Uranium Would Emerge As Main Winner Of Nord Stream 2 Obstruction, Not LNG

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Includes: CCJ, CHK, OGZPY, RDS.A, RDS.B, URG
by: Zoltan Ban

Summary

US shale gas producers such as Chesapeake have been rallying on news that the US may try to actively oppose the Nord Stream 2 project though sanctions, assuming more LNG exports.

It remains to be seen whether such threats or even actual sanctions could still derail the project, which seems more and more likely to go ahead.

Even if the pipeline is obstructed, US LNG may not see the kind of boost that is being hoped for.

Western Europe may opt for a reversal of the trend of denuclearizing of its power generation, instead of opting for more expensive LNG.

The news that the Trump administration is seriously considering obstructing the Nord Stream 2 pipeline between Germany and Russia has given some of the embattled shale gas producers a stock price boost lately. Very few people would ever stop to think how it would affect global uranium demand going forward, because unlike the gas connection, the link between the two may not be immediately obvious.

Thing is however that it could have a major impact, because it would likely force Germany to completely rethink its energy strategy going forward. It may even affect other countries such as France, Netherlands and others in the region. LNG on the other hand may not necessarily see the kind of boost that the US government as well as shale producers would hope.

Odds of success of current obstruction efforts

On the surface, it may seem like the US has the upper hand in dealing with Germany in regards to the pipeline issue. Germany is the dominant nation in the EU politically as well as economically, which ordinarily would suggest that attacking Germany and its interests would likely be met with not just a German but an EU response. When it comes to this pipeline however, there is widespread opposition to the project within the EU, mostly among Eastern members. I believe that this is the factor that the US is banking on as a factor that would seemingly obstruct a unified EU response to any US initiative to obstruct the pipeline project.

While the logic of it seems sound, if we look at the actual lever of pressure that the US is likely to use in order to try to intimidate Germany into abandoning the pipeline, it clearly will not work the way people think it might. It is said that the US is indicating that it may use the threat of a trade war as a way to obstruct the pipeline. German car exports may be particularly impacted. Thing is however that Germany's car industry is greatly extended into the East European economies through the extended supply chain it is using to keep costs down, with Germany being by far the region's greatest trading partner.

Intermediate auto components tend to be the main source of exports to Germany from the Eastern members of the EU. In other words, when the US will hit Germany, it will also hit the economies of the very countries that it is hoping to rely on in order to obstruct a unified EU response. For this reason, I think using trade threats against the EU or Germany is not likely to produce the desired result.

There is the lighter option of simply going after the companies that are partnered up with Gazprom (OTCPK:OGZPY) in this project, such as Shell (RDS.A) (NYSE:RDS.B), OMV, Wintershall, Uniper and Engie. Many of these companies also have interests in the US, or deal with US financial services, therefore the extra-territorial nature of US sanctions would affect them. Thing is however that the project's junior partners simply pulling out might not be enough to obstruct this project, because Gazprom could potentially build the pipeline alone.

Russia's finances and that of its energy companies have improved lately, thanks to higher energy prices and higher export volumes. Gazprom's operating profit increased by almost 20% in 2017 compared with the previous year, to 871 billion rubles. It is in a better position than it was a few years ago when it comes to its revenue and profits. It could therefore potentially undertake the 9.5 billion Euro project by itself if its partners were to abandon it due to US sanctions.

My personal view is that the pipeline project will go ahead, despite all the opposition within the EU, as well as from the United States. Economically speaking, it is necessary given the dramatic decline in natural gas production we are seeing in the Netherlands.

Source: Index Mundi.

Back in 2010, Netherlands' natural gas production made up about half of total domestic EU production. As we can see, production has now fallen to about half of what it was back in 2010 and this trend is likely to continue.

Aside from the production decline issue, Germany also pledged to phase out all its nuclear power plants. There are currently nine more reactors that are still operational, which are set to be shut down by 2022 at the latest. With the EU economy back into expansion mode, more natural gas demand has been observed in the past few years. There is no doubt of the fact that the EU needs more natural gas imports. What is at issue here is whether it will be from Russia, or whether LNG will increasingly plug the gap.

Why US LNG might not benefit, but uranium most likely will

It seems that markets are assuming that obstruction of Nord Stream 2 will automatically lead to a boom in American LNG exports, therefore it could ease the price pressure that shale gas producers are feeling. Companies like Chesapeake (CHK) have seen their stock rally since the news of American obstruction attempts against the pipeline started to stream in. This should not be taken for granted however, even if the pipeline will be obstructed.

For one thing, there is the Turk Stream project which is also set to increase Russian pipeline capacity to Europe. Then there is always a possible plan B which Russia might implement for its North-Western Siberian gas exports. Given the choice of having to build a pipeline all the way South to Ukraine, then transit it through Ukraine, Russia might opt to build an LNG export terminal in the Baltic instead. Due to the short transport distance, it would out-compete all other LNG sources in Northern Europe.

There is also the likely option of countries like Germany and France opting for alternatives to natural gas. Here is where I think the market is missing the real picture in regards to who is most likely to benefit from the potential obstruction of Nord Stream 2. I started looking at uranium as a potentially intriguing investment in late 2016, and started building a position last year, with my investment in Ur-Energy (URG) stock, and then Cameco (CCJ) stock this year.

I have been covering uranium on a regular basis for about a year and a half now, and one of the factors I have been pointing to as potentially boosting the uranium demand outlook has been the possibility of Germany not going through with its plan to close all of its nuclear reactors in the next few years. The main factor I highlighted was the possible obstruction of the Nord Stream 2 project, which has a lot of opponents inside and outside the EU.

Germany still has the nine reactors that the market is factoring in as being set to be closed down by 2022 at the latest. Then there has been talk in France in regards to perhaps reducing dependence on nuclear power generation from 75% to 50%. I don't think the French will go through with reducing their nuclear power generation capacity if affordable natural gas supplies will not be secured. By most estimates, US LNG supplies to Europe are significantly more expensive compared with Russian pipeline exports.

Goes without saying that it would be politically very damaging for either Germany's or France's governments to shut down their current nuclear power generation capacity and opt for US LNG imports, which would increase electricity costs to household consumers as well as industrial consumers. For this reason, I think the current trend in Western Europe of cutting back on nuclear power may be stopped and even reversed in the event that affordable natural gas imports would be jeopardized.

The uranium supply/demand situation has been looking increasingly like it is headed for a balanced situation, followed by a mined and secondary source supply deficit going into the next decade.

Source: CEO.CA.

We should keep in mind that most current forecasts are assuming a decline in uranium demand in Western Europe, while current events may put a stop to that decline or even see a reversal. While I personally think that the odds of Nord Stream 2 being obstructed are relatively low, I do believe that the best way to invest if one does believe that it will be obstructed is to buy uranium mining stocks rather than shale gas producers or US LNG exporters.

Disclosure: I am/we are long CCJ, URG, RDS.A.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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