Please ensure Javascript is enabled for purposes of website accessibility

Will Gazprom's Energy Threat End up Backfiring?

By Kurt Avard – Mar 11, 2014 at 5:10PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Fallout from Friday's threat does not augur well for bottom line.

Three weeks ago I wrote an article examining the Ukrainian protests and how they may affect Russian natural gas giant Gazprom (OGZPY). Essentially a state-run enterprise, the company is the largest extractor of natural gas in the world and a big part of the Russian economy, contributing just under 9% of the country's GDP. With Europe historically dependent on Russian energy, the protests raised concerns that unstable politics would eventually create unstable energy markets. 

Although Ukraine has lost one government and gained another, the instability has only increased, and the subsequent political maneuvering has led to Russia facing off with the EU and the U.S. This has only made things worse for Gazprom, as the EU Energy Commission considers implementing delays to the South Stream pipeline. Now the company is seeing massive shifts in its stock price as well as potential losses in the near future.

What is the South Stream pipeline?
The South Stream pipeline was conceived as a means by which Russia could shift its natural gas through the Black Sea and up through the Balkan region of Europe (through Bulgaria, Serbia, Hungary, Slovenia) to markets in Italy for European distribution. Long seen as a rival to another proposed pipeline (the Nabucco project) in the area, the pipeline was expected to move in excess of 63 million cubic meters of natural gas annually. With its origin in Russia, the obvious winner was Gazprom, which would gain a more reliable way to shift 10% of its annual production to market. 

Why delay the pipeline?
Despite an initial drop in the European stock market after Gazprom threatened Friday to disrupt its supplies of gas to Europe, politics is beginning to drive business decisions as Monday saw the EU Energy Commissioner Guenther Oettinger delaying talks with Russia on the South Stream in response to the crisis in Crimea. As Europe imports 30% of its energy needs from Gazprom, this may be a needlessly antagonistic move.

Or is it?

Although the EU has needed to comply with Russian energy prices in the past, changing circumstances are making the threat somewhat ineffective.

Importing less and less of its energy needs from Russia over time (30% now as opposed to 45% in 2005), the European economy is nowhere near as vulnerable as it would otherwise be. 

With the EU experiencing a very mild winter (comparative to the U.S.), a significant reserve of oil and gas remains on hand. This reserve is estimated at 40 million cubic meters of various energy stocks and permits the European Union to be a little bit belligerent. 

Are Gazprom's opportunities drying up?
Gazprom seems to be reeling in the wake of this potential delay. The stock has lost a fifth of its value. The ousting of Ukraine's last president only compounds the issue by closing off a market for the Russian company.

And things may only get worse for the giant; U.S. companies are entering into negotiations with EU companies to "pick up the slack" generated by a delay in the pipeline. Though there may be some economic disruption down the line for EU firms transitioning from Russian energy to U.S. energy, the fact remains: Gazprom may have overplayed its hand and is now reaping what it has sown.

Kurt Avard has no position in any stocks mentioned. The Motley Fool recommends Kinder Morgan. The Motley Fool owns shares of Kinder Morgan. 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.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.