Russia warns Europe of higher gas prices if Ukraine cancels its transit agreement…
“Today, Dmitry Peskov, the spokesperson for the Kremlin, issued a significant warning regarding the potential consequences of terminating the transit agreement. He indicated that such a decision could adversely affect European consumers reliant on Russian gas, potentially resulting in increased costs for alternative energy sources, including liquefied natural gas from the United States…
Image: Nord Stream after the explosion by Germán & Co via Shutterstock
The economic and political profitability of Ukraine's gas transit role is multifaceted.
In 2021, Kyiv generated approximately $1 billion (€0.92 billion) in transit fees from Russian gas. However, the war has led to reduced deliveries to Europe, decreasing this revenue to about $700 million per year. With such minimal gas volumes, profitability for Ukraine is not achievable. The majority of these fees are allocated to operational costs, including pipeline maintenance. Therefore, any new agreement must substantially boost gas deliveries to help Kyiv overcome its financial hurdles. Without a renewed transit deal involving high volumes, Ukraine will not realize any profit. In the realm of politics, the transit role serves as a strategic asset for Ukraine in its dealings with both Russia and the European Union, especially now that Nord Stream 2 has been taken off the table.
“According to Russian state news agencies, Deputy Prime Minister Alexander Novak stated, as reported by Deutsche Welle on July 16 of this year, that transit through Ukraine is contingent upon Ukraine's established regulations and their willingness to permit it. He further indicated that Russia is prepared to provide the necessary supplies.
In December 2023, Energy Central celebrated top contributors in the Energy & Sustainability Network at the 'Top Voices' event. Winners were featured in 6 articles, demonstrating community recognition. The platform enables professionals to share their work, interact with colleagues, and collaborate with influencers. Congratulations to the 2023 Top Voices: David Hunt, Germán Toro Ghio, Schalk Cloete, and Dan Yurman for demonstrating their expertise. - Matt Chester, Energy Central
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“Andrés Gluski, the CEO of the AES Corporation, has emphasized the ongoing importance of natural gas as a critical bridge fuel for the next 25 years. He emphasized that although the shift towards renewable energy is gaining pace, natural gas will still play a crucial role in fulfilling global energy needs until more accessible and economical low-carbon technologies emerge…
Image by Carnegie Politika
What would the non-renewal of the Ukraine-Russia transit contract mean for the global natural gas market?
The Final Countdown: Will Russia and Ukraine Renew Gas Transit Deal?
Extending the transport of Russian gas via Ukraine after 2024 would likely benefit both Russia and Ukraine. Stopping the flow of gas, on the other hand, would be painful for whichever side initiates it.
Carnegie PolitiKa by Sergey Vakulenko, Published on February 15, 2024“Carnegie Politika is a digital publication that features unmatched analysis and insight on Russia, Ukraine and the wider region. For nearly a decade, Carnegie Politika has published contributions from members of Carnegie’s global network of scholars and well-known outside contributors and has helped drive important strategic conversations and policy debates.
At the end of 2024, a five-year agreement expires governing one of the oldest and biggest economic links between Russia and Europe: the transit of Russian gas through the territory of Ukraine. Kyiv has already said it will not extend the agreement, and Russian officials have confirmed no negotiations to that end are under way with either Ukraine or the EU. Still, that’s not to say that no more Russian gas will ever be shipped via Ukraine.
After all the upheaval of the last two years of war, Russian gas now enters Europe via two routes, each of which carries about 14 billion cubic meters of gas per year. The first is via the TurkStream pipeline and its extension, Balkan Stream, under the Black Sea to Turkey, Bulgaria, Serbia, and Hungary. The second route is a corridor through Ukraine to Slovakia.
The main buyers of Russian gas are Slovakia, Hungary, Austria, and Italy, whose current governments are guided by pragmatism in their foreign policy. Russian gas prices are now much more closely linked to European exchange prices than they were in the last decade, but still work out cheaper than liquefied natural gas (LNG), especially during price surges. Accordingly, some countries are reluctant to stop buying Russian gas entirely, though they have all signed up to the REPowerEU program, which envisages that Russian gas will be fully phased out by 2027.
Ukraine has already said it will not renew the transit agreement with Russia when it expires at the end of this year. European Commissioner for Energy Kadri Simson told reporters at the end of last year that the working scenario does not factor in those supplies. The Austrian company OMV said it was prepared to keep buying Russian gas, but at the same time reserved capacity in pipelines and at LNG receiving terminals that will enable it to manage without it.
Austria and Italy will be the least impacted by an end to Russian gas supplies. Austria will always have other options because multiple pipelines intersect on its territory. Italy also has other alternatives (albeit more expensive ones), since it gets gas from both Algeria and Azerbaijan via pipelines, and through several LNG terminals on its territory.
It’s a little more complicated for Hungary, but it could obtain Russian gas via TurkStream. Slovakia, on the other hand, has hardly any alternatives. It would need to organize a reverse flow from the Austrian hub, or receive gas through small German LNG terminals. Slovakia will also find itself furthest along the supply route, so its opportunities to procure gas will depend on whether Austria, Hungary, and the Czech Republic have enough for themselves.
