Russian Exile: How Europe Will End the Kremlin’s Natural Gas Monopoly

Russia controls the European natural gas market. The map below shows the gas pipelines running from Russia, into Western Europe, and South and East Asia:

Russia controls the European gas market
Click here to enlarge
Source: MIT CENTER for Energy and Environmental Policy Research (July 2011),
IEA 2009, Gazprom

For years, Europe has been at the mercy of Russian natural gas suppliers. And in 2006, Europe bore the brunt of a pricing dispute when Russia simply turned the gas off. Nothing flowed through the pipes.

Again, in 2009, Russia switched off the flow of natural gas, but this time, only to the Ukraine over another pricing dispute. Other parts of Europe received limited amounts of natural gas.

And just to prove a point, in February – in the middle of a cold snap during a mild northern winter – the Russian state-owned gas company, Gazprom decided that it would only supply the amount of natural gas it was contractually bound to.

Sergi Komlev, head of contracts and pricing at Gazprom Exports, told the Financial Times:

‘Gazprom has agreed contractual volumes that it is obliged to supply, to the month and the day. We are fulfilling these obligations but our customers want more volumes than we are obliged to supply.’

It didn’t matter if people were cold, or unable to cook. The company would only supply what was required, rather than what was needed. Chances are Gazprom could have met the extra demand if they wanted to. It was a big ‘stuff you’ to the freezing Europeans.

However, Gazprom will only have itself to blame in the future when it has one less customer.

Ukraine Open to Foreign Investment in its Natural Gas

Last July, a Russian research paper commented on how many European companies wanted to end Russian natural gas dominance:

‘The attitude in Europe towards the prospects for Russian imports seems to be periodically changing from a perceived dominance of Russian gas imports for years to come and a threat to a European energy security.’

The thing is, European countries have their own significant 639 trillion cubic feet (tcf) deposit. So why don’t they develop that?

Simply because of the cost.

Take the Ukraine for example. It has a 38 tcf reserve of natural gas. But Russia offered the Ukrainian government lower than market gas prices for use of the Ukraine pipelines.

That was up until 2008. And then the price started to climb.

Right now, the Ukraine government pays about USD$516 per 35,314 cubic feet of Russian gas. Enough to fill a full-size blimp. Funnily enough, when this price was set last year, it was almost USD$200 above the market price of Russian gas. The Ukrainians were getting stooged on the price…

And so, the Ukraine government complains about the high natural gas price. The Russians happily offered to lower the price. But, only if Ukraine handed them full control of the natural gas pipelines.

Handing over control of the pipelines is something the Ukraine wouldn’t do. Instead, they chose to develop its potential 100-year natural gas reserve.

Just last week, the country opened its borders to international bidders to explore and develop some of the vast natural gas deposits.

There’s no news on which company was successful, but Chevron Corp, Royal Dutch Shell and Exxon Mobil Corp all placed offers to secure a permit for exploration.

Why only now are these big boys moving in? Vitaliy Radchenko, an energy researcher at CMS Cameron McKenna in Kiev said,

‘Up to now most foreign investors have been cautious in embracing Ukraine. The country’s unstable political climate, excessive red tape and high corruption levels have kept foreign business away.’

What’s changed? Simply put, the government no longer wants to buy something from its neighbours when it can develop its own resource.

Radchenko said,

‘For years key policy makers in Ukraine were betting on the fact that somehow they would get the cheap Russian gas. Now it’s clear that this is over, so that puts a lot of pressure on the system to change.’

Profiting From European Natural Gas Explorers

You see, the situation in the Ukraine isn’t unique. Many European nations can no longer risk their energy future and energy security on Russia.

And the best part is, you can take advantage of this.

In fact, there are a handful of Australian listed companies with opportunities in Europe already.

Kris Sayce, editor of Australian Small-Cap Investigator has been watching these stocks for a while. And he thinks now is the time to take advantage of the opportunity in Europe:

‘I’m betting on Europe eventually getting its act together and figuring out that it can no longer rely on the Middle East and Russia for its energy supply.’

He told subscribers in the April issue:

‘…I believe Europe is due to embark on a huge re-evaluation of its energy strategy. And I believe gas will be at the forefront of that strategy.’

If you’re keen to see how Kris plans to take advantage of the growing natural gas movement in Europe click here.

Shae Smith
Editor, Money Weekend

The Most Important Story This Week…

The Reserve Bank of Australia cut the interest rate this week. This was a direct attempt to take pressure off the debt-laden Aussie consumer. This might work in a small way. But what it can’t do is stop the slide of house prices in Australia. This is because the real estate market is dependent on the demand for credit, not the cost of credit. With borrowing demand dropping, house prices are following in the same direction: down.

This is the same reason why house prices in the USA have fallen to their lowest level in decades despite record-low interest rates for a record amount of time. Eventually Aussie house prices will hit a bottom. How they hit that bottom is the question. Money Morning editor Kris Sayce originally thought it would be a crash – a quick, dramatic fall. But recent data has caused him to change his view. Unfortunately, as he writes in How Did We Get It So Wrong on Australian Housing?, it’s something actually worse than the crash he previously predicted.

Since starting out in the financial markets over a decade ago, Shae has extensive experience across various aspects of the industry. Shae cut her teeth in the derivatives industry, teaching clients basic trading techniques with technical analysis.

Joining Fat Tail Investment Research eight years ago, Shae has worked across a number of publications, such as Australian Small-Cap Investigator, Gold Stock Trader and Microcap Trader. She’s spent the past two years however, honing her macro analysis skills alongside Jim Rickards, showing Australians how to invest and profit form global macro trends.

Drawing on her extensive experience, Shae is a contributor to Money Morning, and lead editor of sister-publication Markets & Money, where she looks at broad macro trends developing around the world, combining them with her distaste for central banks and irrational love of all things bullion.

Money Morning Australia