Sorry Europe, Russia Has a New Friend

Russia continues to make waves in Ukraine, using its energy riches as a bargaining chip. That's put Europe in a bind. However, a rekindled friendship between Russia and China could make life even harder for Europe on the energy front, but even better for U.S. gas exporters.

Looking out for number one
Russian natural gas giant Gazprom (NASDAQOTH: OGZPY  ) highlights Europe as a good market, noting such things as the region's decreasing gas production and increasing use of natural gas in transportation and other sectors. In fact, Europe accounts for about 50% of the Russian company's revenues.

But here's the rub, Gazprom is pretty much controlled by the Russian government. So, Gazprom has to do what it's told even if what it's doing would be bad for business. Like, for example, cutting shipments to Ukraine when Gazprom knows full well that it will hurt its business in Europe. And the impact goes beyond just the financial, since key European markets will have to rethink energy security when they sign a deal with Gazprom.

(Source: CIA)

A friend in need...
That's where China comes in. China and Gazprom just signed a $400 billion gas deal that will allow the Russian gas giant to shift away from Europe. That's good news for Gazprom and gives Russia more freedom to make waves. However, more waves could turn out to be really bad for Europe.

If Russia starts to ship natural gas to China in large quantities, it's likely that Europe will become a second-class citizen. It will have to find other sources of energy. That will likely mean more coal, nuclear, and oil will get used than otherwise might be the case. However the region can't just stop buying natural gas.

...is a friend indeed
That's going to make the U.S. natural gas boom an even more important element on the world stage. Right now it's hard to get U.S. gas on the water, but with Russia's shift toward China, the push for more natural gas exports could get increasingly loud. Already there are a number of terminals on the drawing board or under construction.

For example, Freeport-McMoRan Copper & Gold (NYSE: FCX  ) has made a pivot of its own, toward oil and gas drilling. This division now makes up about a third of the company's business. Although that's big news, it would be even bigger if Freeport could get its 50/50 joint venture with United LNG up and running. This duo is working on the Main Pass Energy Hub in the Gulf of Mexico.

Freeport's offshore facility would export natural gas, and the East Coast location would make Europe a prime market. It's in the middle of the approval process, but the facility already has a tentative 20-year deal with India. If gas supplies to Europe fall short because Russia makes an Asian shift, that would give Freeport and its Main Pass terminal a potential new destination for its natural gas.

(Source: George Shuklin, via Wikimedia Commons)

Further along in the approval process is Cheniere Energy (NYSEMKT: LNG  )  and its Cheniere Energy Partners LP, which is building the Sabine Pass terminal. This project has numerous customers already lined up with long-term contracts. However, since the project is still under construction, Cheniere Energy has been a money-losing business for the past five years.

Cheniere Energy is Cheniere Energy Partners' general partner (GP), so as long is there's no natural gas being shipped, there's no money being passed up to Cheniere Energy. However, once the gas starts flowing, look for both the GP and Cheniere Energy Partners' fortunes to change fast. The potential for increased demand out of Europe would help ensure plenty of demand.

A great development
Russia shifting gears toward China is a great development for the U.S. gas export market. And since Gazprom has already found a new customer, the real loser here is most likely to be Europe. But as an investor, what you need to watch is how the shifting gas market has the potential to make the big gas export investments by companies like Freeport-McMoRan and Cheniere even more valuable.

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Read/Post Comments (9) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 31, 2014, at 10:43 PM, kennyhobo wrote:

    Will the Obama Energy Policy destroy Europe? It is likely it will. What's worse is that the Obama attack on coal will stop African nations from developing. It is actually genocide.

  • Report this Comment On June 01, 2014, at 12:50 AM, aleks09 wrote:

    That's what companies do when the customer doesn't pay -- stop providing goods and services.

  • Report this Comment On June 01, 2014, at 1:20 AM, gvidela wrote:

    Unlike panorama as described, is not getting into account that Bahrein has the biggest LP hub in the region and if the action is to ship LP that will be a reasonable source where Europe can supply in LP, but nothing simpler and more economical that a gas pipe. Shipping from the US has more complicate logistics; the amount of ships and the distance to supply Europe needs is staggering, and also the over head that goes along with it.

  • Report this Comment On June 01, 2014, at 4:55 AM, amvet wrote:

    The largest cloud on the horizon is that our supply of NG appears to be much less than hyped. Some experts have reduced our so-called 100 year supply of NG to 5 to 7 years. Our only area of NG production growth is shale and that does not look good.

