Gas forum will work differently to OPEC: Chakib Khelil, OPEC President

OPECs decision to cut output has supported crude prices according to the organizations President, Chakib Khelil. As energy producers met in Moscow, he spoke with RT’s Zinaida Medvedeva about the worlds energy markets.

RT: In what ways do you see OPEC and non OPEC countries cooperating?

CK: Well I think it was a good meeting. We took the right decision to cut more than what the market was expecting, which is 2.2 million barrels per day, additional to 2 previously made, and I think those cuts that OPEC made helped the market achieve those level of prices. Without those cuts, I don’t think I don’t think we’d be seeing $43 today, we’d have seen in the $20’s. So I think the OPEC decision was made at the right time, and we think also that as soon as the cuts will be effective in January then the market will stabilize around $45 to $55. and hopefully by the third quarter we will see prices rising. And OPEC has made the decision. We were expecting non OPEC to join in the decisions, so that’s the only way we can cooperate between OPEC and non OPEC. Of course there are exchanges of information, but those don’t affect the market, they don’t affect the revenues of our countries.

RT: Is there a need for another extraordinary meeting of OPEC countries before the planned meeting in March?

CK: Right now, not necessarily. But there’s still a chance that prices will deteriorate between now and, say, January 19. Then we’d probably ask for a meeting in Kuwait, because there we already have a meeting of heads of states from Arab countries to study the financial crisis. So we would probably do what we did in Cairo, which means calling an OPEC meeting, where we’d ask non-Arab members to join us in Kuwait. That could be a good opportunity, but, of course, this is only in case if the market deteriorates. But I really don’t see it deteriorating further. In March, we’ll have the opportunity to look at the market again and then make the appropriate decision.

RT: How can OPEC make sure that member nations will cut current levels of production?

CK: If you look at the history of OPEC, in difficult times, OPEC has been disciplined – in 1986, when oil price went down to $6-$7, or in 1998, when the price went down to $9. OPEC is disciplined. Of course, you cannot expect 100%. Right now, we are at 60-65%, but still, we haven’t had sufficient time. The last cut was on the 24th of October, and it takes between 2 and 3 months. I think the members will be really disciplined this time. The alternative is to reduce revenues, and I think most of us want revenues. We’ve learned in the past that you cannot cheat, because by cheating, you’re really cheating on yourself. All of us pay for the lack of compliance by others. That’s the only way you can do it, and we cannot punish somebody because he’s not compliant.

RT: Todays meeting will consider some form forum for cooperation between gas producers. Some are calling it ‘gas OPEC’. Do you think the formation will be similar?

CK: I don’t think it’s possible. Oil OPEC is concerned by today’s market conditions, and its managed by day-to-day situations. As you have seen, we’ve decided to cut because the market was moving fast downward. The forum, which we are going to put in place, is not going to be able to do that, because all members have long-term contracts. These contracts have set volumes, so they will not be able to change the volume. And then, the prices are fixed in relation to the oil price. I think the forum will be something different, because the forum will be forward-looking. It’s not going to be backward-looking, and, taking into account history, what do you do?

The forum will be looking at 15-20 years from now – what’s going to happen to the market, how the competition will be put in place, how the Kyoto protocol will affect the revenues of the countries, how the introduction of new sources of energy will affect the shares of our markets. It will be more focused on the future than todays. And of course it will work more together, also just like OPEC, people will work together, because they have a common interest in the long term.

I don’t have an interest in competing with Russia, neither does Russia have an interest in competing with me, because both of us will lose in the end. But, since gas projects take a long time – LNG takes 10 years, and a gas pipeline takes between 10 and 15 years to build – we’re going to have to start thinking, now, about what’s going to happen in 15-20 years. That’s the big difference between OPEC for oil and the forum of gas producing and exporting countries. But both have something in common, and both are going to be economic organizations. They are not going to be political organizations.

The forum of gas producing and exporting countries will be formalized by an agreement between various governments who want to be members of that forum. It defines the objectives of this forum and how it’s going to be organized. Basically, it’s going to be organized just like OPEC for oil is organized. Which means it will have a President, it will have a Secretary General, it will have a board of governors and it will also have a localization for the forum, which means a headquarters. And four countries are the candidates for the headquarters of this forum – Algeria, Qatar, Iran and Russia are offering to localize this forum.

RT: What is the stage of Russian and Algerian cooperation in the gas sphere?

Russian companies are very active in Algeria, but Algerian companies are not active at all in Russia, so we’d like to see Sonatrach, the state company, which has a lot of experience in energy, being involved in projects in Russia, like in exploration, development, LNG, maybe LNG trade and so forth, because Sonatrach has the biggest experience in LNG. We exported LNG to the UK in 1964. We have 45 years of experience.

The price today, at $40, is going to eliminate a lot of gas projects, because $40 a barrel means 4 dollars a million Btu or less. $4 doesn’t even cover the cost. So lots of projects will be postponed whether it’s for LNG or gas pipeline projects. And it will affect the gas market in the next ten years, because it takes that long. So to have a decent gas market you have to have an oil price of at least $70 to $80. That would mean to justify competing in the US market – the US market is about 6 dollars – so if you have $4 today, you are not going to compete in the market of $6, you are going to lose $2. So you have to have $70 to $80. So the same rationale that we talk about for the oil to have at least $70-$80 to develop new reserves, is valid for gas. Gas contract has already been put in place, for the last ten years, maybe for the next ten years. Some of them are indexed, to fuel oil, to gas oil, because these are, really, the competing fuels in the market. Except for the gas that you sell on the spot market. There are basically two free markets – the UK and the US. For those you can sell on the spot market, you get the price of the market, and those are gas-to-gas competitions. It’s gas competing with another gas, coming from some other countries. But in Europe you are really competing against gas oil and fuel oil, and also competing with other energy sources: nuclear, solar and so forth. So your indexation works well as long as you have that situation, when you are competing, but today you are going to compete with gas, on gas-to-gas. And today you are going to have a spot market. Then you will have a free market and gas will have its own determined price.