Could a Russia-Ukraine Peace Deal Backfire on Europe?

Archive edition · Market data and company circumstances reflect 15 February 2025, when this newsletter was sent.

Impact of a Russia-Ukraine Truce on Europe’s Energy

A potential breakthrough in the Russia-Ukraine war could be on the horizon, with Bloomberg reporting that President Trump may introduce a peace plan at the Munich Security Conference.

While the geopolitical landscape remains uncertain, the energy sector is already contemplating the profound implications of such a development, particularly for European energy companies.

A potential end to the war would undoubtedly reshape the European energy market, with key considerations ranging from shifts in natural gas prices to the impact on major European oil companies still entangled with Russian assets.

A Shift in European Natural Gas Prices

Russian gas flows through Ukraine (in mcm/d).

Before the war, Russia supplied nearly 30% of Europe’s gas needs. Today, that number is close to zero. However, should peace talks pave the way for renewed Russian gas flows through Ukraine, Europe could see a significant reduction in natural gas prices (TTF), ranging between 15% and 50%. This decline would have a cascading effect on electricity prices and European energy storage levels.

Analysts suggest two possible scenarios for gas price reductions:

Modest Restoration of Russian Gas Flows

If Russian gas flows return to 2023 and 2024 levels, the net impact on North-West European gas storage would be relatively limited. However, the current risk premium on TTF would dissipate, bringing prices down to approximately 44 EUR/MWh (a 15% decline from today’s levels).

Full Resumption to 2021 Levels

Should gas flows return to 2021 volumes, TTF prices could drop as low as mid-20s EUR/MWh, a potential 50% reduction from current prices. This would position TTF fully below coal generation costs, fundamentally altering Europe’s energy pricing landscape.

While gas prices would likely see sharp corrections, the broader oil market may remain relatively stable.

The combination of the G7 oil embargo and the price cap on Russian oil has largely maintained global Russian oil exports, redirecting supply from Europe to India and China.

Consequently, an easing of sanctions on Russian oil would have minimal impact on global oil supplies, as production constraints are dictated by OPEC+ policies rather than Western sanctions.

A Game Changer for Energy Giants?

The European energy sector, particularly major oil companies, has been grappling with the impact of sanctions on Russian assets.

Among the EU Big Oils, only BP (LON: BP) and TotalEnergies (EPA: TTE) have maintained significant stakes in Russian companies, and they stand to benefit the most from a potential peace agreement.

These figures underscore the significant financial upside for both BP and TotalEnergies should Russia-Ukraine hostilities subside. However, the ability to repatriate earnings and dividends will remain contingent on regulatory changes and the geopolitical climate.

• BP and Rosneft – BP owns a 19.75% stake in Rosneft (RUS: ROSN), which has been effectively frozen since 2022. If peace negotiations facilitate the return of BP’s earnings and cash flow from Rosneft to 2021 levels, this could increase BP’s market capitalization by 20% and boost operational cash flow by 4.6%.
• TotalEnergies and Novatek – TotalEnergies holds a 19.4% stake in Novatek (RUS: NVTK) as well as smaller stakes in the Yamal LNG and Arctic LNG 2 projects. If financial transactions resume, TotalEnergies could see a 10% increase in market capitalization and a 2% rise in operational cash flow.

Europe’s Gas Market Weakens

Even without renewed Russian gas flows, the European natural gas market is poised for a bearish cycle in the coming years.

A wave of new LNG supply capacity from the U.S. and Qatar is expected to flood global markets between 2025 and 2028, placing downward pressure on gas prices.

This trend poses challenges for companies like Equinor (NYSE:EQNR), OMV (VIE: OMV), and TotalEnergies, which have significant exposure to European gas prices.

According to Goldman Sachs estimates, a $1 per thousand cubic feet (mcf) drop in gas prices results in the following changes to operating cash flow:

If European gas prices decline by 15% to 50% following a peace agreement, Equinor could face a -1% to -14% downside in its 2025 cash flow from operations.

With global LNG prices expected to remain low well into the late 2020s, Equinor’s cash returns to shareholders could fall below the sector average, declining to 9.6% in 2026, compared to the EU oil sector’s expected 12% average return.

• Equinor: 2.1% impact
• OMV: 1.3% impact
• TotalEnergies: 0.7% impact

A New Energy Landscape for Europe

While the Russia-Ukraine war has redefined Europe’s energy market, the prospect of peace could set the stage for another transformation. Lower gas prices, an easing of geopolitical tensions, and the potential unlocking of frozen Russian assets all stand to impact major energy firms.

BP and TotalEnergies remain the biggest beneficiaries of any policy shifts, while Equinor and other companies exposed to gas price volatility face downside risks. However, with LNG capacity expansions in the U.S. and Qatar, European energy markets will continue to undergo significant structural changes in the coming years.

Investors and industry leaders will be watching closely as discussions unfold at the Munich Security Conference. The coming weeks could mark a turning point not just for geopolitics, but for the future of Europe’s energy security and investment landscape.

Archive note

This article preserves the analysis in our weekly newsletter sent 15 February 2025. Market prices, forecasts and company circumstances reflect the time of publication and may have changed.

This material is general information, not personal financial advice or a recommendation to trade. Investing and trading involve risk, including loss of capital.