ConocoPhillips (COP), Statoil ASA (ADR) (STO): We Could Prevent Europe’s Energy Scare

Imagine your energy bill increasing by 50% in one day. Pretty scary, eh?

Back in March, this is exactly what happened… in England. In a single day, natural gas prices spiked by 50% there, all because of a failed water pump. As much as this could be considered a fluke accident, there were several factors that led to this single, minute event causing the worlds eighth largest natural gas market to its knees. Let’s take a look at what happened, how the U.S. can prevent this from happening at home, and what it will mean for U.S. gas companies.

Blame it on the rain
Or the cold, rather. March of 2013 was the second coldest March ever recorded in the U.K. The unusually cold weather that late in the season led to higher than normal gas consumption. With so much in use and a rather fixed supply, U.K. gas supplies were dwindling. On March 22, a water pump failed and halted deliveries from the UK-Belguim Interconnector, a pipe that delivered about 40 million cubic meters of gas to Great Britain. The shutdown of this gas pipe was simply the straw that broke the camel’s back. Gas supplies were so short that storage was down to less than two days’ worth of supply, which ultimately led gas prices to surge 50% within hours of trading on the London exchanges.

Ultimately, the pipe got back up and running again, and prices subsided. For many people in the U.K., there was a big sigh of relief. What Europe should consider, though, is the much deeper underlying threat: the delicacy of global energy markets and the threats it poses if a country is not energy independent. Russia’s Gazprom and Norway’s Statoil ASA (ADR) (NYSE:STO) supply 40% of Europe’s natural gas. With so much supply coming from only two sources, Europe is at severe risk if either of these companies suffers a technical (or political) problem. The only way that Europe can solve this problem is to find a more diverse source of natural gas.

Enter stage left: America
Today, 95% of U.S. imports for natural gas come from Canada. Reliance on a single country this much may be alarming, but our dependence on imports has dwindled rapidly. In 2012, the U.S. imported 32% less natural gas than in 2007, and we anticipate becoming a net natural gas exporter by 2020.

The large uptick in domestic production will have some major implications on natural gas markets. With ConocoPhillips (NYSE:COP) just receiving approval for LNG exports to countries not in free trade agreements with the U.S. at its Freeport facility, and Cheniere Energy, Inc. (NYSEAMEX:LNG)‘s facility due to come on line in 2015, the U.S. natural gas market will have something it doesn’t have right now: an outlet for excess supply. U.S. LNG exports, plus all the Canadian gas we are using today, could be an opportunity for European countries to diversify its natural gas sources and in turn reduce the risk of repeating an incident like the U.K. suffered back in March.

Credit: ConocoPhillips (NYSE:COP)