LONDON (ResourceInvestor.com) -- Russian President Vladimir Putin stated last week Russia is interested in the idea of an OPEC for gas producers. Although he also said that such an organisation would not attempt to be a price fixing cartel, as OPEC does, many observers will be sceptical given Russia’s propensity towards maintaining a politicised energy policy whilst concurrently denying that it does so.
Concern will perhaps be greatest in Western Europe, which increasingly relies on Russia gas supplies as the North Sea enters its twilight years. The decline of the North Sea is illustrated by the winding down of investment in new capacity by the Super Majors. Although a lot of North Sea exploration is being carried out by smaller companies, the fact is that pretty much all of the elephantine discoveries that are going to be made have been made, and it makes sense for the industry’s biggest players to chase opportunities in other places.
Hence, Europe has been looking outside of the North Sea for its gas, and in particular to Russia. But the problem with looking to Russia is its willingness to entertain ideas like an OPEC for gas producers, combined with a proclivity for showdowns with its neighbours over energy issues. The recent incident with Belarus is a case in point, even though it wasn’t quite as dramatic as the one with Ukraine in 2006. The lesson from both cases is that Russia isn’t easy to negotiate with on energy matters.
What might an alliance of gas exporters look like? Russia could try and bring in a host of major producers, including Algeria, Libya, Central Asian republics such as Turkmenistan and Uzbekistan, and perhaps even Iran. Coincidentally, Ayatollah Ali Khamenei, Iran’s supreme leader, has been reported as saying that Russia and Iran could set up just such an organisation.
Kazakhstan offers some hope to Europeans. The vast Central Asian country is big enough to act somewhat independently of Russia and has significant gas resources. It could also form a major part of a route for a gas pipeline from the Caspian region to Western Europe that bypasses Russian territory, weakening the Kremlin’s position. But Kazakhstan is closely allied with Russia, and Russia, naturally, is opposed to new pipeline routes that cut it out of the supply line.
Liquefied natural gas (LNG) offers a flexible remedy. Investment in LNG terminals and carrying capacity brings distant reserves, such as those in West Africa, into the equation for the long term. Advances in technology have lowered the cost of LNG transport and should facilitate an increase in its role in supplying Europe’s gas consumers.
Nuclear energy should also be part of the solution. Gas consumption could obviously be reduced by replacing gas fired power plants, which are quite common, with new nuclear plants of a capacity over and above that needed to replace those reaching the end of their design lives. Despite the need to secure adequate uranium supplies to enable such a policy, doing so would be no more challenging, and maybe less so, than maintaining secure gas supplies.
Overall though, we shouldn’t overestimate the difficulties that Russia’s pivotal role in supplying Europe’s gas represents. It isn’t in Russia’s interest to be too intransigent in its energy sales policy, but of course, it is obvious that Russia is in a strong position – and its negotiators know it. What we can see is that the uranium demand should see long term support from Western Europe, and that LNG represents an increasingly important means if supplying gas.
