Friday, September 5, 2014

How Will Europe Survive This Winter Under Putin's Energy Chokehold?

By Karim Rahemtulla

Vladimir Putin has a death grip around Europe’s neck, and he could deliver the final squeeze at any moment.

As you likely know, Russia provides about one-third of all the fuel used by Europe, fuel that Putin can cut off whenever he pleases.

In other words, there’s very little that Europe can do to stop Russian forces from advancing on Ukraine.

Now, Putin has called for a “political solution” to the situation in Ukraine, and EU leaders have put off any further sanctions against Russia at this time.

But as these peace talks ensue, what options do Putin and EU leaders have going forward?

The Choking Point

In the short term, the Russians are in the driver’s seat.

Ukraine is a major conduit for Russian energy to Europe. It’s a country blessed with rich farmland – a regional breadbasket of sorts. Russian natural gas passes through pipelines in Ukraine to customers all over Europe.

Some countries – like Bulgaria, the Czech Republic, Hungary, and Slovakia – are wholly dependent on energy from Russia.

Europe cannot put the screws on Russia by halting energy imports, as it currently has no alternative. Especially when the temperature drops and energy demands rise in the coming months.

At the same time, Russia would be foolish to stop energy exports to Europe, as it would only hurt their coffers. According to Eurostat data, Russia supplied some $250-billion worth of coal, oil, and gas to Europe. That’s around two-thirds of the government’s revenue.

Putin does have another option, however… By deliberately disrupting energy exports, he could trigger a winter of discontent and further torpedo any hope of economic recovery.

If Russia did decide to take the route of deliberate disruptions, it would be able to survive the financial shortfall as it sits on nearly half a trillion dollars in reserves.

That’s not to say Europe is completely out of options, though…

Just as the United States learned an important lesson during the Arab Oil Embargo – the real beginnings of major independent oil and gas exploration within its borders – the Europeans will have to source its energy from providers more friendly to their long-term needs.

Indeed, the Russians will force Europe to respond in four ways, three of which present immediate profit opportunities for perceptive investors…

European Response #1: Boost Imports From Other Sources. Europe will increase energy imports from companies like Norway’s Statoil (STO), which currently supplies 14% of the natural gas used in Europe. Statoil cannot replace all the gas coming from Russia, but it can boost production and its bottom line. STO stands to benefit the most in the near term.

European Response #2: Going Nuclear. Europe will have to turn its attention to nuclear energy again – just a couple of years after the region began shuttering nuclear plants after the Fukushima accident in Japan. This bodes well for companies like Cameco (CCJ), the global uranium powerhouse. Uranium prices are guaranteed to rise at the first hint of a reversal in policies regarding nuclear energy.

European Response #3: New Natural Gas Resources. It will also need to tap into fresh natural gas reserves, like the fields off the coast of Israel and potentially Cyprus (a region I visited last year). Companies like Noble Energy (NBL) are developing these massive fields in the Mediterranean. NBL isn’t ready to supply the region just yet. Pipelines and liquid natural gas facilities are still lacking. But those issues are being addressed, and natural gas could be flowing from the Mediterranean to Europe within the next three years.

European Response #4: The Long-Term (Yet Least-Profitable) Solution. The fourth option is renewable energy, such as wind and solar. Of course, producing renewable energy is still way too expensive compared to fossil fuels. The economies in Europe just aren’t strong enough to support the subsidies needed to make a difference.

None of these solutions will prevent a winter that will probably be devastatingly expensive to Europe this year. But the Russians have provided a very loud wake-up call to Europe – and the world… A wake-up call that will lead to profits for investors willing to bet on a future that confronts Russia’s imperial ambitions.

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