Russian gas deliveries through Ukraine to Europe, which have been ongoing for over 40 years, are set to conclude on January 1, following Ukraine’s Naftogaz decision not to extend its recent five-year transit agreement with Russia’s Gazprom. In light of the ongoing conflict between the two nations, Ukrainian President Volodymyr Zelenskyy indicated on December 19 that Ukraine might contemplate permitting the transit of Russian gas if payments to Russia were suspended until hostilities cease.
A week later, Russian President Vladimir Putin remarked that there was insufficient time remaining in the year to finalize a new agreement. The following outlines the implications of the cessation of Russian gas transit through Ukraine.
Volumes of Russian gas
The volume of gas supplied by Russia to Europe has significantly decreased since Moscow invaded Ukraine in February 2022, prompting the European Union to reduce its reliance on Russian gas. Over fifty years, Moscow developed a substantial share of the European gas market, which peaked at approximately 35% but has now dwindled to around 8%.
As of December 1, the EU received less than 14 billion cubic meters (bcm) of gas from Russia via Ukraine, a stark decline from the 65 bcm per year at the commencement of the latest five-year contract in 2020. The European Commission has stated that this volume can be entirely substituted with liquefied natural gas and imports from non-Russian pipelines. Consequently, Moscow has ceded market share to competitors such as Norway, the United States, and Qatar.
This year, Russia could potentially generate around $5 billion from sales through Ukraine, based on an average forecasted gas price of $339 per 1,000 cubic meters set by the Russian government.
Ukraine, on the other hand, receives between $800 million and $1 billion annually in transit fees. Following the reduction of Russian supplies, EU gas prices surged to unprecedented levels in 2022. However, with the impending cessation of supplies, EU officials and traders believe that a similar price surge is unlikely, given the reduced volumes and the limited number of remaining customers.
Affected countries
The transit route through Ukraine primarily benefits Austria and Slovakia. Austria relies heavily on gas imports via Ukraine, while Slovakia receives approximately 3 bcm from Gazprom each year, fulfilling about two-thirds of its gas requirements.
Gazprom has ceased its gas supply to Austria’s OMV and will initiate a new agreement in mid-November due to a contractual disagreement; however, the overall volumes remained stable as alternative buyers filled the gap.
Slovakia has indicated that the cessation of Russian gas supplies will not affect its consumption levels, as it has diversified its supply contracts. The primary gas supplier, SPP, has established agreements for non-Russian gas with companies such as BP, Eni, ExxonMobil, RWE, and Shell.
Options for buyers
Most other routes for Russian gas into Europe are currently closed, including the Yamal-Europe pipeline through Belarus and the Nord Stream pipeline beneath the Baltic Sea. One potential alternative is the TurkStream pipeline, which runs to Turkey under the Black Sea, with further connections to Bulgaria, Serbia, or Hungary; however, its capacity is limited.
According to Austria’s energy regulator E-Control, Slovakia’s gas supply may be sourced from Hungary, with approximately one-third coming from Austria and the remainder from the Czech Republic and Poland.
Austria is expected to avoid supply disruptions, as its regulator has confirmed that preparations have been made for the transition in supply.
The Czech Republic is likely to increase its gas imports through German pipelines, benefiting from an exemption from a German domestic gas levy starting January 1. Additionally, the Czech Republic has expressed its readiness to assist Slovakia with gas transit and storage capabilities.
Russia supplies Moldova with approximately 2 billion cubic meters of gas annually, which is transported via Ukraine to the breakaway region of Transdniestria, where it is utilized for generating inexpensive electricity sold to government-controlled areas of Moldova.
Gazprom has announced plans to suspend its supply on January 1 due to outstanding payments. Moldovan Prime Minister Dorin Recean has criticized this decision but noted that the country has diversified its supply sources. Moldova intends to implement measures to reduce consumption by at least one-third starting January 1.
Regarding Ukraine, the European Commission has stated that its security of supply will remain unaffected, as the country does not rely on Russian transit gas.
Where the gas comes from
The Urengoy-Pomary-Uzhgorod pipeline, established during the Soviet era, transports gas from Siberia through the town of Sudzha, currently under the jurisdiction of Ukrainian military forces in Russia’s Kursk region.
This pipeline traverses Ukraine and reaches Slovakia, where it divides into separate branches that supply the Czech Republic and Austria. Additionally, Transdniestria, which shares a border with Ukraine, also obtains Russian gas through this route.
