Will Russia's gas flows stop to Europe via Ukraine trigger new energy crisis? Europe’s Achilles’ heel

On October 29, Ukraine’s Naftogaz CEO Oleksiy Chernyshov said that the company will not extend the agreement with Gazprom on gas transit to the EU after the current contract expires in late 2024. This came amid reports that Ukraine is ready to abandon gas transit, mainly because Russia is not fulfilling the contract terms.

Gazprom reportedly is not paying under the contract for the Sohranivka gas metering station, which is de facto located in the occupied territory, so Naftogaz is not receiving enough funding actually to support transit.

Ukraine’s stance toward Russian gas transit to Europe should come as little surprise as since the inception of the Russo-Ukraine war, the European Union (EU) member countries imposed a ban on Russian fossil fuels. Moreover, the EU plans to stop consuming Russian gas by 2027 completely.

Despite the ongoing war, Russia's Gazprom has continued to send gas to Europe via Ukraine under the current contract, with volumes delivered at the Sudzha interconnection point on the Russia-Ukraine border. Despite the bombs, missiles and drones wreaking havoc on Ukrainian energy infrastructure, the web of pipelines has kept pumping gas to the EU — where it ends up mainly in Austria, Slovakia, Italy and Hungary.

Therefore, the upcoming 2024 will be a key year for assessing whether Europe could manage without any Russian gas. Despite some experts’ arguments regarding energy security, since May 2022, Gazprom has been flowing less gas than agreed in the contract and paying less than the agreement provides.

As such, chances of Kyiv and Moscow agreeing to the renewal of the five-year transit contract first signed in 2019 are slim — even though the route through Ukraine accounts for almost 5 per cent of Europe’s total gas imports.

Indeed, since the energy sanctions on Russian natural gas triggered an energy crisis, stoking inflation and raising the cost of living across the European 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.

Under the current agreement, Gazprom is expected to transit 110 million cu m/d of Russian gas to Europe via Ukraine in 2023 and 2024 before the contract expires at the end of next year.

Consequently, there had been natural gas shortages in the global energy market before the Russo-Ukraine war raged, and with the sanctions, the gas deficit became an explicitly critical problem. Russian gas deliveries to Europe via Ukraine totalled just 8.23 billion cubic meters in the first seven months of 2023, a decline of 41% year on year and a fall of 68% versus 2021.

Before the war, additional LNG supplies from Qatar and the US were expected to come on stream in 2025 to compensate for the gas deficit. However, the radical, swift geopolitical landscape of Europe in 2022 forced countries to adjust their energy policy and expectations.

Transit could continue under a more flexible arrangement, with no firm take-or-pay or capacity booking, if Gazprom replicates the model being used with Yamal Europe and books transit capacity on a short-term basis.

Another possibility is to conclude agreements with European companies so that they receive gas at Ukraine’s eastern border and arrange for transportation services with Ukraine on a bilateral basis. Such a design was also discussed during the negotiations in 2019, but European players were unwilling to take all the risks associated with this scheme. Notwithstanding, the US government seems determined to boost LNG exports to Europe after 2025.

For example, some EU countries, such as Austria, said it would be “able to supply its customers even without Russian gas”, having made preparations since the invasion of Ukraine last year. However, not all countries are able to diversify energy sources within a short period and avoid energy crises.

Also, the situation with the Gazprom-Naftogaz contract would be ignited further amid reports that the EU seriously endorsed unprecedented plans to use profits generated by frozen Russian state assets for Ukraine reconstruction.

In this regard, Gazprom chief Alexei Miller warned last week that his company would stop exports if Ukraine doesn't drop its efforts to seize Russian state assets to enforce a $5 billion award for the energy infrastructure Moscow illegally expropriated when it annexed Crimea in 2014.

Despite the heated debates of Naftogaz regarding the gas transit to Europe, it is unlikely that Kyiv will terminate the contract earlier as it would lose additional dividends for the transition of gas to Europe. Nevertheless, the prospects of extending the contract are also poor in light of the heavy bombings of Ukrainian cities by Russian forces.