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How to Profit from the Polish Energy Revolution

by | published February 26th, 2010

Thirty years ago, I found myself in Gdansk, Poland. I was a young university professor at the time, but had ongoing responsibilities from the kind of government job you never really leave. So when an unemployed electrician was leading a strike there, Washington sent several of us in to provide logistical support.

That strike would bring down a communist government, lead to the collapse of a wall, and turn an unassuming man into an international hero, Nobel laureate, and Polish president. His name was Lech Walesa, and I would never see him again…

Until last Saturday evening.

We met for dinner at Malbork Castle, Europe’s largest Gothic fortress and the medieval seat of the Teutonic Knights. Located about an hour outside Gdansk, the castle suffered significant damage during World War II and has been under renovation for years. The war began in 1939 a few miles from Gdansk, leveling the city twice before the Russians took it over. Thanks to Poles like Lech Walesa, they were finally obliged to give it back.

We reminisced, exchanged stories, and talked some politics. But mostly we discussed new markets and new investment opportunities. I had accepted an invitation from another major Polish figure – European Parliament President Jerzy Buzek – to address an energy security roundtable meeting in Gdansk. They even gave me a personal security team, which was certainly something different… because when last in this city, those were the very guys I was trying to avoid.

After five days in Gdansk, however, one thing is clear: What is underway in this part of the world has the potential to make you some serious money…

The Single Most Significant Change in Energy Distribution

I presented a briefing on the impact of planned oil and natural gas import channels into the Baltic region and Western Europe in general, along with how new sources are going to transform the energy balance. This region has remained dependent on energy imports from the east. Every time there is a political hiccup, or Russian gas giant Gazprom (OTC:OGZPY) flexes its muscles, people in places like Poland have to worry about staying warm.

Yet the spin is actually much worse than the reality.

Russia is as dependent on European purchases as Europe is on Moscow sales. Despite what politicians and the media say about Russia’s “bear hug” approach to Europe’s energy supplies, a mutual need has emerged.

The real issue remains having too many eggs in one basket. That is where the new opportunities emerge.

By 2020, as Europe moves from a crude-oil-based energy structure to natural gas and alternative sources, it will be importing over 57% of its gas. Two major developments, however, are changing where that gas comes from and the structure of import flow. Both are going to provide investment profits well beyond the Baltic.

One advance is the rise of unconventional gas in Poland and surrounding countries. Any domestic sourcing will change the energy balance significantly, along with security implications for the entire region. This is a very important focus for investors moving forward. It is also one of the primary reasons I’m headed to London on March 1st to the annual energy gathering at Windsor Castle. (I’ll talk more about this in my column next week from the U.K.)

The second development is already providing investor access to fundamental shifts in European energy. In this case, a shift to liquefied natural gas (LNG). It’s having a major impact worldwide.

The process involves cooling gas to a liquid so that it can be moved by tankers, then re-gasifying the volume on the receiving end. It is a large and growing part of the Asian energy picture and accounts for a rising percentage of deliveries in Europe.

In my judgment, LNG will be the single most significant change in energy distribution over the next two decades.

It also has another primary effect on global gas.

Once LNG traffic becomes an ongoing regular component of the trade, genuine spot markets will emerge. Spot sales in crude oil allow us to set a pricing floor for longer-term transactions. In the past, however, gas has not been able to give us anything beyond regional pricing support, since it’s been limited by where the pipelines travel.

LNG is changing all that…

A Dual Point of Access to Profits

The rise in LNG worldwide will allow us to influence price even in markets without significant tanker traffic.

In places like Europe, where the source of gas is becoming as important as the amount, LNG will have an even greater result. That means new major LNG receiving terminals, such as the Rotterdam Gate project in the Netherlands and the Polskie LNG Co. facility at Swinoujscie (on the Polish Baltic), are important to the overall development of the entire market.

The LNG revolution provides us a dual point of access to the resulting profits – through the local companies involved and the foreign contractors poised to build the facilities. Polskie LNG is a prime case in point. It is a wholly-owned affiliate of Gaz-system. Both are not currently traded, but parent company PGNiG SA (LSE:OFLM-PLN) is listed in London. Those infrequently traded shares will be increasing in exchange value as the Polish LNG projects move into construction phase.

The other LNG opportunity in this part of the world arises from the foreign companies needed to construct the facilities.

Here the pre-tendering process in Poland has produced a short list of finalists for first-stage investor supervision, with two consortia having the inside track and including companies on my radar. Privately-held Savannah-based MEI has previously received the initial due diligence contract for the Rotterdam Gate LNG project, while WS Atkins (LSE:ATK) has a subsidiary up and operating in the Polish market.

Once the FEED (Front End Engineering and Design) contract is tendered, most of the biggest names in the LNG business will be pre-qualified. This list will include privately-held Bechtel, Saipem SPA (OTC:SAPMY), Technip (TKPPY:OTC), McDermott International (NYSE:MDR), Petrofac Ltd. (LSE:PFC), Hyundai Heavy Industries Co. (OTC:HYHZF), and Keppel Corp. (OTC:KPELY).

On the crude oil and refining side, LOTOS Grupa (LSE:OF58) is also in a thinly-traded London Stock Exchange environment, but that is likewise set to change. This primary source of refined product is coming out of its largest upgrade ever. Upon completion later this year, refinery capacity will have more than tripled. The LOTOS Naftaport at Gdansk will be able to increase shipments from non-Russian sources, further limiting the stranglehold Moscow could apply in the future.

I spent several days with LOTOS and PGNIG executives discussing the rising flexibility in the European energy mix. They provided me with advance notice on two new directions likely to keep your attention fixed on this region. One involves rising capital needs for new projects, prompting both companies to consider expanded equity placement offers in London and New York. The other addresses the need to accelerate foreign technical help in designing the new oil and gas network. The average investor will be able to play both the domestic and foreign companies, benefiting from the change.

And it is this rapid change that struck me most in Gdansk, perhaps symbolized by an encounter we had upon leaving Malbork. As we came out of the castle into a mixture of snow and drizzle, a police officer snapped to attention and then extended his hand to Lech Walesa. “Jan koija,” he said, smiling: “Thank you.”

We walked on for a few minutes in silence. Finally, the former shipyard laborer who literally transformed the world remarked: “That’s one of the biggest changes in my country – smiling policja.”

Back three decades in my own thoughts, I understood.

Kent

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