EU searches for alternatives before Russian gas to Europe via Ukraine stops

Russian gas transit deal ends on New Year's Eve
NAFTOGAZ
Pipelines of Ukraine’s national oil and gas company Naftogaz. On January 1, 2025, the Transit Agreement, which has provided political, commercial, technical and legal grounds for the transit of Russian gas across Ukraine during 2020-24, will expire.

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The Ukrainian government has repeatedly stated that it will not extend a transit agreement, which has provided political, commercial, technical and legal grounds for the transit of Russian gas across Ukraine to Slovakia, the Czech Republic and Austria during 2020-24, after it expires on January 1, 2025, as long as the armed conflict between two countries continues.

“It has been made repeatedly clear that Ukraine will not sign a new transit agreement with Gazprom and will not carry any Russian gas in its network from December 31st. That is not expected to change,” Chris Weafer, CEO of Macro-Advisory, the leading independent strategic business consultancy in the Eurasia region, told NE Global on December 23.

“But there are alternatives which are still possible. One option is for Hungary and Slovakia to purchase the gas inside Russia, i.e. to take ownership of the gas on the Russian side of the border, and then to engage Naftogaz to transit Hungarian and Slovakian owned gas across the network as it currently does,” Weafer said, adding that the difference being that Ukraine’s national oil and gas company would not be carrying Russian-owned gas or have any dealings with Russian gas monopoly Gazprom.

According to Weafer, the other option, which has also been discussed, is for Russia to swap gas with Azerbaijan and for Azerbaijan to take ownership of the gas inside the Russian border and then to contract with Naftogaz to carry the gas, on its behalf, to Azeri state-owned national oil and gas company SOCAR’s new customers in Hungary and Slovakia. Russia would then take Azeri gas in its southern districts via the existing pipeline network, he said.

Meanwhile, Reuters quoted a senior source at SOCAR as saying on December 20 that Moscow and Kyiv have failed to agree on a deal brokered by Azerbaijan to continue Russian gas exports to Europe via Ukraine.

Weafer believes that one of these compromise deals, or some close variation to it, will be agreed at the last minute which would keep the existing gas volumes flowing from Russia to Hungary and Slovakia but with changed optics and new counterparties that would legally satisfy Ukraine’s determination not to ever again deal with Gazprom.

Despite the war in Ukraine, Russian gas has continued to flow through a pipeline via the country and there has been no significant disruption to these gas supplies to Europe until now. Photo: NAFTOGAZ

“Ukraine may need to rely even more on EU support in 2025, especially if a Trump Administration reduces U.S. support. Kyiv cannot afford to have two EU member states as enemies blocking future aid efforts or, eventually, trade deals with a post-war Ukraine economy,” Weafer argued.

Gas prices in Europe are rising

Katja Yafimava, a senior research fellow at the Oxford Institute for Energy Studies, noted that if transit of Russian gas via Ukraine stops, it is likely that alternative supplies would be available. But she noted there will be an impact on prices, particularly in countries like Slovakia and Austria, where it would be compounded by additional transportation costs.

She said that Hungary would be much less affected as it is getting nearly all of its Russian gas supplies through TurkStream. “Its interest in continued transit across Ukraine is explained by the fact that it wants to have several options for getting Russian gas, not to be overly reliant on TurkStream alone,” Yafimava she told NE Global on December 23.

Slovak Prime Minister Robert Fico met Russia’s President Vladimir Putin on December 22, during a surprise visit to Moscow, a move that was criticized by some Western leaders and Ukraine’s President Volodymyr Zelenskyy.

A day earlier, Hungary’s Prime Minister Viktor Orban said Budapest is in talks with Moscow and Kyiv on keeping open gas shipments via Ukraine, noting that he did not want to give up that route even though its Russian gas imports now come via the Turkstream pipeline.

According to Yafimava, Southeast Europe is in a better position, particularly countries with a coastline and liquified natural gas (LNG) terminals like Greece, and also those receiving their Russian gas via TurkStream. “If transit stops, Europe will have no other choice apart from importing more LNG, but it will have to out-compete other buyers on price, as there is no additional uncontracted LNG available in the short term – certainty not this winter. It will also have to continue to do so over next summer season to refill storages,” the Oxford energy expert explained.

Weafer agreed that Southern Europe is in much better shape as it is linked to both the Southern Gas Corridor, which takes Azerbaijan gas directly to Italy, and to the TurkStream 2 pipeline which takes Russian gas from the point where the trans-Black Sea TurkStream splits. One pipe takes gas directly into Turkey while the send goes north to deliver gas to the Balkan states.

Responding to Trump’s tariffs threat

Since Russia’s invasion of Ukraine, the EU has already substantially increased imports of U.S. LNG but there is still room to further increase imports from U.S. suppliers.

U.S. president-elect Donald Trump has warned that unless Europe buys more U.S. LNG, the EU will face tariffs on its exports to the U.S. market. Weafer noted that in the event of a ceasefire and the start of a peace process, the U.S. is most unlikely to start easing the sanctions against the Russian LNG sector. “The U.S. will want to suppress Russian LNG volume growth for as long as possible. Instead, if there is to be some sanctions easing, probably in a salami-slice process rather than in larger chunks, the more likely area of easing will be in the financial sector rather than energy,” Weafer argued.

“But the EU is paying more for U.S. LNG than it is for Russian LNG. The big question is how long major economies in Europe will be prepared to support the U.S. economy by paying high U.S. energy prices while suffering a loss of economic competitiveness to India, Turkey, China and other markets to which Russia is exporting both oil and gas at a discount to the U.S. prices?” Weafer asked and added: “We have already seen the damage done to the German chemical sector and that will get worse and affect more industries in the coming years.”

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Co-founder / Director of Energy & Climate Policy and Security at NE Global Media

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