Where Will This Russian Energy Giant Look After China?

After China, Japan and India could be crucial markets for Gazprom as it looks to focus more on Asia.

Jun 5, 2014 at 3:42PM

Gazprom (NASDAQOTH:OGZPY) recently signed a major gas deal with China. The 30-year supply contract helps the Russian gas giant to diversify its revenue sources. However, as Russia continues to face isolation in the west in the wake of the crisis in Ukraine, Gazprom will be looking to further diversify into Asia. Indeed, the company had said earlier this year that it sees diversification into the Asian market as a priority in 2014. So where will Gazprom go after China?

Gazprom's focus on Asia
Last month, Gazprom signed a deal with China National Petroleum Corporation (CNPC), the parent company of PetroChina Company (NYSE:PTR), under which the Russian company will supply 38 billion cubic meters of Russian gas annually to China over a 30-year period. While the price for gas supplies has not been revealed by Gazprom, it is widely speculated that the price is around $350 per 1,000 cubic meters, lower than what Gazprom charges Europe for gas.

As I noted in a previous article, the deal will be more beneficial for Russia than for Gazprom. However, it does allow the Russian gas giant to diversify its revenue sources. Gazprom currently relies heavily on Europe for its revenue and the company has been looking to diversify in the wake of the Ukrainian crisis, which has isolated Russia. This explains the urgency to sign a deal with China. The key question now is where Gazprom will go to further diversify its revenue.

Japan could be another key customer in Asia
Prior to the Fukushima nuclear power plant meltdown, Japan relied heavily on nuclear energy to generate power. However, since the disaster, the country has shut down all of its nuclear reactors and is relying on imported gas to meet its energy needs. In a recent energy plan, Japan had said that it sees a future for nuclear energy in the country. Indeed, the country is likely to start some of its nuclear reactors. However, that is likely to take some time, given the opposition to nuclear in the country. Also, the share of nuclear energy in power generation is expected to be lower than pre-Fukushima days, which means that Japan will have to rely on imported natural gas.

Importing natural gas has of course had a negative impact on Japan's trade figures. The country currently relies on more expensive LNG, which has significantly inflated its energy bills. Not surprisingly, the country is now looking to Russia to bring down its energy bills. According to a report from Bloomberg, lawmakers in Japan have revived efforts for a $5.9 billion natural gas pipeline from Russia following the deal between Gazprom and CNPC.

Gazprom and Russia are likely to be keen to further discuss a pipeline now that Japan has shown interest.

India could be a major market for Gazprom
Another major market for Russian gas in Asia could be India. According to the U.S. Energy Information Administration, India is the fourth largest energy consumer in the world. Currently 35% of the gas consumed in India is imported.

Like Japan, a large part of India's imports is expensive LNG. With India also looking to bring down its current account deficit and secure its energy needs, it could serve as an important market for Russia and Gazprom.

Why Gazprom needs to diversify
In 2013, gas sales to Europe and Turkey accounted for 32% of Gazprom's total revenue. Even without the Ukraine crisis, there was a need for Gazprom to diversify its revenue sources as the shale boom in the U.S. has changed the dynamics of the global energy market. There are currently restrictions on U.S. LNG exports. Currently, Cheniere Energy's (NYSEMKT:LNG) Sabine Pass is the only project that has all the required approvals.

However, the U.S. has been under pressure to approve more projects, especially after the Ukraine crisis. In addition, Europe continues to look for alternative sources to meet its energy needs. Given this scenario, it is important for Gazprom to cut its dependence on Europe. After China, Japan and India could be two crucial markets for the company in Asia as it looks to diversify.

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Varun Chandan Arora has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.

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