EU faces energy challenges

In an article published by Politico, the International Energy Agency has issued a stark warning regarding the potential loss of the Ukraine gas pipeline as Europe braces for the winter months.

The contract for Russian gas has become problematic, and alternatives are available. This is the reasoning adopted by many European officials as a multibillion-dollar deal allowing Russian gas to flow through Ukraine into the EU approaches its expiration at the end of the year.

Data supports their view: the EU can generally source gas from other suppliers. However, for a few countries—particularly Austria, Slovakia, and Hungary—the situation presents a costly dilemma with potential repercussions across Europe. Unlike much of the EU, these three nations have not yet reduced their dependency on Russian gas. Due to both political and practical reasons, they have maintained their ties to Moscow's energy, benefiting from lower costs.

The Ukrainian pipeline has been a critical link in this relationship. With that link now at risk, these countries may soon need to find alternatives. While options are available, any shift from the current arrangement will likely come with added expenses.

Following Russia's full-scale invasion of Ukraine in early 2022, Europe's heavy dependence on Russian gas became a pressing issue, especially as Moscow cut off supplies through the Nord Stream and Yamal-Europe pipelines—two crucial energy routes to the EU. In response, Europe quickly adapted. Coastal nations expanded their capacity to import liquefied natural gas (LNG) from countries like the United States and entered into new contracts. By 2023, Russian pipeline gas accounted for only 8 per cent of the EU's energy imports, down from over 40 per cent in 2021. 

Despite this shift, some pipelines continued to operate, including one that runs through Ukraine under a prewar contract. For the EU overall, this route became largely redundant, representing only about 5 per cent of the bloc's gas imports in 2023. However, for Central and Eastern European countries, the route remains crucial. These nations, lacking access to the seas, were less able to pivot to LNG imports and continued to rely on Russian gas. “It may not represent a large share of the total European gas supply, but it is an essential source for specific regions,” said Samantha Gross, director of the Energy Security and Climate Initiative at the Brookings Institution.

On the second anniversary of the war, Austria was noted for being 98 per cent dependent on Russian gas, much of which flowed through Ukraine. Slovakia also received several billion cubic meters of gas via this pipeline, while Hungary, although relying on less gas from Ukraine, remains heavily dependent on Moscow's energy overall. The International Energy Agency recently cautioned that the potential loss of the Ukraine pipeline poses a “key uncertainty” for Europe this winter. “Although Russian gas flowing through Ukraine constituted only a small portion of total EU gas demand in 2023, the cessation of these transit flows would have a significant impact on some Central and Eastern European markets and Moldova,” the agency stated. 

At present, EU countries relying on the Ukraine pipeline are effectively obtaining Russian gas at the lowest possible prices, avoiding intermediaries who charge higher rates. “If that gas is cut off, they will still be connected to the rest of Europe, making it possible for them to secure supplies,” Gross explained. “However, instead of being at the front of the supply line, they would be at the back.” Being pushed to the back of the supply line would create significant challenges. 

New contracts would have to be established, and alternative routes would need to be developed—whether for LNG transported from the coast or pipeline gas from other nations to compensate for the lost Russian supplies. In either scenario, the costs are likely to be considerable. “If that gas arrives in Europe as LNG, it will almost certainly be more expensive than the Russian pipeline gas,” Gross noted. “One of the main reasons Europe relied so heavily on Russian pipeline gas in the first place was its affordability.” Ultimately, it’s more about price than volume, according to Christoph Halser, a gas and LNG analyst at Rystad Energy.

By Naila Huseynova