Cheap gas today is rather an emotional subject
According to the Russian Prime Minister, the future gas price is becoming a key issue for the Russian economy. The fact that Vladimir Putin deemed it necessary to point to the end of "an era of cheap gas" when addressing the 7th ministerial meeting of the Gas Exporting Countries Forum largely testifies to the alarmist mood in the government. The thing is that while gas prices are tied to oil prices, albeit indirectly, gas prices will fall following a landslide of oil prices, even if not right away. It is clear that this may lead to a catastrophe for the Russian economy and the country's present political elite. Regrettably, the Russian economy has failed to switch over from its raw material orientation to an innovative economy over the past eight years. The formation of numerous state corporations in recent years looks more like organisational attempts to make up for the lost time than a competent implementation of the transition strategy. Sizeable budget funds are spent on them, and they cannot be replenished as quickly as in the pre-crisis period
What is the way out of this situation? The current global economic depression, the bottom of which we have yet to see, objectively lowes the price of a barrel of oil, and the present price of the 2004 level may sink further by this summer. All attempts by OPEC members, even when they are supported by independent oil producers, are unlikely to bring prices to an acceptable level of around $70 per barrel within the next few months. In this situation, natural gas becomes the main source of budget revenues. There is surely some logic in what the Prime Minister says: Gas prices are not falling as fast as oil prices. Gas contracts are signed for a long term and cannot be changed depending on the current supply and demand or financial speculations on the stock market. However, the length of a contract can become a disadvantage when a company is forced to supply the commodity at low prices even after the end of the crisis, which is expected by many economists to occur in late 2010. Therefore, another organisational move connected with the formation of the so-called "gas OPEC" has been placed on the agenda. The association with OPEC is not fortuitous. Despite all official denials, the establishment of the Gas Exporting Countries Forum is, in the final count, aimed at keeping gas prices at a level that is acceptable for gas exporters. Claudia Kemfert, a leading expert at the German Institute for Economic Research (DIW Berlin), thinks that the aim of the new organisation is clear enough: this is the desire to control the gas market in the same way that OPEC controls the oil market. Thus, the establishment of a gas OPEC should be regarded as the gas exporters' desire to influence price formation, says the German expert, as quoted by the Deutsche Welle Radio on its site. However, Russia will face serious obstacles. The Russian leaders will have to finally choose between gas pipeline construction and the development of LNG production, not an easy task. As Claudia Kemfert justly notes, only LNG delivery by cargo vessels will make gas price control technically possible and gas supply transactions more spontaneous. At present, the bulk of gas is supplied via gas pipelines on the basis of long-term contracts. In order to control future gas prices, the Russian government will have to give up the predominant pipeline method of gas supply by reducing their share. Therefore, it will have to reject Gazprom's current tactics with respect to other countries, i.e., penetrating their markets on the shoulders of its business partners. Pipeline gas supplies and LNG supplies are competing projects, and Russia's gas reserves are not big enough to simultaneously develop both businesses. Besides, the choice in favour of LNG will require large investments, as Russia's presence in this sector is insignificant. Of course, Gazprom has plans to develop the LNG business, but it needs funds for its projects. Thus far, the financing issue remains unsettled.
Oleg Nikiforov, executive editor of the NG-Energia supplement
Oleg Nikiforov