    Many US oil and NG fields have large production decline rates. The EIA provides monthly data on six shale fields on the production decline of older producing wells vs the production from new wells. More and more new wells will be required to keep production from shrinking.

    Key word---Legacy.

    See

    http://www.eia.gov/petroleum/drilling/pdf/dpr-full.pdf

  • Report this Comment On June 01, 2014, at 10:57 AM, Dart14N wrote:

    Three reasons why this analysis is wrong:

    1. The gas going to China will be predominantly from east Siberia gas fields, not from the western Russian fields from which gas shipped to Europe originates.

    2. China won't pay Gazprom the $400/tcm that Germany pays, since it can (and does) buy much more cheaply from Central Asian suppliers. And as more US LNG hits the market, the spot price will go even lower. The fact that the deal was concluded in haste after negotiations over price broke down, and that Gazprom isn't revealing the sale price of the gas, indicates very strongly that the price is much lower than the $350-400/tcm it said it was going to get when talks broke down.

    3. Russia will have to pay most if not all the costs of extending pipelines to northeast China, further eroding any net gains on the deal.

    Bottom line: with Russia's poor gas infrastructure, its margins on the China deal will be exceptionally narrow, if in fact they're positive at all.

  • Report this Comment On June 01, 2014, at 11:57 AM, jfelano wrote:

    That's ok, Europe has a new friend too, the USA. USA will be oil independent in 3-5yrs and we will be exporting oil soon, and shale gas is already starting to be exported. We just found that Colorado has more oil deposits than all of OPEC combined, that's including Saudi Arabia. That's trillions of dollars in oil we will be exporting.

  • Report this Comment On June 01, 2014, at 9:16 PM, MarioCarbone wrote:

    Here in US you haven't been evr good in geografy. And also Amaricans are mixing costs and friendship.

    1. If gas won't come from Russia, then Quatar and Algiria will provide additional LNG. They are much closer and have more cheap NG. Also Iran and Iraq are close with their large reserves.

    2. For eastern and middle Europe problem is also infrastrucure that doesn't exist. Who will pay? They don't have own money.

    3. With Russia it is two way busines. If we won't buy their energy, they won't buy industrial goods from Europe. Where then Europe can export instead of that. This production in easthern Europe is not competitive enough to compete around.

    Look for example what will happen with Ukraine production on fertilizers now, as they won't have gas at the half price anymore...

    If I could predict future of NG in US I would say that big majority of it will stay in US and it will be burn instead of coal and oil. In exchange of that US will import less oil, or will bevome even edporter. Transporting oil is far less costly because you dont need liquification and de-liquification process that double the current cost of NG as is in US.

    Cheinere itself won't be prigitable at all after it will have to compete with the prices on spot in agermany that are now 10$ and would fall to 7-8$ in future.

  • Report this Comment On June 02, 2014, at 12:06 AM, quasimodo007 wrote:

    when is the USA/WEAK EU/WAFFLING GB going to Wake to EVIL czar putin/SATAN. EVIL czar putin/SATAN has a VERY DEEP DEEP HATRED for the USA ever since the FAll of EVIL ussr.

    Evil czar putin/SATAN is CZAR of all evil russia for LIFE .So EVIL czar putin/SATAN now has Lots and Lots of MONEY and Lots of Time. Can Weak EU and WAFFLING GB hear EVIL czar putin/SATAN Singing his favorite Beatles song " BACK IN THE USSR" as he Surrounds WEAK Europe and Waffling GB. EVIL czar putin/SATAN see the USA/EVILNsA as WEAK, GREEDY/ DEAF/ BLIND/ Arrogant /Ignorant and DOWN RIGHT DUMB

  • Report this Comment On June 02, 2014, at 9:38 AM, amvet wrote:

    The only growth areas for NG in the US are the shale areas and these are not impressive. Look at the EIA data for six shale fields:

    The percentage of new NG production in one month that is offset by the decline in old production.

    BAKKEN 73:4%; EAGLE FORD 71:2%; HAYNESVILLE 93:2%; MARCELLUS 59:2%; NIOBRARA 85:0%; AND PERMIAN 66:22%

    The oil situation for each of these six fields is worse. Look at http://www.eia.gov/petroleum/drilling/pdf/dpr-full.pdf

    .

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