The Rising Influence of Rising Affluence

[DewDiligence]

Tiny Cheniere Could Be Gazprom’s Nemesis

[The reason, of course, is LNG, which allows gas to be priced at a level commensurate with the world price of oil.]

http://online.wsj.com/article/SB10001424052748704679204575647143626625572.html

›DECEMBER 1, 2010
By LIAM DENNING

Why should Russian behemoth Gazprom worry about Cheniere Energy, a minnow struggling under a debt nine times the size of its $317 million market capitalization?

Cheniere runs a liquefied-natural-gas import terminal in Louisiana. The opening of shale gas reserves obviates the need for LNG imports, so Cheniere wants to build a new facility by 2015 to export LNG. It has signed memoranda of understanding with three potential customers: Morgan Stanley and two Chinese and European gas distributors.

Tuesday demonstrated why such companies might be interested. With snow falling, U.K. gas prices spiked to $9 per thousand cubic feet, $5 above U.S. prices. Paying, say, $3 for liquefaction and shipping would still leave a nice profit.

Export costs to China are more like $4, but then LNG contracts there command about $12 per thousand cubic feet, says Citigroup.

Whether highly leveraged Cheniere can pull this off is an open question. Notably, hedge-fund manager John Paulson last week sold nearly half of his stake after a rally sparked by the signing of the agreements. But even if Cheniere doesn't, the economics mean someone else could.

Gazprom's profitability rests on selling gas to Europe at prices linked to more expensive oil. For the first 10 months of this year, Gazprom's contracted gas cost 44% more than U.K. spot-market gas, according to Sanford C. Bernstein.

America's sudden gas riches mean LNG cargoes destined originally for itself can supply Europe, eroding Gazprom's market share and forcing it to adjust contract terms for some customers. Should America start exporting LNG, it would further undermine the old model of captive regional markets paying oil-linked prices. That is great for customers; Russian gas monopolies, not so much.‹