The flow of Russian gas through Ukraine will stop on Wednesday as a transit agreement between the two countries expires following Moscow’s full-scale invasion.
The pipeline is one of the last two routes still carrying Russian gas to Europe nearly three years after all-out war. EU countries will lose about 5% of their natural gas imports during winter.
Although traders have long expected flows to stop, the end of the pipeline route through Ukraine will affect Europe’s gas balance at a time of strong heating demand. Slovakia is the most affected country.
“While one would think that losing these quantities [is] Aldo Spanjer, senior commodities strategist at BNP Paribas, said:
The deal to allow Russian gas to pass through Ukraine was reached in late 2019 and signed the day before Gazprom’s previous 10-year contract was set to expire. At the time, the European Commission pushed hard for the deal.
However, as the EU begins to wean itself off dependence on Russian fossil fuel imports following Russia’s full-scale invasion of Ukraine in 2022, the European Commission is encouraging member states to seek alternative supplies. The pro-Moscow governments of Hungary and Slovakia resisted the shift and sought to extend the deal beyond January 1.
The Ukrainian government cabled months in advance that it was unwilling to negotiate an extension because it wanted to deprive the Kremlin of gas export revenue. Brussels-based think tank Brueghel said ending financial flows would cost Russia $6.5 billion if it could not redirect them.
But it would also be a financial blow to Ukraine, which earns about $1 billion a year from gas transportation fees, although the gross profit margin is only about a fifth. Without Russian gas flowing through it, Ukraine’s vast gas pipeline infrastructure could face increasing Russian attacks, analysts say.
Slovak Prime Minister Robert Fico visited Moscow on December 22 to discuss natural gas transportation contracts. He blasted Ukraine for its intransigence on the deal, asking whether the country had “the right to harm a country’s economic and national interests.” [EU] Member States”.
Fico said on Facebook shortly before the agreement expired that “other gas transportation options besides Russian gas were proposed to Ukrainian partners, but these options were also rejected by the Ukrainian president.” Slovakia’s prime minister also threatened to cut off Slovakia’s backup power supply to Ukraine in retaliation.
Hungarian Prime Minister Viktor Orban is also seeking a solution that would allow Russia to import natural gas through Ukraine. His government has also turned to using the last remaining pipeline to transport Russian gas through Türkiye to neighboring Romania to replenish supplies.
Austria will still import Russian gas in 2024, but has shifted to importing alternative sources such as LNG. Its energy company OMV terminated its long-term contract with Gazprom in mid-December due to a legal dispute.
The gas outage will also have a significant impact on neighboring Moldova, which declared a state of emergency in its energy sector in mid-December due to uncertainty over Russian gas shipments.
A halt to the flow of Russian gas through Ukraine could increase European demand for higher-priced LNG, which Asia is also vying for.
EU officials have long insisted that the bloc can survive without supplies from Russian pipelines, even if that means accepting more expensive gas shipments from elsewhere.
The European Commission said on Tuesday it expected no disruption. “European gas infrastructure is flexible enough to supply gas of non-Russian origin to Central and Eastern Europe via alternative routes,” the report states. “This has been enhanced by significant new LNG import capacity since 2022.”
Turkish pipelines still carry Russian gas to Europe, accounting for about 5% of EU imports. The United States recently imposed sanctions on Gazprombank, Russia’s main pipeline for energy payments.
But in an effort to lessen the impact of sanctions, Russian President Vladimir Putin in early December dropped the requirement that foreign buyers of Russian gas pay through the bank. Countries including Türkiye and Hungary have also said they have received exemptions from U.S. sanctions.
Natasha Fielding, head of European gas pricing at Argus Media, said: “Going into the new year, sanctions have added an extra layer of uncertainty over the fate of Europe’s remaining Russian gas supplies, keeping gas prices volatile. She said the U.S. exemption This means that “buyers of Russian natural gas transported through the Turkey Stream pipeline can breathe a sigh of relief.”
Traders did not rule out future increases in Russian gas flows to Europe. European companies forced to cut output due to high gas and energy prices will return to buying Russian gas because it is already cheaper than liquefied natural gas, a senior trader said.
“At some stage there will be a peace deal… People want to end the war, so they have to sign a peace deal. One of the benefits that Russia will get is the ability to resupply gas to Europe,” the trader said.
While European governments may impose restrictions to prevent the continent from becoming overly reliant on Russian gas again, “you would expect to see some Russian gas coming back to Europe because fundamentally the geography has not changed,” the trader said.
Additional reporting by Andrew Bonds
