A Look at the Gas Exporting Countries Forum

Mikhail Krutikhin: Don’t press too hard

It is safe to forget about the Gas Exporting Countries’ Forum (GECF) between its rare meetings. The effect the organization—eagerly promoted by Russia and Iran—makes on the global, or regional, gas industry is exactly zero. Some of the members, however, used the recent summit of GEFC on July 1 in Moscow to teach Gazprom a lesson in marketing strategy. 

The management of the Russian gas giant on many occasions reiterated insistence on oil-indexed pricing formulas in its long-term contracts with European customers, even though prices of gas on the spot market showed a stable tendency of remaining lower. This inflexibility has already cost Gazprom a significant portion of market niches in the EU. Europeans prefer to switch to any other supplier if they have a chance to diminish dependence on deliveries from Russia. And they take Gazprom to court to change the terms of the contracts—and win the cases, making the supplier return billions of dollars of unfairly collected revenues for several years. 

Arab members of GECF were unwilling to share the critical attitude of their hosts in Moscow toward the Third Energy Package of the EU that aims to divide the functions of gas suppliers, transporters and sellers and liberalize the market. 

Qatari energy minister Mohammed bin Saleh Al-Sada declared at the forum: ‘It is necessary to keep in mind the consumers’ interests—and not only the suppliers’. 

His colleague from the UAE Suhail Mohammed Faraj Al Mazroui focused on the need to maintain good relations between the supplier and consumer and said that the role of natural gas in the global energy balance was based on stable supply at affordable prices. ‘Any price markup or decrease of supply,’ he added, ‘makes a negative impact on the status of gas as a reliable energy source forcing the consumers to seek alternatives.’ 

It was the right kind of diagnosis. If you press your clients too hard and overcharge them, you are forcing them to either look for cheaper prices other vendors can offer, or replace natural gas with alternative sources of energy. 

The Russian gas monopoly is already suffering from the high prices it charges. In 2007, deliveries by Gazprom accounted for 36% of gas consumption on Germany. In the first four months of this year, according to the Federal Office of Economics and Export Control (BAFA), the share fell to just 25%. Germany did increase its gas consumption (by 3.4% last year), but incremental demand—and some of Gazprom’s former market—was absorbed by non-Russian suppliers. 

Driven by high gas prices, the Germans are replacing gas with coal, forsaking environmental considerations. Two coal-fed power stations opened in the country in 2012, to be followed by six more this year. 

It was probably futile to invite GEFC members to transform this organization onto a cartel along the lines of OPEC. The world’s largest gas suppliers show they understand what the seller’s intransigence leads to.

Published with the kind permission of RusEnergy. Mikhail Krutikhin is with RusEnergy, an independent privately-run company established in 2000 by a group of Russian experts with a long experience in consulting and publishing business. Based in Moscow, it specializes in monitoring, analysis and consulting on oil and gas industry of Russia, Central Asia, Azerbaijan and Ukraine.