Russia and Iran Discuss a Cartel For Natural Gas

February 6, 2007

Gas accounts for a growing share of global energy use, but the nations that produce most of it don't work together to influence markets. That's a stark contrast to the oil market, in which members of the Organization of Petroleum Exporting Countries manage output to keep prices at levels they favor.

During his annual news conference in the Kremlin yesterday, Russian President Vladimir Putin said "a gas OPEC is an interesting idea. We will think about it." His comment comes days after Iranian Supreme Leader Ayatollah Ali Khamenei publicly called on a visiting Kremlin official to establish a group of natural-gas producers similar to OPEC. Russia and Iran are the world's largest and second-largest holders of gas reserves, respectively.

While there are several reasons why a gas cartel isn't likely to work as well as OPEC has managed the oil markets, the talk has alarmed big gas consumers, particularly in Europe, which gets a quarter of its gas from Russia. A cartel would be less menacing economically in the short-term to the U.S., which still gets most of its gas within North America.

Still, over time, the market is becoming more internationally flexible as shipments of liquefied natural gas rise. U.S. imports of LNG have more than doubled since 2002, though they still account for a small fraction of gas consumption here. Other Western countries are seeing demand for the clean-burning fuel climb even as their home-grown supply of gas declines. These shifts have turned gas in the last few years from a humdrum commodity into a prized fuel increasingly subject to geopolitical spats.

Comparing gas prices is difficult because until recently, there hasn't been a global market for the fuel. Asian gas-delivery contracts have tended to be pegged to the price of crude oil, while in the U.S., spot gas prices are typically set by trading at a Louisiana pipeline hub. U.S. gas cost between $2 and $3 per thousand cubic feet in the 1990s, but has averaged more than twice that in recent years. A contract for the delivery of gas in March closed yesterday on the New York Mercantile Exchange at $7.54 per thousand cubic feet, up over the past few weeks due to the cold weather.

The prospect of Russia and Iran working together to influence markets can't be comforting for Western countries. While Russia doesn't have the same pariah status as Iran, Moscow has under Mr. Putin faced increasing criticism for using its vast energy riches as a diplomatic lever. Early last year, state-controlled gas giant OAO Gazprom cut off supplies of natural gas to neighboring Ukraine in a pricing dispute that briefly reduced the volumes delivered further down the pipeline in Europe.

Together Russia and Iran hold more than 40% of the world's known gas reserves, according to the BP Statistical Review of World Energy. Moscow has cultivated relations with Tehran in recent years, building a nuclear-power plant in Iran and last year selling it air-defense missiles. Moscow has also resisted efforts to increase