A Gas and Cash Gusher

01/06/2010 11:03 am EST

Focus: STOCKS

Yiannis Mostrous

Editor, The Capitalist Times

Yiannis Mostrous, editor of the Silk Road Investor, says giant gas producer Gazprom will profit from a new deal that could push costs down and prices higher.

Russian energy giant OAO GAZPROM (OTC: OGZPY) is far and away the largest gas-producing firm in the world.

Gazprom owns more than half of Russia’s proven gas reserves, controls close to 85% of the country’s total natural gas production, and accounts for nearly 20% of global gas production.

Recently Russia and Turkmenistan signed a new agreement on gas purchases that lowers the annual maximum long-term volumes to 30 billion cubic meters from 50 billion to 70 billion cubic meters.

The price formula for Turkmen gas will be set in a similar manner to Gazprom’s long-term export contracts to Europe, suggesting that Gazprom has already arranged to resell the Turkmen gas.

As the Russian firm will no longer be obligated to absorb as much Turkmen gas, it will be allowed to develop more of its domestic sources, probably at a lower cost. At the same time, the company will save billions of US dollars on gas purchases—a major cost that Gazprom incurs each year. China and Iran will likely absorb the excess Turkmen gas; both countries’ gas needs are on the rise.

Turkmenistan produced about 66 billion cubic meters of natural gas in 2008, of which Gazprom purchased 42.5 billion cubic feet, Iran bought 6.5 billion cubic feet, and the rest was consumed domestically. By 2013, Turkmenistan is expected to export up to 90 billion cubic feet of gas, with 30 billion cubic feet destined for Russia, 40 billion cubic feet for China, and 20 billion cubic feet for Iran.

According to BP’s (NYSE: BP) Statistical Review of World Energy 2009, Turkmenistan holds 7.94 trillion cubic meters of proven reserves. However, two giant fields, South Yolotan and Yashlar, may hold 4.3 [trillion] to 15.5 trillion cubic meters of additional gas.

In other news, the firm’s oil subsidy, Gazprom Neft, will invest US$2 billion in Iraq to develop the Badra oilfield and produce crude within three years. The firm expects to reach full production within six to seven years.

OAO Gazprom has teamed up with Vietnam’s Petrovietnam to carry on oil and gas projects in Russia, Vietnam, and other countries. Gazprom will hold a 51% stake; Petrovietnam will hold the remaining 49%.

Russia’s Federal Tariff Service increased the tariff for transporting natural gas through Gazprom’s pipeline system by 12.3% for the New Year. Wholesale gas prices are expected to rise around 15%, effective January 1, 2010.

The stock trades at [around five times] consensus earnings estimates for 2010, much lower than its emerging market peers, which trade at 11x earnings. Buy Gazprom. (It traded above $26.50 on the Pink Sheets Tuesday—Editor.)

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