Gazprom Wants In On Offshore Israeli Natural Gas, Should Investors Want In On Gazprom?

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In North America we are blessed with an abundance of natural gas thanks to the shale gas boom. We have unlocked so much previously trapped resource that we appear to be well supplied for the next generation of North Americans as well.

Other places in the world aren't yet so lucky. Natural gas that is imported to Asia is done so at prices that are multiples of the price in North America. It was only a couple of years ago that in Europe natural gas supplies to many countries were shut off entirely during a winter because of a dispute between Russia and China.

That was in 2009 when Gazprom (OTCPK:OGZPY) shut off shipments of natural gas to the Ukraine because of a billing dispute between the two parties. Ten other European countries who receive some of their natural gas supplies from that pipeline were also then left out in the cold with nowhere else to turn.

Over the past couple of years I the European natural gas supply situation has changed materially for the better. The good news? Massive discoveries of natural gas by Noble Energy offshore Israel that will provide another source of the cleanest fuel to Europeans.

In 2010 Noble (NYSE:NBL) drilled an exploratory well into its "Leviathan" prospect and found a monster prize. The total gross estimate for the Leviathan natural gas is 17 trillion cubic feet, which was the largest offshore natural gas discovery in 2010.

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But the Leviathan discovery was not alone, because near where the Leviathan well was drilled is the Tamar discovery which contains 9 trillion cubic feet of gas on its own. In fact when you also add in successful wells at "Dolphin", "Dalit", "Tanin" and offshore Cyprus Noble has found 35 trillion cubic feet of natural gas in the Mediterranean region.

And Noble isn't alone as another couple of high impact wells are set to be drilled on the Myra and Sarah blocks by a group of companies including The Israeli Land Development Company, Modiin Energy and IPC Oil and Gas Holdings. And those wells are following closely on the heels of a well that has spud on the Shimshon prospect by Isramco and ATP Oil and Gas (ATPG).

With 35 trillion cubic feet of natural gas already discovered, and more likely coming with the currently active exploration wells this looks to be an area that could lessen Europe's reliance on the Russians for natural gas.

But guess who is calling? The week one Mr. Putin was in Israel and apparently Gazprom is very keen to participate in the development of Israel's gas reserves including those already discovered through the creation of a local subsidiary.

There goes the neighborhood.

As a consumer I wouldn't want to rely on Gazprom to supply me with my natural gas. As an investor though, perhaps I should consider it as an investment opportunity. Compared to the other mega sized energy producers globally it is without question cheap on a reserve basis. It is strong financially and a dominant energy supplier having produced 18% of the world's natural gas as recently as 2008. Additionally Gazprom is in close proximity to an area of the world where demand for energy is growing relentlessly.

When it comes to monster developments like Israel, Gazprom has a distinct advantage in getting its foot in the door with attractive terms because it is one of the few entities that can fund projects of this scope.

But when you invest in Gazprom you also take on a partner. And that partner is the Russian Government which has majority control of the company. And while I am willing to take on some political risk if the upside in an investment is high enough, I don't think there is any need to these days as there are bargains a plenty in the energy patch right here in North America. The energy sector has been shellacked in a manner similar to 2008 and I think a search for opportunities can stay within North America.

A good place to start might be Canada's sleepy giant Penn West Energy (PWE) which at under $13 is priced where it was during the financial panic of 2008/2009 despite sitting on the biggest land position in Western Canada that has massive tight oil opportunities that weren't even on the radar five years ago. If oil prices aren't going in the dumper permanently, Penn West is in my opinion a great investment at current prices.

If oil goes to $65 and stays there I would expect that at some point Penn West would have to cut back on its dividend (currently yielding over 8%). Of course if oil goes to $65 for very long, that tight oil boom that is ramping up North American supplies will be greatly curtailed, as well I suspect would be production out of OPEC.

Disclosure: I am long PWE.