What's new in production

	Vol. 229 No. 11
DAVID MICHAEL COHEN, PRODUCTION ENGINEERING EDITOR, DAVID.COHEN@WORLDOIL.COM

A gas OPEC, or just hot air?

This summer’s Russian invasion of Georgia, in response to that former Soviet republic’s attack on the breakaway region of South Ossetia, let loose a torrent of anti-Russian sentiment in the West not seen since the Cold War. Much of that rhetoric stemmed from fear that the fighting would damage the Baku-Tbilisi-Ceyhan (BTC) oil pipeline from the Caspian Sea to the Mediterranean, which Russia sees as a threat to its influence in the Caucasus.

If Russia were looking for a way to reduce tensions with the West in the wake of this little war, probably the last advice I would give them would be “Form an OPEC-style gas cartel with Iran.”

Yet the formation of just such an organization was announced late last month by the two nations along with Qatar-the three countries with the most gas, accounting for 57% of the world’s proved reserves. The announcement followed an unprecedented high-level Oct. 21 meeting in Tehran by the gas ministers of Iran and Qatar and Alexei Miller, CEO of Russia’s Gazprom, at which the three agreed to form an organization to coordinate gas export policy and foster cooperation on E&P projects. The group plans to finalize its structure and adopt a charter in Moscow on Nov. 18.

In fairness to Russia, they didn’t call the emerging organization a “gas OPEC.” That language came from Iran, whose every foreign policy move lately seems calculated according to the question, “What can we do to really cheese off the US?” In this respect the agreement is a huge success; it makes a mockery of US attempts to economically isolate Iran over the country’s alleged covert nuclear weapons program, and will probably provide President Mahmoud Ahmadinejad with a large diplomatic boost for his reelection campaign next year.

On the other hand, membership in a gas cartel can’t help but draw attention to the disconnect between Iran’s enormous undeveloped gas reserves and its claims that it must enrich uranium for “peaceful” electrical generation.

It was Iranian Oil Minister Gholamhossein Nozari who said following the Oct. 21 meeting that the three parties had reached “a consensus to set up a gas OPEC.” This is in line with Iran’s goals for the cartel, which are to set quotas for gas production and push prices up while damaging the US economy. Gazprom’s Miller shied away from such inflammatory language, calling the agreed-upon organization a “major gas troika … to give assurances over gas supply to the world.” Nevertheless, Russian officials have not exactly rejected the “gas OPEC” language, as they did vehemently last year, when the idea was floated by Iranian Supreme Leader Ali Khamenei. At that time, Sergey Chelpanov, deputy director general of Gazprom Export, was quick to respond, quite clearly, “There is no gas OPEC ... and no work is under way to set up such a body.” It seems Russia has warmed to the idea since then.

But is a global gas cartel even possible? As has been pointed out repeatedly since the meeting, there is no global gas market as there is with oil, simply because gas cannot travel globally with the same ease as oil. Gas requires constant pressure containment, so transportation usually requires a pipeline; this generally limits gas markets to a local scale. Liquefying gas allows it to be transported globally by specialized tankers, but the expense of LNG infrastructure has driven the emerging LNG market to long-term contracts that would make price manipulation by a far-flung group of exporters extremely difficult.

However, in recent years, a growing number of new projects have sold less than 100% of projected output to specific buyers, leaving LNG available for short-term trade. This has led to small but growing spot LNG markets in both the Atlantic and the Pacific, linking different regional markets.

The US Energy Information Administration’s Energy Outlook 2008 predicts a greatly increased role for LNG by 2030 as gas displaces oil and coal in many countries’ energy portfolios. In the US, the EIA predicts that LNG and pipelines will dramatically reverse roles by 2030, with LNG accounting for 90% of gas imports by 2030, from 15% in 2006. If environmental legislation slows the expansion of coal-fired electrical plants in the US, or if Canadian tar sands projects continue to divert Canadian gas away from export to the US, the role of LNG will be even greater.

The three members of the new gas cartel stand to play major roles in this global LNG market. Russia now supplies about a quarter of the EU’s imported gas, and in April 2008, Gazprom announced plans to add 90 million metric tons (tonnes) of LNG production by 2030, with an eye to supplying 25% of the LNG market. In Qatar, LNG export facilities with a total capacity of about 77 million tonnes are expected to be in operation by 2015, which the EIA says will account for 14% of the total projected increase in production from 2005 to 2015 for the non-OECD countries, excluding non-OECD Europe and Eurasia.

Iran, whose giant South Pars gas field is part of a larger structure shared with Qatar, has not had the success that its neighbor has had in developing its gas resources, which, combined with the need for gas injection in the country’s oil fields, has made Iran a net gas importer. However, despite international sanctions, Phase 6 of the long-delayed South Pars project went online last month, with the next two phases expected online by May for expected production of 3.6 Bcfd of sour gas, along with condensate and liquefied petroleum gas volumes. Iran’s LNG plans are still largely on the drawing board, but as more production comes online, the drive to move some of it to the growing LNG market will be considerable.

For the near future, the skeptics are correct: an Organization of Gas Exporting Countries (OGEC doesn’t quite have the same ring to it as OPEC, does it?) will not have anything near the same power to control the market as its oily cousin.

However, the founding members have their eye to the future, and consuming nations would be well advised to look forward too, so as not to find themselves in the grip of a global gas cartel 20 years down the line.