Prospects for an OGEC (re-run)

Last week's meeting of the Gas Exporting Countries Forum in Qatar spurred all sorts of speculation about a future gas version of OPEC. I wrote about this possibility last fall, and my view hasn't really changed:

An interesting article in the Financial Times (subscription required) raises--and then partially demolishes--the idea that producers of natural gas might band together in a cartel similar to OPEC, in order to control the future supply and price of international gas. Concerns about Russia's intentions seem to be the main driver, here, and at least for Europe these are quite legitimate. But while the FT accurately skewers the notion of an OGEC from the perspective of the current international gas business, dominated as it is by long-term contracts for pipeline gas and LNG, I wonder if they lack the necessary imagination to see how it could be made to work in the future.

I'm no expert on the history of OPEC, but when it was formed in 1960, the international oil industry looked quite different from today's. Global trade in oil was dominated by the major oil companies--the so-called Seven Sisters of BP, Chevron, Esso (Exxon), Gulf, Mobil, Royal Dutch/Shell and Texaco. In their glory days, these companies controlled proprietary value chains from wellhead to gas station, not unlike today's LNG value chains. The founders of OPEC foresaw a different world, in which nations owned not only the resource in the ground, but also the means of getting it to market and capturing much of its value added. In this regard, they were more accurate forecasters of the future than the corporations whose assets they subsequently nationalized, and which 30 years later had merged down to four survivors in order to compete with the big national oil companies.

Several of the factors the FT cites as hurdles to forming an alliance of gas-producing countries seem either temporary or superficial. Although most LNG is tied up on long-term contracts, many of which are pegged to oil prices, the number of "spot" cargoes is on the rise, as producers de-bottleneck their facilities to squeeze out extra volumes, outside their contractual commitments, and as contract-holders learn to optimize the value of their offtake by taking advantage of arbitrage opportunities. At the same time, having to attract project investors may be less constraining than suggested. The majors have been frozen out of many of the best remaining oil prospects, and they are turning to LNG to create bookable reserves to fill the gap. As long as gas resource owners offer access, and on terms at least as generous as those available for oil, the integrated international companies will sign up.

The biggest impediment to the effectiveness of a future OGEC may be more fundamental. Oil still enjoys a near monopoly on the transportation fuel market, and biofuels and synfuels will be a long time breaking it. Gas has no comparable lock on its future markets. Current gas consumers and their suppliers are locked in an embrace that is tantamount to Mutual Assured Destruction, but when, for example, power plant developers doubt the future affordability or availability of gas, they build coal, wind, nuclear, or some other capacity instead, and the associated potential gas demand disappears. Gas left in the ground due to greed is nearly worthless. This difference may not rule out an eventual OGEC, but it implies that it should at least be more user friendly than OPEC has proved.