War in Ukraine Highlights Europe's Biggest Need in the Energy World

With the situation in Ukraine looking bleaker by the day, natural gas prices in Europe are on a rapid climb. This would be less of an issue once BP can get its Shah Deniz gas project off the ground.

Mar 4, 2014 at 11:15AM

Think of the global energy markets like a spider web. Each single strand connected to another, but some of the strands are more critical to the entire structure. Take both Syria and Ukraine. Like a short strand in the middle of the web, the Syrian civil war has had little impact on the greater energy market because it is not a major producer, consumer, or major transport hub. Contrast that to Ukraine, which is a much more critical part of the web. Its geographic location makes it the gateway for the European natural gas market, and the potential disruption of that gateway could send Europe into an energy crisis. 

While this situation looks dire to many, BP (NYSE:BP) should see this as a great opportunity for one of its projects. Let's take a look at why Ukraine's civil strife could send Europe's gas prices through the ceiling and why BP is in such a great position to change it. 

Ukraine and Europe's gas market


Source: commons.wikimedia.org/P.S. Burton.

Ukraine itself is not a major energy player when it comes to the consumption or production of natural gas. What makes it so important, though, is its location between the natural gas fields in Russia and the demand centers of Europe. The natural gas that flows through Ukraine represents 34% of all imports to the European continent, and all of that gas originates from Russia. For years, this has made the relationship between Ukraine and Russia so important to natural gas across Europe. 

To give an idea of how important this relationship is, we only need to look back to 2006. Russia's Gazprom and Ukraine found themselves in a pricing battle that resulted in Gazprom shutting off the gas to Ukraine. Within hours of the pipes closing, France, Germany, Italy, and several other European nations all saw gas line pressure drop by at least 30%. Luckily, the conflict only lasted four days and deliveries of gas were restored. 

If the conflict in Ukraine were to persist, there is a chance that something similar could happen, which would strike a major blow against a slowly recovering European economy. Several projects from Russia such as the Nord and South Stream Pipelines provide crucial links between Russia and Europe without passing through Ukraine, but the recent standoff over Russia's involvement in Crimea could put many European countries in a difficult situation regarding intervening in the conflict and energy security. 

From conflict, opportunity
The tension over the conflict in Ukraine makes one thing very clear in the energy market: Europe needs to diversify its energy sources. Liquefied natural gas will certainly play a large role in it, but there is one project operated by BP that could have an even deeper impact: the Shah Deniz gas project.

Sd Pipeline Map

Source: BP media relations.

Shah Deniz and the adjacent work on the Trans-Anatolian and Trans Adriatic Pipelines would be one of the first established links between the gas fields of the Caspian Sea and continental Europe that would not traverse either Ukraine or Russia. Once fully complete, the entire project will supply Turkey and European companies with 2.5 billion cubic feet per day. This amount is equivalent to almost 10% of Europe's total imports. 

While it may be a good idea for Europe, this is a great outcome for BP and its partners in the project, the Azeri national oil company SOCAR and Statoil (NYSE:STO). Current prices for imported gas in Europe hovers at about $11 per thousand cubic feet, almost double the price for an equivalent amount of gas here in the United States today. By choosing to construct a pipeline instead of trying to construct an LNG facility, BP and its partners will be able to avoid the higher costs of liquefaction and transport of LNG. Once the second phase of the project is completed in 2018, its production will generate just under $10 billion in revenue annually based on today's European spot prices. Also, based on the size of the natural gas find, the project should have a life of more than 40 years.

Recently, Statoil has sold part of the project back to BP and SOCAR, reducing its working interest from 25% to 15%. Also, Total (NYSE:TOT) has announced that it will sell its entire stake in the project. Some might consider these signs that the project is doomed, but they are both more indicative of the situaion for both individual companies. Statoil has said it wants to focus more on some recent offshore discoveries in Norway, and Total is looking to shed several assets off its books where it is not the operator. 

What a Fool believes
BP isn't the only one to see supplying gas via pipeline as a highly profitable venture. Noble Energy (NYSE:NBL) has mulled over the idea of supplying gas to Europe via pipeline from its recent gas discoveries in the offshore regions of Israel and Cyprus, but it is running into a slew of problems. Ultimately, though, projects like BPs should not only provide a crucial diversification of the European gas market, but it will likely be a core asset for BP for many years to come as it starts to rebuild its portfolio following the Deepwater Horizon sell-off. 

What will be 2014's version of Core Labs?
The Motley Fool's chief investment officer really nailed his 2013 top stock pick with oil services company Core Labs, which shot up a spectacular 75% this year alone! Now, he has selected his No. 1 stock for 2014, and it's one of those stocks that has the potential for a great year ahead. You can find out which stock it is in the special report: "The Motley Fool's Top Stock for 2014." Simply click here and we'll give you free access to the name of this 

Tyler Crowe has no position in any stocks mentioned. You can follow him at Fool.com under the handle TMFDirtyBird, on Google +, or on Twitter, @TylerCroweFool. 

The Motley Fool recommends Statoil (ADR) and Total SA (ADR). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers