Filenews 28 December 2024
The contract for Russian gas and its transit through Ukraine is nearing completion, and statements by Ukrainian President Volodymyr Zelensky show tensions around energy and the ongoing conflict.
The meeting between Russian President Vladimir Putin and Slovak Prime Minister Robert Fico is important as it highlights the continuation of the relationship between Russia and the European Union despite political and energy pressure.
Kiev's proposal to continue the transit of gas on condition of non-payment by the end of the war is, it seems, unacceptable to Moscow, which rejects a new deal with Ukraine.
Which markets will be hardest hit?
What happens if the transit of Russian gas through Ukraine is completely cut off, and who will be most affected?
Russian gas supplies to Europe via Ukraine are relatively small. Russia sends about 15 billion cubic meters (bcm) of gas through Ukraine in 2023 – just 8% of the maximum Russian gas flow to Europe via various routes in 2018-19.
Russia spent half a century building its share of the European gas market, which at its peak stood at 35%.
Moscow has lost its share of rivals such as Norway, the United States and Qatar following Russia's invasion of Ukraine in 2022, which prompted the EU to reduce its dependence on Russian gas.
EU gas prices climbed to record highs in 2022 following the loss of Russian supplies. The price rally will not be repeated, given modest volumes and the small number of customers for the remaining volumes, according to EU officials and traders.
Natural gas: The Ukrainian route
The Soviet-era Urengoy-Pomary-Uzhgorod pipeline carries natural gas from Siberia through the city of Sudzha – which is now under the control of Ukrainian military forces – to Russia's Kursk region. It then flows through Ukraine to Slovakia.
In Slovakia, the gas pipeline is divided into branches going to the Czech Republic and Austria.
Russia's total gas exports via the route have remained stable despite Gazprom cutting off flows to Austria's OMV (OMVV.VI), opening a new tab in mid-November due to a contractual dispute, and legal battles as other buyers stepped in to buy the volumes.
The only other operational route of a Russian gas pipeline to Europe is Blue Stream and TurkStream to Turkey under the Black Sea. Turkey sends some Russian gas to Europe, including to Hungary.
Why is the Ukrainian route still working?
Although the remaining transit volumes of Russian gas are small, the issue remains a dilemma for the EU. Many EU members, including France and Germany, have said they will no longer buy Russian gas, but the stance of Slovakia, Hungary and Austria, which have closer ties to Moscow, challenges the EU's common approach.
The countries, which still receive Russian gas, argue that it is the most economical fuel and also blame the EU's neighbouring countries for the high transit fees imposed on alternative supplies.
Ukraine continues to earn $0.8-1 billion in transit fees annually from the transit of Russian gas.
According to Reuters calculations, Gazprom's total pipeline gas exports to Europe via all routes in 2024 have risen to 32 billion cubic meters from 28.3 billion. cubic meters in 2023, when they collapsed to their lowest level since the 1970s.
Russia and Ukraine at an impasse
Russia could earn about $5 billion from sales through Ukraine this year, based on an average Russian government forecast of the gas price at $339 per 1,000 cubic meters, according to Reuters calculations.
Russia's monopoly that exports gas via Gazprom pipelines slumped to a net loss of $7 billion in 2023, its first annual loss since 1999, due to the loss of EU gas markets.
Russia has said it would be ready to extend the transit deal, but Kiev has repeatedly said it will not.
Another option is for Gazprom to supply part of the gas via another route, for example via TurkStream, Bulgaria, Serbia or Hungary. However, capacity through these routes is limited.
Hungary wants to keep the Ukrainian route open, but said it would continue to receive Russian gas from the south, via the TurkStream pipeline on the bottom of the Black Sea.
The EU and Ukraine also asked Azerbaijan to facilitate discussions with Russia on the gas transit agreement.
A senior source at Azerbaijani energy company SOCAR told Reuters on Friday that Moscow and Kiev had failed to agree on an agreement brokered by Azerbaijan to resume Russian gas exports to Europe via Ukraine.
