Russia gas flows through Ukraine could stop next year, Kyiv says

One of the last arteries carrying Russian gas to Europe could be shut off by the end of next year when Ukraine’s supply contract with Gazprom expires, the Ukrainian energy minister has said.

In an interview with the Financial Times, German Galushchenko said that the chances of Kyiv and Moscow agreeing on the renewal of the five-year transit contract first signed in 2019 were slim - even though the route through Ukraine accounts for almost 5 per cent of Europe’s total gas imports.

“I really can’t imagine how it could be bilaterally,” Galushchenko said when asked if Ukraine would be prepared to renegotiate the agreement with Moscow following last year’s invasion.

“I can tell you that we are preparing our system for a cut of supplies,” he added.

Moscow’s decision to slash gas supply to Europe last year triggered an energy crisis, stoking inflation and raising the cost of living across the continent. But while several routes were shut off, the Ukrainian pipeline is one of just two that have continued to supply gas, albeit at reduced volumes.

According to data from energy consultancy ICIS, Austria relied on Russian gas passing through Ukraine for about half of its gas imports in May, while in Slovakia, the pipeline accounted for 95 per cent.

The energy minister said Europe would be relatively prepared for a further slowdown in supply, having had to adapt to similar cuts in the past by reducing demand and sourcing alternative imports such as liquefied natural gas.

But this is the first acknowledgement from Kyiv that the contract underpinning the remaining flows from Russia through Ukraine will probably be allowed to expire at the end of next year.

Without the Ukrainian transit route, the only pipeline from Russia still delivering gas into Europe would be TurkStream, which supplies countries in the south-east of the continent and accounted for just under 3 per cent of Europe’s gas imports in May.

While Galushchenko suggested that European politicians might wish to renegotiate the contract — as happened in 2019 when an EU delegation brokered trilateral talks with Russia and Ukraine — analysts say this is unlikely given the difficult optics of holding talks with Moscow.

The European Commission declined to comment on whether it would try to instigate talks with Russia on the contract renewal.

The loss of even a small percentage of supply has the potential to raise prices across the continent given the tightness of global gas markets, though supplies of LNG are expected to rise rapidly from 2025 with the launch of major projects in Qatar and the US.

Earlier this month, Russian deputy foreign minister Mikhail Galuzin said that a decision not to extend the gas transit agreement would “deal a blow” to the EU, while Ukraine would “shoot itself in the foot by losing the dividends from transit”.

European gas prices surged to more than 10 times their normal level in 2022, reaching the equivalent of almost $600 a barrel in oil terms, but have since fallen sharply. The benchmark TTF contract is back to about €40 per megawatt hour — down almost 90 per cent from its peak last August.

The current gas transit contract was signed in December 2019, a last-minute deal that came just 24 hours before the previous agreement expired, securing Russian gas flows through Ukraine until 2024.

Under the deal, Russia’s state-owned energy company Gazprom agreed to send a minimum of 65bn cubic metres of gas in 2020, and 40 bcm/year between 2021 and 2024, through the Ukrainian pipeline, which would have secured the country $7bn in transit fees.

However Russia is currently only shipping volumes of about 12 bcm/year, and Kyiv claims Moscow has been underpaying it, despite a contractual obligation to pay the full transit fee regardless of whether agreed volumes of gas are supplied.

OMV, one of Austria’s largest energy companies, said it would be “able to supply its customers even without Russian gas”, having made preparations since the invasion of Ukraine last year.

If the contract lapses, Gazprom could technically still send gas through Ukraine by booking capacity through auctions that its gas transmission system operator is obliged to hold, under European rules.

“It’s hard to see how you renew a contract that neither side believes the other has honoured, let alone in a middle of a war between the two parties,” said Laurent Ruseckas, an analyst at S&P Global Commodity Insights.

“But in theory, the gas should continue to flow if European buyers still want it and Russia is prepared to send it,” he added.