Global Insight Perspective | |
Significance | The fierce EU reaction is indicative of increased suspicion of producer motivations in the light of the January disruption in Russian gas supplies to Europe (the result of Gazprom's price dispute with Ukraine), ignoring the fact that both Gazprom and Sonatrach, the Algerian gas company, are both threatened by increasing cooperation on the consumer side. |
Implications | For Algeria and Russia, the EU reaction to their agreement reinforces the notion that there are two rules in operation here: one for consumers, who are able to form alliances, engage in collective bargaining, and essentially play off producers against each other, and another for producers, who are called on to operate on their own. |
Outlook | The EU's dependence on imports makes it hyper-sensitive to any signs of supply-side coordination, despite the fact that its actions also provoke concern among producers. A better understanding of the motivations and valid concerns of each side of the supply/demand equation would be an important step in building trust between producers and consumers in the European market. |
Panic Stations
More than three weeks later, the press debate in Europe continues to focus on the merits of the producer-cooperation agreement signed on 4 August between Algeria's Sonatrach and Russia's Gazprom. EU member states—Italy in particular—reacted with scathing criticism of the deal, viewing it as a mechanism to set gas prices and put the squeeze on European consumers. Italy has even called for an inquiry into the repercussions of the link-up between its two largest suppliers (see Algeria: 11 August 2006: Algeria Seeks to Reassure Italy on Gazprom-Sonatrach Link-Up).
Although the core fear among Europeans is that the Gazprom-Sonatrach alliance presages moves to establish a gas cartel to rival OPEC, the actual terms of the Russian-Algerian memorandum of understanding touch on issues like LNG cargo swaps, upstream and third-country cooperation and LNG marketing and technology sharing. Taken in that context, the cooperation agreement between Gazprom and Sonatrach is remarkably similar to a number of other agreements concluded by the Algerian state player over the last year in a bid to extend its role through the gas-supply chain, streamline its operations, and reduce its dependence on the core EU market. However, Sonatrach's other agreements were made with commercial actors or Norwegian international oil company (IOC) lookalike Statoil.
The fierce reaction to Sonatrach's latest cooperation deal reflects the fact that the EU continues to harbour serious suspicions about Gazprom and the motivations of the Russian government, which holds a majority stake in the gas giant. The January gas dispute between Russia and Ukraine, which resulted in an interruption of Russian gas flows to Europe when Ukraine siphoned transit gas from its pipeline system, has proven to be a seminal event in the minds of European policymakers, who largely blamed Gazprom for the “gas war”, ignoring the fact that the dispute was commercial rather than political while downplaying Ukraine's role in undermining the flow of Russian gas to Europe.
The subsequent rhetorical war over the threat to Europe's energy security has prompted EU members to redouble their efforts to diversify their sources of gas imports and reduce their (increasing) dependence on Russian gas (see Russia: 26 April 2006: Gazprom Turns Up the Heat on Europe in Rhetorical War of Energy Security). With Europe taking a “blame Gazprom first” approach, it is not surprising that Gazprom—which has been a reliable gas supplier to Europe for over 30 years—is making efforts to diversify its own markets for its gas exports, targeting supplies to the North American and Asian markets.
Producers Have Interests Too
Indeed, the EU reaction to the Gazprom-Sonatrach deal, while not surprising, ignores some of the very real concerns of producers, many of whom find their positions weakened in the light of Europe's emerging collective energy policy and the abolition of destination clauses and moves to shorter-term contracts. European gas-market liberalisation is almost entirely geared for the benefit of consumers at the expense of producers. Thus, Sonatrach is looking to the U.S and India markets, while Gazprom has stated an interest in expanding its export options to Asia and North America in a bid to balance its portfolio away from Europe. Yet, when producers look to other gas markets to hedge their dependence on European buyers, the EU reacts with anger. Considering the EU move to create a common, deregulated gas market, thereby reducing the leverage of producers in supplying that market, it should be expected that there would be some resistance by producers seeking to protect their interests.
