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A Long-Term Look at Natural GasBy Matt Badiali, editor, S&A Resource ReportWednesday, July 7, 2010 Gazprom, the giant Russian natural gas company, wants to land a whale.
If this giant deal goes through, it'll be more support for the long-term trend we've laid out for natural gas here in Growth Stock Wire. And more price support for our favorite natural gas plays. Let me explain...
Gazprom is a monster energy company. It produces 84% of Russia's natural gas and 17% of the world's natural gas.
The company is notorious for using its supply muscle to tweak Europe's nose. In the winter of 2008/2009, the company cut off gas to Europe because of a dispute with Ukraine. Bulgaria had to close schools and ration gas supplies. Countries like Austria and Germany relied on limited reserves.
It's going to get worse. Thanks to a recent deal that is nearing finalization, China could instantly become Gazprom's largest client. The agreement says the company will supply China with 6.8 billion cubic feet of natural gas per day... roughly 15% of its current production.
Here's the thing: Gazprom can play games with its supply because there's not really a global market for natural gas like there is for oil. North America has a huge supply... and prices are low. Europe pays about 1.5 times as much for gas. Asia about four times as much. Right now, there's no way to ship large amounts of natural gas overseas and take advantage of the price disparities.
I expect Gazprom's prices to rise. Europe will have to pay a premium to keep the flows going west, rather than east to China. But the pinch will only last for so long.
What we're going to see is more investment in Europe's natural gas shales... more development of large natural gas deposits that are closer to Asia... and more investment in liquid natural gas (LNG) facilities in the U.S.
All these trends will push the natural gas market toward a global equilibrium. Over the long term, prices in Europe and Asia will fall... and prices in the U.S. will rise.
I'm not recommending any of my readers buy shares in Gazprom. Russia isn't the friendliest place in the world toward foreign shareholders. And a unified natural gas market will mean less opportunity to inflate its prices.
But I am interested in this deal. It's another chapter in a trend I'm mega-bullish on: China is consuming more coal, more oil, and more natural gas, which means a tailwind for energy investments... my favorite right now being beaten-down natural gas.
We should keep an eye on the majors that are ahead of this trend – like ExxonMobil with its purchase of the big natural gas producer XTO.
And once again, I think natural gas royalty trusts are a great play here. These companies pay big dividends by selling a commodity that's been beaten down for years now. Any move up in the natural gas price will be good for investors. And we can collect income while we wait.
Good investing,
Matt
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