Could a gas Opec be forthcoming?

At the New York Mercantile Exchange (Nymex), the futures contracts for gas delivery in January have fallen some 20% this year to $4.56. This compares to the high reached in the middle of 2008 at around $ 12.50. However, these wild price fluctuations are not uncommon for Natural Gas: after reaching $10 in 2000, Natural Gas dropped to $2 in 2001.

A peak of $14 at the end of 2005 was followed by a severe drop to almost $4 in 2006. Of course, a lot of money can be made by active traders in this kind of high volatility environment. Gas exporting countries on the other hand, prefer stable gas prices to wild fluctuations and are seeking ways to stabilize them.

On December 9 Qatar will host a meeting of the Gas Exporting Countries Forum of 11 nations to discuss slumping world markets (and prices). Abdullah bin Hamad al-Attiyah, Qatar's Oil Minister stated for example that '...gas should have a premium, it is a clean fuel, it's a choice fuel...'.

He also, however, noted that '...limiting the supplies in most of the contracts is impossible because those are long-term contracts...'. Qatar's proven natural gas reserves are approximately 15% of the total world reserves.

As stated before, although oil prices pushed upwards this year, gas prices did not follow suit. Even worse, gas traded at the open market has slumped, thus making long-term oil-linked gas contracts now more expensive. For example, European utility companies like Germany's E.ON and the French GDF Suez, typically buy most of their gas under supply contracts linked to the cost of crude oil products that are valid for as long as 30 years.

These contracts are accompanied by take-or-pay clauses requiring utility companies to take minimum volumes, even when demand drops, or pay a penalty. In other words: these gas contracts are not being affected by short term price fluctuations. Because of the world economic crisis, this year demand for gas in Europe dropped by a 'record' 5% to 7%, according to Gazprom Deputy Chief Executive Officer Alexander Medvedev. Gazprom is the world's biggest gas producer, with Europe as its main market.

The forming of a bloc of natural-gas producers, in an organisation such as Opec, would be a logical step as Russia seeks to limit oversupply. However, it is doubtful whether gas producing countries will eventually succeed in controlling the market more. The Forum, referred to by some as 'Gas Opec' or 'Gaspec', is not able to set production quotas like the Organisation of Petroleum Exporting Countries does. Instead, members inform each other about investment decisions. In other words, the gas producing members do not all invest at the same time thus containing the risk of triggering an oversupply.

Russia and Iran, which have the world's largest gas reserves, are currently competing to name the first GECF secretary- general, a step in establishing a group that may one day match the price-setting power Opec has in oil markets. According to Shokri Ghanem, the chairman of Libya's National Oil Corp, the appointment of a secretary general should boost the organisation and will make it more effective. Other members that will attend the forum include Venezuela and Algeria.

It should soon be seen whether an effective 'Gaspec'-cartel could eventually be established, or whether the 'gas bloc' remains splintered without pricing power.