Slovak Prime Minister Robert Fico has suggested that instead of OGTSU (Ukrainian gas pipeline operator) signing a transportation contract with Russia, European companies could sign them, meaning the latter would effectively purchase gas on the Russia-Ukraine border and then task Ukraine with transporting that gas.
If Ukraine sticks to its guns and does stop transporting Russian gas through its territory, the transit system operator could declare sections of pipeline or other infrastructure decommissioned. But if they are considered operational, then European companies could book transport capacity on a daily, monthly, or yearly basis—just as they do when arranging the delivery of gas from the LNG terminal in Belgium to their domestic markets.
There are certain benefits for Ukraine in continuing to transport Russian gas. Mechanisms best described as “virtual reverse” and “virtual transportation” enabled Ukraine to maintain physical supplies of gas even when it stopped buying gas from Gazprom and switched to purchases from European traders. Even now, when Ukraine consumes significantly less gas due to being at war, and its own deposits are almost enough for its needs, this system is useful.
The issue is that gas extraction and consumption centers are not always located where they need to be, and this is where the virtual transportation comes in. Now, even the process of transporting gas from Ukrainian fields to Ukrainian consumers is effectively a virtual one: it is Russian gas that is sent to some areas (especially in the southern part of the country), while Ukrainian gas goes into the Slovak gas transportation system. Without an external supply of gas from Russia, Ukraine would have to modify its pipeline system and run it differently.
The situation will become even more complicated if the Ukrainian economy recovers and demand for gas grows. With no Russian gas flowing through the country, Ukraine would have to buy gas from Austria, pay for its transit through Slovakia, and then organize its delivery from the western border to the center of the country where consumption is concentrated. At the same European gas exchange price that Ukraine currently pays, physically reversing the flow would cost $30–40 more per 1,000 cubic meters than it does under a virtual reverse.
In 2022, Ukraine began providing large-scale gas storage facilities in the west of the country to EU countries, and plans to keep doing so. But that business also depends to a large extent on virtual reverse and swap operations: on the ability to buy gas at Austria’s Baumgarten hub and transport it virtually to Ukrainian storage facilities free of charge. Without any Russian gas transit, such operations will be more difficult and costly.
Russia, too, would take a hit—primarily financial—if it could no longer transport its gas via Ukraine. There are no equivalent alternative markets for the Yamal gas currently sold to Europe, and that will not change significantly, even with the construction of the Power of Siberia 2 pipeline to China (no earlier than 2030) and an LNG plant on the Baltic Sea (currently planned for 2026–2027). The combined capacity of those two new projects is approximately half of the volume by which supplies to Europe have already decreased.
According to Gazprom CFO Famil Sadygov, the state-owned gas giant’s 2023 revenues from gas sales at home and abroad amounted to about $48 billion. Losing about $7–8 billion per year in export revenues for 15 billion cubic meters of gas would therefore mean a loss of 15 percent of revenue, or more than half of Gazprom’s gas business EBITDA (excluding the company’s share in Gazprom Neft).
The second problem for Gazprom is the threat of claims for financial damages from its European customers. Some of the company’s long-term contracts with EU countries are valid through 2040, and the inability to deliver that gas due to an issue with a transport company is the supplier’s problem. If Kyiv bans the transportation of Russian gas, that will be considered a force majeure, which might relieve Gazprom from its delivery obligations. But if the Ukrainian gas transit system operator simply shuts down the border metering station, declares the route closed, and stops accepting gas from the Russian side, it will be a different story.
Another consideration affecting Russia as a whole is that payment for Russian gas is made by EU companies via Gazprombank. That means that neither the bank nor Gazprom itself will be subject to full blocking sanctions while the deal is in effect.
While it may be difficult right now to look ahead to the restoration of relations after the war, it is worth noting that it is much easier to return to previous volumes from a reduced level under a current contract than to restore ties that had been completely severed and enter into new contracts. At the same time, for Russia, Ukraine, and Europe, the flow of Russian gas and the ability to stop it is one of the few remaining steps on the escalation ladder.
In purely pragmatic terms, therefore, the continuation of gas transit after the end of 2024 is likely to be beneficial for both Russia and Ukraine. For European countries that continue to purchase Russian gas, the advantages are also clear.
The situation may change in 2026–2027, when significant new volumes of LNG from the United States and Qatar are due to enter the market. It’s possible that supply growth will outstrip demand growth, causing LNG prices to drop considerably. Accordingly, it will become less expensive for EU countries to go without Russian gas, and political pressure will increase as the deadlines laid out under REPowerEU approach.
There are still many unknowns in this equation, however. In Washington, the Biden administration has announced a pause on granting new LNG projects the right to export to countries that do not have a free trade agreement with the United States. While that will not affect the market balance in 2026, it may cause European buyers to question the reliability and inexhaustibility of U.S. LNG supplies, and persuade them to maintain alternative options, including Russia.