European Gas – Infrastructure Risk Returns

We view the specific targeting of Ukrainian gas storage facilities in response to drone strikes on Russian refineries a s a meaningful market development . A key part of the commercial rationale for storing gas in Ukraine assumed that as facilities favoured by European companies were located in the west of the country, far from front lines , infrastructure was unlikely to experience collateral damage. Going forward, storing gas in Ukraine will likely require a deeper risk premium – subsequently, if Ukrainian gas storage is required to clear the European gas market, a deeper late-summer/winter contango will be required to absorb this via the incorporation of insurance costs within the spread. Given our bearish market views , we expect the Q1-25 to Sum-24 spread to widen through Sum-24 as the market 1) re cognises the need for storing gas in Ukraine to balance the market and avoid storage containment risk 2) firms demand a greater risk premium for storing gas in Ukraine. Shifting the delivery point for Russian gas to the Russia-Ukraine border from the Ukraine-EU border, with Gazprom’s European counterparties assuming transit risk has emerged as one solution to the expiry of Gazprom and Naftogaz’s transit deal at the end of 2024. In the current environment, European buyers may be unwilling to assume transit risk, at least without significant discount on volumes – which may be too high for Gazprom to accept, or at least change Russia’s calculus regarding maintaining flows. Indeed, through cuts to flow via NS1 in 2022 , Russia highlighted capacity and willingness to conduct mutually damaging energy policy. As such, the market may begin to price increased risk to the continuation of Cal-25 transit, depending on the complicated intersection between Ukraine’s future operations against Russia’s energy infrastructure and the Russian response, with Russia’s assessment of the balance of incentives critical .