Russian to head ‘Gas OPEC’ seeks oil price link

The Gas Exporting Countries Forum, also called Gas OPECor Gaspec, elected Russian Leonid V. Bokhanovsky as its first secretary general Wednesday, the NYT reported. And he’s not wasting any time looking for ways to stabilize prices. Bokhanovsky has already called for a study on how to maintain the link between natural gas and oil prices in contracts, the NYT reported.

The 11-member countries of Gas OPEC, which includes Qatar, Iran, Russia and Nigeria, have met informally since 2001. The group adopted last year a formal charter. Potential new members of the group include Azerbaijan, Uzbekistan and Canada, Bokhanovsky told a Gulf Times reporter at the Gas OPEC meeting.

So, why the sudden call to action? In short, Gas OPEC wants to find a way to stabilize prices in a world saddled with a glut of gas and weak demand.

The world is overloaded with natural gas, in part, because of a boom in unconventional gas production in the United States. The International Energy Agency, which advises energy-consuming countries, said last month in its 2009 World Energy Outlook, the emergence of unconventional gas production in the U.S. is an international game-changer that will have far-reaching implications on global supply and prices.

IEA’s chief economist Fatih Birol called it a silent revolution in his comments during the reveal of the 2009 World Energy Outlook. Gas exporting nations ramped up their investment in liquefied natural gas industry on the belief that the U.S. would need substantially more supply, Birol explained. But the development of unconventional or shale natural gas in the U.S. has changed that outlook. Now, thanks to technological improvements, producers in the U.S. can reach gas trapped in geological formations, once considered impossible or at least financially unfeasible to access. Domestic production has ramped up and has reduced the need for imports.

At the same time, there has been a slump in global demand, which has already impacted Russia’s bottom line. Russia’s main customers are European utilities, which lock in long-term supply contracts linked to the cost of crude oil.

Meanwhile, spot prices have dropped as consumption has fallen, leading to an abundance of natural gas in storage. Russia’s customers have been encouraged to try and renegotiate prices or delay deliveries from these long-term — oil-linked and more expensive contracts. This has been an unpleasant development for Russia, which had expected to gain market share in Europe, a point the NYT reported also notes.

Hence, the sudden call to arms and a desire to stabilize natural gas prices. the question is how they will do it? The group has signaled it will not set production quotas. Qatar’s ruler Sheikh Hamad bin Khalifa Al Thani, concerned with the disparity between the price of crude and natural gas on international markets, has pushed for linking gas prices to oil. A move the IEA has warned against.

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