Fears over the possible formation of a 'gas OPEC' -- coordinated from Moscow and including all major gas producing states -- have made headlines since the idea was mooted by Iranian President Mahmoud Ahmadi-Nejad in 2006. At the time, Ahmadi-Nejad reportedly proposed to establish a Russian-Iranian cartel to steer gas prices.  The two countries together have 41.5% of world proven gas reserves, and the possibility of a 'gas OPEC' would surely raise concerns in Europe, already facing record high gas prices and preoccupied with the question of its energy security.

Meanwhile, the idea of gas-producing states coordinating their actions is neither new nor easily realisable. Former Gazprom chairman Rem Vyakhirev first proposed it in 1998, and discussions also took place within the Shanghai Cooperation Organisation (SCO) to set up an 'energy club', which could include Russia, Kazakhstan, Uzbekistan, China and Iran, which currently has observer status in the organisation.

However, the nervousness with which the international community received Ahmadi-Nejad's proposal gave Russia the idea that it could pursue 'gas OPEC' -- at least rhetorically -- to gain additional leverage among the consumer states. Consequently, Russian leaders did not rule out the possibility of leading a joint effort to coordinate gas volumes and prices, and the idea featured prominently during Putin's visit to the Middle East -- notably, in talks with Qatar, but also Saudi Arabia. If such a cartel were to go ahead, Algeria would become Russia's natural partner.

On the surface, the world's largest gas exporters appear to have strong incentives to keep gas prices high, given their reliance on energy exports and revenues. Yet there are major differences between the oil and gas markets that make forming a gas cartel unrealistic.

Price manipulation difficult

The first and most obvious reason is the fact that most gas is sold on long-term contracts, which makes OPEC-like price manipulation far more difficult. Breaking contracts is not an option, as gas producers would be subject to stringent arbitration penalties. Furthermore, the gas market is rigid, as this commodity travels by pipelines to specific destinations, making rapid changes very difficult. The growth of liquefied natural gas (LNG) may reduce this rigidity in the future, but at present the LNG section of the market accounts for a relatively small share of all gas sold and bought. Technical problems when tinkering with production volumes would have a detrimental effect on gas wells and result in losses to the producer. 

Geopolitical strife

However, even if a gas OPEC were technically easy to set up, geopolitical problems would prove paramount. Moscow would demand to lead any such cartel, but that could only come at the expense of its relations with Europe, China and the United States. It is indeed highly dubious that Moscow would be prepared to make such a sacrifice to secure friendships with Iran and Algeria. Despite Moscow's tacit support for Tehran on its contentious nuclear programme, the Kremlin would regard a nuclear-armed Iran as an acute geopolitical threat on its doorstep. Moreover, Iran's massive gas reserves make it a serious competitor in the long run, especially if and when the country opens to foreign investment.

Algeria, on the other hand, has been traditionally regarded in Moscow as a 'junior ally' in Africa. But it has recently shown intransigence in both gas and arms negotiations. Sonatrach has reportedly abstained from renewing the gas cooperation pact with Gazprom, signed in 2006. Sonatrach management stated that the agreement had resulted in "nothing concrete", while Gazprom confirmed that the sides had diverging strategic approached.

Problems with Algiers have not been constrained to the gas sphere. The contract to supply jet fighters to the country has been suspended, after the Algerian authorities expressed dissatisfaction with the quality of Russia’s MiG-29UBs, delivered in late 2006. The jet supplies are part of a package on military-technical cooperation, worth some 8 billion dollars, which Russia has negotiated in exchange for writing off Algeria's foreign debt to the former Soviet Union.

Gas OPEC and military cooperation will feature high on Putin's and Bouteflika's agenda when they meet in the Kremlin. While the suspension of the MiG contract negatively affects Russia's arms deals portfolio today, the formation of gas OPEC remains unrealistic and would prove detrimental if pursued further.