U.S. Energy Secretary, Rick Perry, is meeting with Russian energy ministry, Alexander Novak, this Thursday to talk about Iran sanctions. And while the topic of the day most likely be Iranian sanctions and the potential cooperation from Saudi Arabia and other OPEC+ members, the item on top of Perry's agenda is to defend U.S. natural gas exports to Europe, which outlook looks threatened by Russia's growing footprint in the region.
Perry and Novak are likely to discuss the building of Russia's Nord Stream 2 pipeline project, which will carry Russian gas to Germany under the Baltic Sea, an initiative that Germany has supported all along given their dependency on Russia to meet their energy needs. Nord Stream 2 AG is owned and operated by PJSC Gazprom (OGZPY) , the largest supplier of natural gas in the world, accounting for 11% of world gas production.
According to a Reuter's article, this is a major visit for the U.S. as Perry will be the most senior country official to visit Russia since President Trump met Russian President Putin in Helsinki last July to try to improve ties that have dipped to a post-Cold War low, following the recent round of sanctions. In addition, President Trump, like many of his predecessors, must still call on large OPEC oil producers to avoid any suddent price hikes that could shoot up fuel prices going into a midterm election season.
What is most troublesome for the Trump administration, is that the Nord Stream 2 project signed financing agreements with large European companies in key allied countries: ENGIE (France), OMV (Austria), Shell (UK/Netherlands), Uniper (Germany) and Wintershall (Germany). We note that Wintershall (BASFY) is being bought out by Russian-oligarch, Mikhail Friedman, through his energy vehicle, DEA Deutsche Erdoel AG, which has interests from Mexico to Norway. In addition, European states that are involved in the construction of this pipeline include Finland, Sweden, Denmark and Germany.
Meanwhile, the U.S. has begun sales of LNG to Poland, through a Sempra (SRE) owned facility, and Lithuania, though a Cheniere (LNG) owned facility, as both European countries aim to reduce their reliance on Russian gas, even if that means paying more for the shipments than the gas sent via pipeline. The U.S. says the advantage of its LNG is dependability and stable pricing.
However, In a big blow to U.S. exporters, PetroChina (PTR) signed a 22-year deal with Qatargas this week to purchase 3.4 million tons per annum (mtpa) of LNG, which is the company's biggest supply deal. This comes amid a growing trade war with the U.S. that threatens to cut China's purchases of American fuel. Under the deal, Qatargas will supply LNG from the Qatargas 2 project, a joint venture between Qatar Petroleum, Exxon Mobil (XOM) and Total (TOT) . The first cargo will be delivered later this month. The contract is PetroChina's largest by annual volume. China's LNG imports have surged 35% in the first eight months of this year, helping it overtake Japan as the world's biggest buyer of natural gas, amid a drive by President Xi Jinping's government to boost use of the fuel.
In addition, counties like Argentina are also exploring ways to export their stranded gas. U.S.-based, Excelerate Energy, and Argentina's largest natural gas transporter, Transportadora de Gas del Sur, signed a Memorandum of Understanding to evaluate building the country's first liquefaction plant. They plan to complete the study by the end of the year, when the companies will share it with government to decide their next steps. Excelerate already supplies the two floating storage regasification units (FSRU) Argentina has for importing LNG -- one in Bahia Blanca and the other in Escobar, up the Parana river from Buenos Aires.
While we think Gazprom would most likely end up being the winner in this LNG game, we recommend shorting OGZPY stock as the company is exposed to emerging markets volatility and could be widely used as a hedge for long positions in Rosneft (OJSCY) .