With Liquefied Natural Gas (LNG) prices trading near historic lows, there’s been some chatter about whether or not a natural gas equivalent to the Organization of Petroleum Exporting Countries (OPEC) will form. Geopolitical factors alone render the formation of an Organization of Gas Exporting Countries (OGEC) extremely unlikely, while technical factors make it even less likely. OGEC would be more viable if Eurasian overland gas exporters (Russia, Turkmenistan, Azerbaijan, and others) signed on, but marginally higher delivered gas prices would not outweigh risks to their political, economic, and financial ties with the People’s Republic of China. A worldwide natural gas cartel appears extremely improbable.

Why OPEC+ (kind of) works

OPEC consists of 13 countries mostly located in the Middle East and Africa, with Saudi Arabia, Iraq, Iran, Kuwait, and the UAE traditionally producing the most volumes. OPEC+ is a broader grouping of 11 countries, with Russia, Mexico, and Kazakhstan featuring most prominently. Without diving too deeply into OPEC’s history, the cartel has gradually expanded since it was founded in 1960. While there have been intra-OPEC disputes and even wars, such as when Iraq invaded Kuwait, the cartel has generally been able to hold together despite divergent geopolitical interests and economic competition. Why?

The oil cartel has held together, in part, because of the physical characteristics of oil. First, with about 5,000 million metric tons of crude traded per year, oil is an extremely liquid asset. Second, only a few countries hold the majority of global oil reserves, production, and surplus production capacity, enabling them to modulate and control global supply production. As of 2019, OPEC controlled roughly 75% of the world’s total crude oil reserves and produced 42% of the world’s total crude oil output. Most importantly, oil infrastructure is firmly in place already: a highly rational, global supply chain exists from well to pipelines to VLCCs to refineries to gasoline tanks.

Natural gas, on the other hand, is typically transported over long distances in its liquefied form. LNG’s qualities  work against cartel formation. LNG trade in 2019 totaled only about 350 million metric tons, a small fraction of the volume of crude oil traded globally. Downstream facilities are also not as well developed. Land-based regasification terminals are expensive, time-consuming projects, and many countries do not have adequate natural gas pipeline infrastructure in-place. Due to the relatively low cost of oil transportation, a cartel in oil market can simply affect the price by setting a quota. But gas markets are typically regional rather than global. For instance, the U.S. cannot export gas to Europe unless the destination has already built an LNG terminal. With a much more rigid market, weaker supply chain connectivity, and monopsony/monopoly dynamics, supplier-producer relationships are critical for ensuring decade-long flows but are often subject to the vagaries of international politics. 

The primacy of oil

Oil enjoys a prominent position in the economic and political systems of exporting countries in ways that natural gas cannot match. Russia, the world’s largest natural gas exporter and 2^nd largest oil exporter, earned $49 billion from natural gas exports in 2018 – less than 25% of its earnings from oil in the same period. Even Qatar’s earnings are split between natural gas and oil. Natural gas’ limited economic footprint disincentivizes most states from orienting their geopolitical posture around the commodity.

Forbidding Geopolitics: Why OGEC couldn’t work

Geopolitics alone will likely prevent OGEC from ever exercising market power. Australia and the U.S. accounted for about 25% of 2019 world LNG exports; their share, along with Canada’s, is expected to rise in the future. Moreover, Australia, Canada, and the United States will almost certainly never sign up for a gas cartel. Indeed, their legal systems would probably never allow it, not to mention that private-sector companies would chafe at export restrictions. OGEC would start with at least 3 of the world’s largest producers unrestrained by the cartel.

Russia also has few incentives to participate in any gas cartel. Russia cut off gas during disputes with its Ukrainian and Belarusian neighbors, and has had very tense relations with the West since 2014. A gas cartel that included Australia, Canada, the United States—and Russia— would likely prove impossible so long as Western-Russian relations remain frayed. With these four producers outside of OGEC, the cartel’s production levels could have limited impact on prices. 

OGEC could function if Russia, Turkmenistan, Azerbaijan, Algeria, and other gas exporters signed on, but this dynamic seems extremely unlikely. These countries have never coordinated gas production before and, indeed, are often engaged in cutthroat competition with one another. Furthermore, a world-wide OGEC would likely upset each country’s relations with the People’s Republic of China, the world’s largest natural gas importer. China operates a monopsony in many natural gas markets: it enjoys substantial leverage over its suppliers and can play exporters off one another. For instance, consider Turkmenistan. The Central Asian country likely holds the 4th or 5th largest gas reserves in the world, has a very complicated history with Russia and Gazprom, mainly exports to China, and would have little incentive to limit supplies to China. Most gas exporters, including Turkmenistan, would likely be unwilling to risk the totality of their economic, financial, and political relationship with China over marginal increases in natural gas export earnings. Geopolitics all but ensures that OGEC is a dead-end dream.

OGEC: insurmountable obstacles

OGEC faces obstacles which will almost surely prove insurmountable. LNG is less fungible than oil; LNG and natural gas infrastructure are expensive to build out; natural gas will not displace oil’s primacy in geopolitical calculations; and an OGEC alliance would quickly fall apart due to Chinese pressure. Moreover, producers themselves have shown little interest in the concept. If LNG producers want to lift profits they’ll have to cut their costs rather than restrict supply. OGEC isn’t happening.