Oil and gas industry executives met in St. Petersburg this week during the St. Petersburg International Gas Forum to discuss energy's future and sustainable development models amid new realities. During one energy panel it was highlighted that the world needs Russian gas to keep the "lights on," which is in strong contrast to the Trump Administration's efforts to sabotage it through sanctions.
How do we play this market?
We recommend that investors buy Rosneft shares as crude oil makes its upward rally and hedge the "sanctions risk" with the iShares MSCI Russia ETF. The fund's largest holdings include Lukoil (LUKOY) with a 16% weight and Gazprom (OGZPY) with a 13.48% weight. Investors focused on U.S. stocks should continue to buy Cheniere Energy (LNG) shares on any weakness related to geopolitical risk. While there's no clean hedge or ETF for LNG-related trades, a relative value trade that could minimize the exposure to global LNG would be short Tellurian TELL as it's an early stage LNG developer.
Russia's oil and gas growth are unstoppable regardless of any sanctions and investors should act accordingly. The Trump Administration's political leverage decreases as it gets closer to potentially harming its major trade partners in Europe and Asia, who not only depend on Russian natural gas, but also are heavily invested in assets in the country.
Companies like Royal Dutch Shell (RDS.A) and Total (TOT) have a vested interest in keeping Russian natural gas flowing into the European and Asian markets. Shell is an investor with Gazprom in the Sakhalin-2 LNG project off of Russia's Pacific coast, along with Japanese commodities powerhouses Mitsui and Mitsubishi. Total is an investor in the Yamal LNG project with Novatek (NOVKY) and China's oil giant, CNPC.
Sakhalin-2 supplies about 4% of the world's current liquefied natural gas (LNG) market, and Japan, South Korea and China are the main customers for oil and LNG exports. Any further U.S. sanctions against Russia threatens the flow of natural gas towards our key Asian allies, thus escalating geopolitical conflict.
Yamal LNG is also one of the most competitive as it leverages the immense onshore gas resources of Russia's Yamal Peninsula. The project aims to tap natural gas reserves totaling more than 4 billion barrels of oil equivalent. Every year, nearly 16.5 million metric tons of LNG will transit through the port of Sabetta, with all LNG production sold to customers in Europe and Asia under 15- to 20-year contracts.
Royal Dutch Shell CEO Ben van Beurden emphasized during the conference that if the U.S. imposes sanctions on export projects his company will have no choice but to abide by those restrictions. However, long-term LNG contracts will be extremely difficult and onerous for the multiple parties to unwind (buyers, sellers, lenders, vendors) were sanctions to hurt Russian LNG exports, delivering a gigantic and systemic force majeure, as it's called in the industry, which could in turn also hurt the U.S.
In conclusion, it's clear that Europe will need more imports as indigenous production in Europe is in decline and that Europe will need to import from multiple sources. Whether we want it or not, Russia is a cheap and reliable supplier of natural gas and probably one of the most competitive versus expensive U.S. LNG.
We anticipate that global energy lobbyists and the leaders of European and Asian nations will be spending a lot of time in the White House trying to President Trump away from the sanctions pen.
