African oil export cartel in the offing? By Cyril Widdershoven, GESA, vol. 2 - issue #22 - 12/18/2003 As the last OPEC meeting, December 4, has not really shaken international markets, traders and financial analysts, the latter are still keeping an eye on developments within and especially around the international oil cartel. The possible rift between leading members of OPEC, especially Saudi Arabia, Iran and Kuwait on one side and Nigeria, Algeria, Libya and possibly Venezuela on the other, seems to be widening. Still no real threats are looming on the horizon in the coming weeks, but it has become clear that the internal powers of OPEC are waning. Most analysts agree that the next meeting could be the first step to a possible oil glut in the years to come, largely due to the unwill of non-OPEC producers to control their production and export increase and the growing pressure inside of OPEC to renegotiate their respective export quota. Nigeria, Algeria en Libya could become the powerbrokers in a new OPEC scheme, to be devised after December 2003. The exponential growth of their crude oil production in the coming years cannot be sustained within the current export quota of OPEC. To counter this internal dissent, Saudi Arabia and Venezuela, the leading member countries that have set the latest quota system and price-band of the cartel, are at present trying to find external support for their control of the international crude oil markets. To compensate for possible internal dissent, both leading members are setting up meetings with countries such as Russia, Norway and Mexico. With the latter a meeting is scheduled in the coming days, just after the end of Ramadan (after November 28/29), to discuss the stability of the global market. Additionally, international politics will be discussed, such as the attacks in Turkey and Iraq, which are both having a direct influence on international oil price levels as we have seen. The same negotiations have been conducted officially, and unofficially with other major producers. The success story of OPEC since 1999 has partly been built upon the support of leading non-OPEC members for the price-band tactics and export quota scheme of the cartel. Time will show if this can be repeated indefinitely. Most factors that are currently forming international energy markets are not anymore purely related to the price of crude oil or the overall export levels of producing countries. External factors have taken over the primacy of supply and demand factors in the oil market. Diversification of energy sources and supply routes have caused a decrease in the importance of the oil factor, not only in the economy but also in the financial and political- strategic sectors. The emergence of natural gas, and the widespread production and usage worldwide of the this commodity is changing the market place forever. OPEC’s (perceived) stranglehold on American and European consumers is decreasing rapidly. In stark contrast to the fact that more 60% of the world’s crude oil reserves are in the Arab (Persian Gulf) countries, natural gas has been more evenly spread, with most reserves being found in the Former Soviet Union (FSU) countries, such as Russia or in the Caspian, or in Iran, Norway, Canada and Egypt. West Africa will play a major role in the new natural gas markets worldwide. The gigantic reserves currently being found in and around the Gulf of Guinea, in Nigeria, Angola, Sao Tome & Principe or Equatorial Guinea, are proponing a bright future and immense impact on world markets for the natural gas sector in Africa. The demand for gas increases substantially every year, supported by American, European and Asian thirst for energy. In the United States, where gas well sites are being depleted at a rate of 29% annually, demand for imported gas is expected to surpass that of Japan in less than 10 years. Currently, Japan ranks as the leading importer of natural gas. Liquefaction is the key to globalising natural gas and finding a market for stranded reserves like those off the coast of West Africa. Liquefying gas into LNG (liquefied natural gas) dramatically shrinks required storage space. In the past natural gas was mostly a localized, isolated business because of the difficulties in storing and transporting the commodity. Today, however, LNG's reduced costs make it a viable option for locations like Africa. Nigeria -- which has large natural gas reserves offshore -- now boasts the fastest-growing LNG business. By 2006 Nigeria's Bonney LNG project, with its six processing plants, will place Nigeria third among the world's LNG exporters. Other African countries such as Angola, Algeria, Equatorial Guinea, and Egypt are considering or expanding their natural gas and LNG capacity. As stated by Chevron official Thomas Kirkland “ in many ways the natural gas business today looks like the oil business did 50 years ago. This is especially true in Africa, he said, where LNG producers are still in the early stages of building links between growing gas reserves and potential customers. While there are sure to be "growing pains," he said, "the potential economic, environmental, and social gains will make the struggle worth it." For the African continent this is a very bright and rosy picture, to be fully supported by the industrialised world. But is has some possible international repercussions too. It puts up for grab a new power structure, especially if current substitution levels between natural gas and crude oil worldwide continues. The importance of natural gas producers could become a threat to the position of OPEC itself. Why should countries such as Iran, Algeria, Libya or Nigeria follow suit in OPEC when most likely their future lies in the production and export of gas, in the form of pipeline gas or LNG. The role of natural gas is also more stable for both partners in the connotation. First of all it needs large investments, which only can be sustained if there is the possibility of long-term contracts to recuperate the investments with a profit. Secondly, it has the possibility to be free of OPEC interference. No deals will be affected by quota arrangements of the old party figures behind OPEC currently. Should the Western world be happy and start thinking of at last a totally free energy market, supplied by free market forces around the world? No, there are still possible threats around. The forming of an Organisation of Gas Exporting Countries would be very feasible. It only would need in- depth cooperation between Russia, Iran and Norway to have already more than 65% of total natural gas reserves in the world. If Algeria, Nigeria, Angola and Egypt would become a member the world could be held ransom. The latter is a doomsday scenario, most likely it will never happen that an OGEC will repeat the 1973 price shock scenario of Saudi Minister Yamani. Still, it is a possibility. It also could be used to better current natural gas operations, by setting a price system, like the OPEC price band, or coordinate the further expansion of natural gas exploration in not so commercially attractive areas or countries, such as Mauritania, Chad or Palestine/Israel. This could become a regulator, but without a doubt with the potential of a market controller. These developments could be less threatening if it would not be based on largely Eurasian producers, but if the power structure was leaning towards an African organisation, an AOGEC, an African Organisation of Gas Exporting Countries. The more stable and pro-Western orientation of producers within the African continent could prevent a ransom approach from others. West Africa, supported by Algeria, Libya and Egypt, could become a power centre to be aware off. The time is there for these countries to start cooperating in the natural gas sectors, power and stability would not only attract increased foreign direct investment but also support the economic and social development of the Dark Continent, this time by their own will and natural resources, not anymore lead by the hand of the West.