Gazprom out, LNG in: Long-term gas market implications of Russia’s invasion of Ukraine

Gazprom’s gas sales to Europe may never recover to pre-pandemic levels. We think it will be increasingly difficult for any European company to sign new long-term contracts with Gazprom, or even renew existing ones upon expiry . This has significant implications for Europe’s future supply stack. In this note, we have updated our longer-dated gas thesis. Our prior analysis viewed the outlook for European gas prices at the intersection of Gazprom’s market power and the global LNG capacity addition cycle. Events over the past two weeks have effectively killed Gazprom’s market power, with European customers likely to keep contractual relationships to a minimum and avoid taking spot or short-term deals. This biases European gas prices even higher than we had previously expected over 2023 and 2024 and leaves a gap open for new LNG capacity seeking to take a final investment decision (FID) in the coming years. A significant volume of capacity seeking FID is US - based and more certainty regarding future utilisation rates supports a more bullish view on the long-dated Henry Hub curve. Prices must support a production base that can meet domestic demand on top of ~1 7.5 bcf/d of price insensitive feedgas by 2027. Finally, we expect the longer dated Henry Hub curve to exhibit more seasonality as price insensitive export demand intersects with spiking domestic consumption during high demand periods (cold winter weather, for example). Henry Hub may need to price off domestic consumption in this instance. We are also less bearish on Cal25 TTF, given the fact Gazprom’s ability to compete with LNG on volume will be significantly diminished