The EU’s Gazprom Headache

Despite all its natural gas wealth and long-term promise, Russia is an incredibly hard place to do business. Just ask BP (NYSE:BP) investors how their TNK-BP joint venture is going.

The latest headache involving the former communist nation comes just one month after Russia finally joined the World Trade Organization after trying for the last 19 years. With the ink barely dry on the historic agreement, European Union antitrust authorities began a formal investigation this week into whether the Russian natural gas giant Gazprom (PINK:OGZPY) had blocked fair competition in the markets of Central and Eastern Europe.

With Russia supplying about a quarter of Europe’s gas needs, the probe underscores one of the most pressing issues in Europe — finding a reliable and safe source of energy. With nations like Germany and Switzerland beginning to shut down their nuclear operations, many policymakers and analysts see natural gas as the go-to source to fuel the continent’s rising energy needs.

However, despite Europe’s vast reserves, development of unconventional assets and shale gas has been mild at best. Thanks to bans on hydraulic fracturing (or fracking), tough geology and various political issues, Europe’s shale gas industry has been almost nonexistent aside from a few nations.

This is exactly why you don’t want to stir up the bees’ nest and piss off your largest supplier. Things will get ugly here and could have some interesting effects on the global natural gas market.

“Nobody Wants a Gas War”

The EU antitrust probe against the Russian energy giant stems from three factors. The two biggest of which argue that Gazprom may have hindered the free flow of gas across Europe as well as imposed unfair prices on its customers by linking the price of gas to oil prices.

In the official investigation statement, the EU commission said “Such behavior, if established, may constitute a restriction of competition and lead to higher prices and deterioration of security of supply. Ultimately, such behavior would harm EU consumers.” Gazprom could be fined as much as 10% of its global annual revenue if found in violation of EU competition rules.

Needless to say, Russian officials weren’t too pleased with the probe. Gazprom responded that it has followed “all the norms of international law and legislation,” while Russia’s economy minister said the probe was driven strictly by “political factors.”

Perhaps, strongest reaction came from Russia’s EU Ambassador Vladimir Chizhov in an interview with The Wall Street Journal. Chizhov highlighted the fact that the EU is free to conduct probes as it wishes, saying it “can look into anything it wants: whether there is life on Mars or whether there are some irregularities with Microsoft (NASDAQ:MSFT) or Google (NASDAQ:GOOG).” He added that Russia will always “favor negotiated solutions because nobody wants a gas war.”

There lies the biggest issue. Russia will always do right by Russia first. Nothing in its history has said otherwise. The quasi-capitalist country isn’t going to play fair, just because the EU wants it to. Especially in this case because it has the upper hand and easily could turn off the spigot. A winter in the Balkans is mighty mighty cold without heat.

At the same time, short of outright asset seizures or perhaps conflict, the EU realistically will have a tremendously difficult time forcing the Kremlin to pay those potential fines.

And Russia should have no trouble finding new sources of demand for all that natural gas, if it decides to give the EU the proverbial finger. Already, the nation is looking both east and west to secure new contracts. Gazprom recently signed a $7 billion liquefied natural gas contract with Japan and is currently in talks with Argentina’s YPF (NYSE:YPF) to provide LNG as well as drilling technology.

Europe at a Crossroads

The issues with Gazprom highlights a major problem for the EU: a lack of energy supplier diversification. In general, the monetary union has two choices.

The first is to start getting serious about fracking its own reserves. According to the U.S. Energy Information Administration (EIA), Europe has around 75 trillion cubic meters of shale gas, or roughly 39 years worth of demand. However, public outrage over fracking has caused many nations to ban the practice. Despite the threat of cold winters, many EU governments are perfectly content with letting their bounty remain fallow.

The second choice — and perhaps most advantageous for investors — is securing LNG contracts from more stable suppliers. I wrote last week how Royal Dutch Shell’s (NYSE:RDS-A, RDS-B) plans to begin drilling directly in China for shale gas could throw a wrench into the various LNG export facilities here in the U.S. Well, Europe could be a better opportunity for U.S. exporters than Asia.

Already, there’s plenty of public and political backlash for Cheniere Energy Partners‘ (NYSE:C) Sabine Pass LNG export terminal. But I suspect much of that criticism would disappear if those exports aren’t going to a real direct rival. By focusing on Europe’s growing needs, firms like Sempra Energy (NYSE:SRE) and Energy Transfer Equity (NYSE:ETE) could see their ambitious LNG plans come to fruition because they should have an easier time passing regulatory hurdles.

In the end, Europe’s Gazprom natural gas headache could be a great opportunity for producers and exporters here in the U.S.

As of this writing, Aaron Levitt didn’t hold any securities mentioned here.

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