Monday, December 10, 2007

Russia and Algeria: Natural Gas Partners?

Natural gas price fluctuation in different areas is directly associated with the number of suppliers and distributors that are competing for shares of the market. Much in the same way that filling stations jockey for interchangeably lower prices one week and higher prices the next, large natural gas purveyors compete with each other for their consumers’ dollars. This competition is healthy and helps to create a healthier economy with more honest, realistic pricing because of different companies keeping each other in check. When companies band together and coordinate their prices, all competition is gone and the threat of skyrocketing prices is a very realistic one.

Russia controls over a quarter of the world’s gas reserves. No other single country possesses as many large fertile gas fields. Presently, however, Russia is experiencing a bit of a squeeze. The natural gas rich nation seems to have been overextending itself in exporting natural gas to other countries in the last decade, while needs at home have been exponentially increasing. The Russian gas giant, Gazprom has found itself deeply in debt and taking all sorts of options into consideration to heal its woes. Perhaps that explained the drastic measure taken in April 2006. All of Europe watched anxiously as Russia and Algeria, Europe’s two largest suppliers of natural gas, entered into talks in 2006 to form an alliance between the two nation’s natural gas companies. The two powerhouses signed an agreement, a “memorandum of understanding”, calling for a coordination of gas prices, which could have inevitably driven up prices in Europe and beyond. Perhaps the cooperation of Algeria could help Russia more immediately by helping raise prices of gas across Europe and help Gazprom get back into the black. With Gazprom supplying 25% of the European Union’s natural gas needs and Algeria providing another 10%, some countries within the EU, such as Italy, for instance, would experience unavoidable situations where dependence upon Russia and Algeria combined would reach a whopping 72% of market share. Corruption would be inevitable and smaller countries would experience cold winters or empty pockets. Could Russia and Algeria actually work together to create a natural gas cartel in Europe?

Apparently not. Europe collectively breathed a sigh of relief this week when the union was rendered null and void and the collective agreement between the two state-owned gas companies was dissolved. The threat is still a viable one, however. Once two countries enter talks that would collectively make themselves richer, the lure is strong to return to the table again until an agreement sticks.

About the Author: Robert Jent is the president of Triple Diamond Energy Corp. Triple Diamond Energy specializes in acquiring the highest quality prime oil and gas properties. For more information, visit

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