How to Profit from the Coming Euro Gas Shortage

The impact of the massive natural gas deal between Gazprom and the Chinese this week will be felt for years.  It has absolutely shocked me how little press has been devoted to this $400 billion 30-year deal for Russian gas.   One wave of Putin's pen has entirely shifted the way we'll now need to look at the European energy picture.

Interestingly, no final price has been settled on for this massive deal. This is, on the face, a very bad sign for Gazprom, implying that the Chinese are demanding exceedingly cheap gas contracts assumed to be more than $100 per thousand cubic meters LESS than Russia currently charges into Europe.

But Putin is willing to deliver such cheap supply to China for more than 30 years hence because it gives him so much more leverage into Eastern Europe and the EU and a particularly strong hand to play in Ukraine.  With a new and ready customer to the East, Gazprom no longer needs the EU markets nearly as much as the EU needs Gazprom.  It is now the Europeans who will have to scramble, and quickly, to find new natural gas sources before the bulk of the gas starts heading for China in 2018.  

That sounds like a lot of time, but it's not - and Putin will not wait 3 years to begin turning down the spigots in the winter into Ukraine and the EU if he's unsatisfied with political outcomes.  It is a tactic that Gazprom has used successfully twice; in 2006 and 2009, and US sanctions and tough talk has Putin ready to fight back in a way that is unstoppable.  He's going to freeze Europe - literally.  

Now, looking through that window of possible events makes the walk away of Woodside Petroleum (WPL) from the Leviathan partnership they had in the Levant basin of the Mediterranean with Noble Energy (NBL) look exceedingly short-sighted.  Noble clearly wanted to grab the low-hanging fruit of Leviathan first, by signing local piped gas deals with Egypt and Jordan - a move that would monetize their monster gas find in the quickest way. Woodside, clearly, was much more excited about a big LNG investment that would move gas into Europe - an idea that would cost billions more and take several more years to see profit on.  And it is not clear that Israel isn't about to get greedy on Leviathan and perhaps Woodside also feared a "Brazil-like" money grab on the Mediterranean leases by the Israelis.   

But adding that all up doesn't matter at all - with the new Russia/China pact, the gas under the Med has become much more valuable than it was even 24 hours ago, with many European suitors now drooling at the gas prospects Woodside thought Noble had abandoned. Yes, Woodside could have had it all - they're big enough to handle the opportunity of Leviathan and Tamar - but now they've left.  And Noble knows they'll need a partner, someone perhaps even bigger than Woodside to grasp the biggest prize here - the LNG project that Woodside wanted.  And it's coming.  And now it'll come even faster.

My bet for that next partnership is on Total (TOT), the French giant who has a fabulous record of playing in tough Mideast political waters  (Libya, e.g.) while getting the energy out and is a natural go-between to the Israelis and their prospective cut on sales, and the hunger of EU members for this new source of natural gas.

I'll bet the phone will ring in Houston soon and Chuck Davidson will hear a French accent on the other end - and perhaps find a partner capable of seeing forward to the future and realizing the potential of Leviathan in light of a coming Euro gas shortage.  

Bottom line is  -- I really, really like Noble energy here.