Will the West’s Energy Play Deter Russia?
Gazprom, the Russian energy crown jewel, has seen its valuation drop considerably in the last few months in tandem with the Russian-Ukrainian crisis. Investors are having mixed reactions about Russia’s investment environment, though some are still playing roulette. Sanctions against Russian-linked investments must be carefully watched as they have significant valuation outcomes. Russia is now excluded from the June G-8 meeting, which has been moved from its original venue of Sochi.
Interestingly, markets reacted Tuesday, March 25th, by raising the stock price of Gazprom and Lukoil. In fact, Lukoil spiked 6% before coming back down. Markets have settled into the current state of the Russia-West standoff. Shorting Russia, so to speak, potentially shorts many other firms like British Petroleum (BP), Exxon (XOM), Chevron (CVX) and Shell (RDS.B) (RDS.A). Washington could extend sanctions in key industries, which includes Russian energy, if any further challenges are initiated by Russia.
Many in Washington are wishing they had unlocked U.S. natural gas exports earlier. But the issue is receiving center stage with testimony happening today about accelerating liquified natural gas (LNG) exports. As a way to strengthen energy positions, the North American energy trifecta of the U.S., Canada and Mexico need steadfast, well-conceived policies, keeping recent events in mind, but long-term goals front and center. U.S. exports of LNG will not start officially flowing until the end of 2015 through Cheniere’s Sabine Pass facility located on the Louisiana side of the Gulf of Mexico. Another new LNG facility was approved on March 24th in Oregon.
Europe has options to diversify its energy portfolio, but it will take time to develop. Each country has differing energy portfolio options from European Union heavyweights like France and Germany to more peripheral countries. In a Stratfor note, “A South Stream pipeline project could come to a halt following an EU summit during which leaders decided the Continent should decrease its energy dependence on Russia, Euractiv reported March 24. The South Stream would bypass Ukraine to deliver gas to Europe.” To diversify Europe’s reliance on Russian oil and gas, new prospects like Cyprus and Israeli gas in the Eastern Mediterranean and infrastructure that links alternative routes and supply sources are being suggested.
A recent article “Russia’s Gazprom, European Energy And U.S. Oil And Shale Gas: Shorting Russia?” highlights some of the drivers influencing energy politics and economics that have been dominating headlines. On March 24th, investors debated their positions, with a market consensus that Gazprom may have hit bottom given today’s further rise.
This current standoff between Russia and the West will likely take twists and turns for some time in the future. Investors in energy may need to brace themselves for a bumpy ride.