Is Vladimir Putin Building a New OPEC?

For years, natural gas has been a relatively regional product, and producers that had access to major markets via pipelines were the only game in town. The prospect of liquefied natural gas, or LNG, exports from new places all over the world is turning that logic on its head, and so the former big bosses of natural gas are looking to maintain their prominence through an OPEC-style cartel. Let's find out why these natural gas giants are nervous and discover what an organization like OPEC could mean for the natural gas industry.

Under pressure
At the most recent meeting of the Gas Exporting Countries Forum, Russian President Vladimir Putin urged members to defend the traditional method of pricing natural gas, through oil-indexed, long-term contracts. According to Putin, this would be done to maintain the energy security of import countries. Even if Putin's reasoning for this kind of move sounds altruistic, there is certainly a much more self-serving reason to maintain the oil-index price structure: maintaining price control. 

Source: wikicommons.org/politsurfer

Unlike the U.S., many of the other natural gas markets around the world are based on long-term pipeline supply contracts that are on a fixed, oil-indexed price. This model has been thrown on its head because of the boom in U.S. natural gas production. Countries that had built up large LNG export capacity to deliver to the U.S., such as Qatar, found themselves without their largest customer, and were looking to dump this LNG on new markets.

To further compound the problem, the U.S. expects to start LNG exports in 2015 when our first LNG export terminal, Cheniere Energy's (NYSEMKT: LNG  ) Sabine Pass facility, comes on line. It is very possible that all of this LNG trade could undercut oil-indexed prices in markets like Europe and Asia.

Henry Hub Natural Gas Spot Price Chart

Henry Hub Natural Gas Spot Price data by YCharts

As long as the costs to take natural gas, liquefy it, and transport it remain below import prices for these other regions, there is a great opportunity to capture market share from the oil-indexed contracts from places like Russia. This of course, makes the world's largest supplier of natural gas very uneasy because so much of the country's economic health depends on it. Gazprom (NASDAQOTH: OGZPY  ) , the Russian gas giant, is the exclusive exporter of natural gas in Russia and accounts for 10% of Russia's GDP.

OGEC doesn't seem to have as good of a ring to it
It is very likely the countries that would be involved in this close natural gas relationship would be the countries who are already members of the Gas Exporting Countries Forum. Combined, these countries represent over 60% of the worlds natural gas exports. That's a greater market share than OPEC's 57% of total oil exports.

GECF Member Countries 2011 Natural Gas Exports (Bcfpd)
Russia 21.39
Qatar

11.00

Norway (observer status) 9.41
The Netherlands (observer status) 5.40
Algeria 5.03
Nigeria 2.51
Trinidad & Tobago 1.70
Bolivia 1.29
Egypt 1.02
Kazakhstan (observer status) 0.94
Iran 0.88
Equatorial Guinea 0.51
United Arab Emirates 0.50
Libya 0.35
Venezuela  0
Iraq (observer status) 0

Source: U.S. Energy Information Agency

Several of these countries already have significant control over prices in certain regions of the world. For example, both Gazprom and Norway's Statoil (NYSE: STO  ) are responsible for 40% of Europe's natural gas market, all of which is sold on those lucrative oil-indexed contracts.

What makes an organization like OPEC so powerful, though, is its ability to carry spare production capacity and a willingness to shut off the pump if prices get to low. If the member countries could get on board with this kind of move, it would be a very powerful tool in determining natural gas prices around the world. 

What a Fool believes
Could a move like this squeeze the profitability of natural gas exports for the U.S.? Potentially, yes, but there are other places around the world that are more likely to suffer from a move like this. Countries like Australia, which has struggled to keep costs under control and doesn't have feedstock as cheap as in the U.S., are more likely to suffer from this. Chevron's (NYSE: CVX  ) massive Gorgon LNG project is more than $15 billion over budget, so cost overruns could make the return on investment for these kinds of projects less lucrative.

At the same time, having an OPEC-type price controller would certainly limit how much the U.S. could potentially export at an economically feasible level. Gazprom signed a 30-year deal with PetroChina (NYSE: PTR  ) that will supply the Chinese company with 3.7 billion cubic feet per day of gas starting in 2018, just about the same time when the majority of the other major LNG facilities around the world are expected to come on line. If Russia could get some of these natural gas exporting countries to sign on to this "OPEC of gas" idea, it could change the game. 

One thing is almost certain as natural gas begins to be exported from the U.S. -- that the price we pay per million British thermal units is likely to rise a bit. That's why we've picked one incredible utility with exposure to natural gas that presents a rare "double-play" investment opportunity today as "The One Energy Stock You Must Own Before 2014," and you can uncover it totally free, in our premium research report. Click here to read more.


Read/Post Comments (2) | Recommend This Article (9)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 09, 2013, at 9:53 AM, amvet wrote:

    First, I would like to point out that the drive to have spot prices controlling the NG market is driven by politics, not economics or logic. The goal is to damage Russia.

    Producing NG and crude oil are long-range projects requiring massive investment over many years. Only an idiot would willingly put such an industry at the mercy of quick-changing spot prices which are controlled by the massive naked futures leveraged trading of a few funds and banks which have recently ruined hundreds of mining companies.

  • Report this Comment On July 09, 2013, at 3:31 PM, EllenBrandtPhD wrote:

    Since some reading this story may be unfamiliar with Statoil (STO), I want to summarize again why I believe its prospects for the second half are among the strongest in its sector.

    STO has lagged its nearest peers the past three months almost entirely because of currency. Its news stream has been solidly good, but that hasn't mattered, because the NOK - Norwegian Krone - has lost so much ground against both the Dollar and the Euro, in a mammoth finagling and pre-positioning play prior to the Norwegian election, which is now only five weeks away.

    Finally acknowledging what is happening in Norway, the Market at large "permitted" the Krone to have its biggest rise against the Dollar and Euro yesterday - a mammoth move. Today, it gave back a little, the main reason STO is subdued today. But the move should without fanfare continue up until the election, with minor setbacks. When Solberg wins, the NOK is likely to soar against the Dollar and the Euro, retaking its prior position of strength in worldwide currency markets.

    That's because Erna Solberg and her opposition party - which now leads the incumbent socialists by as much as 30 points - is going to usher in the most business-friendly administration- which in Norway means NOK friendly and STO friendly - in over 50 years.

    She will roll back business taxes in general and STO taxes in particular.

    And even more significant, she has made privatizing more of STO - now 3/4 owned by the Norwegian government - one of her top campaign planks.

    She has firmly stated that the privatization - which could take the government ownership stake down to 50 percent - will be effected "at the highest possible price" for STO.

    That is a direct quote, And it means that the Norwegian government and its very powerful private wealth fund are going to be literally working to get STO's stock price up from September on.

    I think they want it above 30 - and if Brent continues to be supported via any number of eventualities, including horrid geopolitics in the Middle East and elsewhere or a very bad hurricane/typhoon season - both of which look pretty likely - even a goal of 30 may be understating the matter.

    Buy some STO, IMO, before the rest of the market understands what is going on.

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