Gazprom’s controversial North European Gas Pipeline will connect gas fields in
western Siberia with Western European markets, especially Germany, Scandinavia,
the Netherlands, and Britain. By 2013, the two pipelines will have a combined
capacity of 55 billion cubic meters, possibly extending to Bacton in England via
the Netherlands. The pipeline’s strategic benefit to the Russians is it will
bypass those former Soviet states and ex-Warsaw Pact countries who could
compromise or even interrupt Russian gas deliveries to Western Europe in case of
political dissonance.
The pipeline adds range to Gazprom’s western markets. It also provides economic
and political leverage. Gazprom will be able to raise prices with far less risk
that the respective countries might retaliate (or merely compensate) by raising
fees for crossing their territories.
Russian politicians by now have a very clear understanding of how capitalism
works. And President Putin wants to double Russia’s gross domestic product (GDP)
within the next 10 years. Reaching this target is almost impossible without
foreign participation and cooperation. Putin credited a fair share of Russia’s
economic growth to the “positive development” of Gazprom: “This did not happen
by itself. But it was the result of certain measures undertaken by the Russian
government.”
Last month, Russia opened an undersea pipeline to Turkey that will also supply
southern Europe and possibly Israel. There are agreements with China to feed
that country’s insatiable appetite for energy with Russian natural gas. Gazprom
intends to capture 20% of the British natural gas market by 2015 as well as
build large retail networks to tap into the United States.
Gazprom is the perfect proxy for Russia’s almost inexhaustible energy reserves,
but also for its economic expansion. (Russia holds approximately one-third of
the world’s natural gas reserves, and ranks in the top 10 countries for oil
reserves.) We consider Gazprom as the most promising strategic energy you can
make this decade. Gazprom has established one of the most effective
international networks of joint ventures. Management is actively developing
plans for exploiting a gargantuan natural gas reservoir in the Arctic to supply
U.S. markets by 2010.
The company is far more likely to come out ahead of any government- triggered
“special measures” than anyone else. It’s corporate diplomats are nothing short
of amazing when it comes to creative problem solving. As the company expands and
solidifies its power base, we see increased institutional buying, especially
from the United States and China, to drive up the stock price. The good news:
Gazprom is trading in the United States as an over-the-counter ADR. (ADRs
require a company to adhere to U.S. accounting standards, which means there is a
limited possibility for numbers games.)
We recommend you allocate part of your strategic capital to purchase Gazprom
OAO (OTC: OGZPY), and, after the emerging markets rout in June, is currently
priced at around US$40 per share.
This is a long-term play we will follow for the next couple of years, with a
potential upside of 20-50% per year. We advise that you observe a 30% trailing
stop on your position.
