Deal or no deal: will Ukraine transit Russian gas post-2024? [Gas in Transition]
Ukrainian authorities remain adamant that they have no intention of renewing the country’s gas transit agreement with Russia, due to expire at the end of this year, raising the risk of a further reduction in Russian supply to Europe. As things currently stand, experts are doubtful that a deal will be reached. But the situation could well evolve rapidly over the coming months, depending on developments in the Russia-Ukraine conflict, and conditions on the European gas market.
Kyiv and Moscow agreed on the current transit contract in 2019, which required Gazprom to pay to send at least 60bn m3/year of gas via Ukrainian pipelines in 2020, regardless of how much it actually delivered. This threshold was lowered to 45bn m3/yr annually for the 2021-2024 period.
Despite war raging in Ukraine for almost two years now, the country remains a key transit route for Russian gas, though overall supplies to Europe are down significantly as a result of Moscow attempting to destablise the continent’s energy market with steep cuts to flow in 2022. Based on publicly available transmission system data, NGW calculates that Russia sent 13.7bn m3 of gas through Ukraine last year, or 53% of the total it piped to Europe.
While many of Gazprom’s former customers in Europe no longer receive its gas, supplies to remaining key clients such as Austria, the Czech Republic, Hungary and Slovakia, are still dependent on Ukrainian transit. This is because there is only one other remaining route Russia can use to Europe – one of the two 15.75bn m3/yr strings of the TurkStream pipeline that runs under the Black Sea to Turkey. The string flowed 12.2bn m3 of gas last year. The other string is reserved for supplies to Turkey.
All but one of the four 22.5bn m3/yr strings of the Nord Stream 1 and 2 system linking Russia directly with Germany have been rendered inoperable, very likely permanently, following sabotage attacks in September 2022. The final one would need to be certified by German authorities to be put on stream, and Berlin halted that process in February 2022, days before Moscow launched its invasion of Ukraine. The Yamal-Europe pipeline running through Belarus and Poland to Germany meanwhile cannot flow gas westwards as a result of sanctions and counter-sanctions imposed by the Polish and Russian governments.
What this means is that, if Russian gas transit via Ukraine was halted, the supplies could not be diverted to an alternative route, save for a modest volume that could use unutilised capacity via the one TurkStream string. That is unless there was the political will to enable flows to resume via Yamal-Europe, or permit the remaining Nord Stream string’s use.
Source: GTSOU
Where do the sides stand
The Russian position on continued Ukrainian transit is clear-cut. Having once aspired to bypass Ukraine altogether as a transit route – one of the main reasons for its development of the Nord Stream 2 pipeline, Moscow no longer has leverage. For the time being it has to rely on Ukraine if it wants to continue serving its remaining clients in Europe, so negotiations are undoubtedly in its interest.
With Gazprom currently sending roughly 40mn m3/d of gas via Ukraine, it would stand to lose $5.1bn in annual gross revenues, assuming a $350/’000 m3 gas price if transit was halted and the supplies not diverted to an alternative route, Ronald Smith, senior oil and gas analyst at BCS Global Markets, tells NGW.
Russian Deputy Prime Minister Alexander Novak was quoted as saying by the Moscow-based RIA news agency on January 27 that Russia was prepared for negotiations on continued gas transit “if the other party EU wishes.” But “so far we don’t see such a desire,” he cautioned.
The European Commission has not publicly stated its position. But it is intending to rule out a contract renewal, Bloomberg cited sources as saying on January 26. The EU executive concluded that those countries still heavily dependent on Russian gas would be able to find alternative sources of supply if transit via Ukraine was ended. It will discuss the plan in February with member states before officially presenting it to energy ministers on March 4, the news agency reported.
As for Ukraine, its government once more reiterated its position on January 25. “The position of the Ukrainian side is clear: the transportation contract ends at the end of this year, we are not going to negotiate with the Russians and extend the contract.”
Implications of no deal
With far less Russian gas heading to Europe now versus two years, the continent could “on paper” make do without Russian gas on the back of rising LNG production in the US and Qatar, Smith says.
“However, being able to do something does not necessarily make it the right decision,” he continues. “For the sake of energy security, having the possibility of importing Russian gas – especially for land-locked countries in Eastern Europe such as Austria – is probably a very good policy,” he cautions.
Despite its vow not to enter talks with Moscow, it is in Kyiv’s own interest that Russian gas flow continues, and not just for revenue that this transit generates, Katja Yafimava, senior research fellow at the Oxford Institute for Energy Studies, tells NGW.
“If transit stops, the European gas balance will tighten thus directly impacting prices of gas imported by Ukraine from Europe,” she explains. “But for continued transit to be acceptable in Ukraine politically, its government would need to be able to demonstrate that it agrees to continued transit at the EU request to safeguard supply security of several European countries that are still importing Russian gas through Ukraine e.g. Austria and Slovakia.”
“So, if the EU makes such an overture towards Ukraine, Ukraine is likely to accept it – although it might try to drive a bargain in return,” she adds, noting that resumed negotiations on resolving the military conflict would be conducive to talks on continued gas transit.
Yafimava believes that “while the new gas transit arrangement does not look like the most likely scenario at present, things could change as the year progresses.”
Smith puts the odds of the EU pushing Ukraine to extend the transit deal at 50:50. Meanwhile the expectation of Thierry Bros, energy expert and professor at Po Paris, is that transit will stop at the end of this year.
“But Slovakia and Hungary could sign amendments to their Russian contracts with delivery moved at the Russia-Ukraine border and with lower prices,” he says, which would result in 10bn m3 of gas still flowing through Ukraine annually.
Kyiv has indicated that it might be interested in this option. In its January 25 statement, the government said that “Ukraine can talk with a European country (EU member) about using its gas transportation network."
If Ukraine is no longer an option, and Europe needs more Russian gas, the remaining Nord Stream 2 string could be made ready for operation within a few days, Smith says, provided Germany is prepared to certify the pipeline. Likewise, what is preventing the Yamal-Europe pipeline flowing Russian gas could be resolved relatively quickly, depending on whether there is the political desire to make that happen.
“The Yamal-Europe issues are purely political, but involve a number of court cases,” he explains. “Thus, a change in political winds could always happen very quickly, but negotiating the clearing of any outstanding court cases might take a few days or weeks. In short, as with one line of Nord Stream-2, it could happen quite quickly, but the required improvement in the political situation appears far over our event horizon.”
Yafimava concludes that “renewed export flows through these corridors would require a major change in the European-Russian political relationship and would arguably be even more difficult to agree than continued transit across Ukraine post-2024.”