Russia, Iran and Qatar - which between them have nearly 56 per cent of all proven gas reserves - have been leading the push for an alliance. Russian President Vladimir Putin, whose use of energy for political leverage has alarmed Europe, says the proposal for a gas version of Opec is an interesting idea.

But many obstacles stand in its way. The Gas Exporting Countries Forum was founded in 2001 by 15 exporters, but has achieved little. Many of the exporters do not appear to have much in common, and may well compete in future. For example, Qatar is committed to ship huge amounts of liquefied natural gas to Japan, South Korea and India. Meanwhile, Russia recently started exports of LNG to India, and is building pipelines to supply gas to China, Japan and other parts of Asia.

Opec can influence oil prices because crude is sold on a spot market - for cash and immediate delivery. Any output cuts are felt quickly. By contrast, gas is sold to Asia and Europe mainly through long-term contracts of up to 25 years. Suppliers and buyers agree to prices linked to the cost of oil.

China and India have used their huge demand potential to bargain for favourable long-term pricing. There is concern among gas exporters that other Asian buyers, including Japanese and South Korean power generators, will seek similar pricing when some of their long-term contracts end in the next few years.

Despite this, Indonesia - the world's leading LNG exporter until overtaken recently by Qatar - is sceptical about a gas producers' alliance. It is significant, too, that Russia has never joined Opec - evidently because it does not want to be bound by the group's quotas.

(Originally appeared in the March 9, 2007 issue of South China Morning Post in Hong Kong, reproduced here with permission.)