Hence, we have the cooperation agreement between Sonatrach and Gazprom. While the EU's worst fears of collusion and price-fixing between the Algerian and Russian gas companies may yet prove true, there are also valid reasons why the two companies would seek to work together outside of the price issue. For Sonatrach, the Gazprom agreement follows a string of similar arrangements with the likes of BG, Shell, and Norway's Statoil, intended to give Sonatrach access to overseas upstream acreage and U.S. regasification rights, in exchange for the lure of upstream acreage and LNG projects in the domestic sphere (see Algeria: 7 February 2006: Shell Signs Upstream, LNG, Marketing MoU with Algeria's Sonatrach). Renewed protectionism in 2006 suggests that Sonatrach will be unwilling to see any of these alliances move much beyond the allocation of upstream acreage and some downstream and export rights, reflecting a keen awareness of the national interest in Algerian energy policy (see Algeria: 21 July 2006: Algeria Prepares to Go Into Reverse on Hydrocarbon Law as Political Factors Rule the Day).
Gazprom, meanwhile, is keen to tap into the Algerian company's expertise in LNG production, an area where the Russian gas giant—as the world's largest gas producer—is sorely deficient. Although Gazprom is moving slowly into the LNG arena, the company has been slow out of the gate, continuing to rely on its extensive, Soviet-era pipeline system as the means to deliver gas to customers in Europe. Only in the past year has Gazprom even got its feet wet in the LNG sector, with several spot deliveries of LNG cargoes to the U.S., U.K., and Japanese markets that Gazprom bought from other producers. Although Gazprom plans its own LNG exports in the future, the cooperation deal with Sonatrach gives the Russian firm access to LNG cargoes to participate in the emerging Atlantic LNG trade. Thus far, however, the cooperation agreement has not produced any cargo swap deals or other actions, suggesting further talks between Gazprom and Sonatrach are likely as they seek to work to pursue their common interests.
Outlook and Implications
Of course, there is no question that, as producers, both Russia and Algeria are keen to maximise the return on investment for the gas that they extract, as well as dictate the terms of gas sales. However, it is one thing to seek to maximise prices, and quite another thing to collude to fix prices. Producer coordination in the European gas market has proven impossible so far, and—to this point at least—producers have shown little stomach to try to set prices. The limited previous interaction between Russia and Algeria outside of this deal is another factor weighing against the collusion argument, with Algeria looking increasingly to the United States and Europe in its political affairs, while economic liberalisation outside the energy sector remains a guiding principle. Russia, meanwhile, is continuing to go its own way.
Even if the intention to collude to fix gas prices was there (or emerged in the future), the growing number of suppliers and energy sources means that any coordination, if planned, would be as difficult to implement as efforts to form cartels in other commodities—such as coffee, cocoa, and the metals sector, which have floundered. OPEC is really the only viable producer-side cartel—and even that is not entirely effective. A single flexible-production transportable product, combined with similar economic, political, and cultural conditions in the mostly Arab members, is why OPEC has achieved some notable successes, although the organisation's ability to move the market is still prone to break down when members’ interests fail to coincide, as Algeria's serial over-production attests. By contrast, the establishment of a “GasPEC” would be exceedingly difficult—while the emergence of LNG has made a gas cartel possibly more feasible, it has also given consumers more options to receive gas.
However, high gas prices, the wider political suspicion of Russia, and a growing import dependency have conspired to enlarge the threat in EU eyes, despite the very real arguments against, both in terms of intentions and practicalities. Rather than prompting the EU to take heed of producers' concerns in the move to deregulate the European gas market, the Russia-Algeria agreement is now likely to accelerate Europe's interest in energy diversification—both in terms of suppliers, where Nigeria, Libya, Egypt, Iran, and Central Asia are waiting in the wings, and in terms of the overall energy mix, where biofuels and nuclear power are gaining increasing support. Gazprom and Sonatrach should take note of European concerns over the nature of their cooperation, and a vow not to collude in setting gas prices would go a long way to easing EU fears. Likewise, the EU would do well to make an effort to understand better the motivations and valid concerns of the producers that supply Europe with the bulk of its gas imports.