2008-10-22

Natural gas cartel would fail in bid for OPEC-like impact

It's not enough that oil prices are subject to the vague inner workings of the Organization of Petroleum Exporting countries, but if things go according to plan, a natural gas-focused organization is in the process of being established.

Key energy officials from Qatar, Russia and Iran met Tuesday to discuss this very subject. This is significant because these countries are the three largest in the world in terms of natural gas reserves.

The obvious question from this news is what impact could it have on natural gas markets, especially in North America.

The first is that natural gas has yet to become a global commodity, though it is slowly headed in that direction.

This means that any fears about an initiative like a natural gas cartel involving Russia and any number of producers based in the Middle East delaying the development of North American natural gas initiatives such as the Mackenzie Valley pipeline or the Alaska pipeline are unfounded.

And there are a good number of reasons for this.

Let's start with the fact that a global market for natural gas is tied to the development of liquefied natural gas capabilities around the world -- whether it's liquefaction or regasification. Those facilities, in addition to the tankers needed to transport the LNG, are not exactly cheap.

As Tristone Capital's Chris Theal points out, the only way the so-called LNG trains are built is if they are tied to 20-year contracts; without those long-term contracts, the financing doesn't happen.

"There is a structural aspect to LNG markets that doesn't exist with crude oil, which trades on the spot or forward-month basis. LNG, on the other hand, is underpinned by 20-year pricing agreements," said Theal, Tristone's managing director of research.

Companies with unallocated capacity have the ability to play off markets that happen to be willing to pay more for natural gas at certain times of the year, but that happens to be a small percentage of the global market.