US Insulated from OPEC-Style Natural Gas Cartel - For Now

WASHINGTON Apr 13, 2007 Dow Jones Newswires

A natural gas cartel modeled on OPEC would have little near-term impact on the U.S. but its reverberations eventually could be felt as the country increases its reliance on imports.

This week, a group of key gas-producing nations agreed in Doha to study pricing policies in what some perceive to be a step toward forming a group that could restrict exports to support prices, as the Organization of Petroleum Exporting Countries does with crude oil.

U.S. Energy Secretary Samuel Bodman immediately criticized the efforts to form a cartel, arguing that it would threaten free markets and the free flow of energy.

Globally and nationally, "an open and competitive market... is essential for increasing energy security around the world," Bodman said Tuesday.

The U.S. has encouraged the use of natural gas because it's a cleaner-burning alternative to crude oil and it's largely supplied by North American producers. However, skyrocketing prices in 2005 that followed destructive hurricanes in the Gulf of Mexico exposed the vulnerabilities of domestic sources and led to a redoubling of efforts to expand capacity to import liquefied natural gas, or LNG. Shipped via tanker, LNG is free from the geographical restrictions imposed by pipelines and would open the U.S. up to a bevy of new suppliers.

But the creation of an effective cartel could diminish the benefits of lower prices and reliable supplies U.S. energy officials hope to derive from LNG.

Despite the backlash from U.S. energy officials, analysts don't think the group could be an immediate force on the U.S. market.

"Honestly, it's not going to have a significant impact," said Jason Schenker, an economist with Wachovia Corp. in Charlotte, N.C. "It would have a greater effect on the Europeans than it would on us just because of who the potential members are. We are more dependent on natural gas from Mexico and Canada whereas the Europeans don't care, for instance, about the Gulf of Mexico during our hurricane season."

Over the long term, as U.S. and European demand for gas grows, "there could be more of an impact," Schenker said.

Btu's Here, Btu's There

The U.S. produces the lion's share of the gas it needs, with LNG imports making up less than 3% of total gas supplies. Most other gas imports are piped in from neighbors Mexico and Canada. But the global LNG market is growing and the nation's long-term natural gas picture is one of greater dependence on global supply, especially as demand for the fossil fuel increases.

LNG is expected to grow to about 16% of total U.S. gas usage in about two decades, said Bill Cooper, executive director of the Washington-based Center for LNG, which represents LNG producers, shippers and gas consumers. But even "at those numbers, while (a cartel) would have an impact, it wouldn't have a significant impact."

While a gas OPEC's control over prices would be "limited at best," the globalization of gas markets means that problems in any part of the world would effect the U.S., said Kevin Book, a senior energy analyst at Friedman, Billings, Ramsey Group, Inc.

"Btu's anywhere in the world are Btu's here," Book said. "A commodity crisis elsewhere always comes home to roost." Btu's are British thermal units, a metric by which gas volumes are measured.

Assessing Impact Of Theoretical Cartel

Still, experts note that it's impossible to determine the impact of a cartel that has yet to be formed.

The group's goals are unclear at this point, noted Cooper of the Center for LNG. "If it's price discovery, it's certainly not a bad thing. If it's price manipulation, that's different."

He added that it will be hard for a gas OPEC to be effective.

"Gas cartelization is a difficult, heavy lift to accomplish," he said.

For one, cartel or no cartel, the U.S. likely will receive most of its LNG rom Trinidad and Tobago and new LNG terminals probably will still be built, Cooper said.

Although policymakers could act to boost production of domestic supplies to lessen the U.S.' energy dependence, Cooper said that's a move officials should be taking anyway, given that demands for gas are expected to soar. Under any scenario, the U.S. is going to need gas from offshore, the Rockies and Alaska.

"For the government to not have a policy to develop the resources we have now is somewhat short-sighted in light of our demand," he said. "Forget cartels."

Copyright (c) 2007 Dow Jones & Company, Inc.


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