Russian gas flows through Ukraine are set to stop on Wednesday when a transit agreement between the two countries expires in the wake of Moscow's all-out invasion.
The pipeline was one of the last two routes still carrying Russian gas to Europe after nearly three years on a large scale. war. European Union countries will lose about 5 percent of their gas imports in the middle of the winter.
While traders have long expected flows to stop, the end of the pipeline's route through Ukraine will impact the gas balance in Europe at a time when demand for heating is high. Slovakia is the most affected country.
“While one assumes that the loss of these volumes is calculated, an initially strong bullish price response is not out of the question,” said Aldo Spanger, chief commodities strategist at BNP Paribas.
The deal to allow Russian gas to pass through Ukraine was agreed at the end of 2019, and was signed a day before the previous 10-year contract between the national gas companies expired. At the time, the European Commission strongly promoted the deal.
However, following Russia's large-scale invasion of Ukraine in 2022, the Commission encouraged member states to look for alternative supplies as the bloc moves to wean itself off Russian fossil fuel imports. The Moscow-friendly governments of Hungary and Slovakia have resisted this shift and sought to extend the agreement beyond January 1.
The Ukrainian government had sent a telegram months ago that it was unwilling to negotiate an extension of the deal, because it wanted to deprive the Kremlin of its income from gas exports. Ending the flows would result in a loss of $6.5 billion for Russia unless it can redirect them, according to the Brussels-based Bruegel Research Centre.
But it would also be a financial blow to Ukraine, which earns about $1 billion a year from gas transportation fees, although only about a fifth of that amount was in total profits. Analysts noted that Ukraine's massive gas pipeline infrastructure could face increased Russian attack if Russian gas does not flow through it.
Slovak Prime Minister Robert Fico visited Moscow on 22 December To discuss the gas transportation contract. He criticized Ukraine's intransigence regarding the agreement, asking whether the country had “the right to harm the national economic interests of a European Union member state.”
“The other gas transfer,” Fico said on Facebook shortly before the deal was set to expire Options Of Russian gas was offered to Ukrainian partners, but the Ukrainian president also rejected that.” The Slovak Prime Minister also threatened to cut off backup electricity supplies from Slovakia to Ukraine in retaliation.
Likewise, Hungarian Prime Minister Viktor Orbán sought an alternative solution to allowing Russian gas imports through Ukraine. His government has also turned to the last remaining pipeline to ship Russian gas through Türkiye and to neighboring Romania to supplement supplies.
Austria, which is still importing Russian gas throughout 2024, has turned to alternative sources such as liquid natural gas imports. Its energy subsidiary OMV in mid-December terminated its long-term contract with Russia's Gazprom due to a legal dispute.
Cutting off gas supplies will also have a major impact on neighboring Moldova, which in mid-December declared a state of emergency in the energy sector due to uncertainty over the transportation of Russian gas.
Stopping Russian gas flows through Ukraine is likely to increase European demand for more expensive liquefied natural gas, which Asia is also competing for.
EU officials insist the bloc can survive without Russian pipeline supplies, even if it means accepting expensive gas shipped from elsewhere.
The European Commission said on Tuesday that it did not expect any disruptions. “Europe’s gas infrastructure is flexible enough to provide gas of non-Russian origin to Central and Eastern Europe via alternative routes,” she said. “It has been enhanced by significant new LNG import capacities since 2022.”
The Turkish pipeline that transports Russian gas to Europe contributes about 5 percent of European Union imports. The United States recently imposed sanctions on Gazprom Bankthe main channel for Russian energy payments.
But to mitigate the impact of sanctions, Russian President Vladimir Putin in early December dropped a requirement for foreign buyers of Russian gas to pay through a bank. Countries such as Türkiye and Hungary also said they had received US exemptions from sanctions.
“Sanctions have previously added an extra layer of uncertainty over the fate of remaining Russian gas supplies in Europe as we enter the new year, which has helped keep gas prices volatile,” said Natasha Fielding, head of European gas pricing at Argus Media, a pricing firm. an agency. She said that the US concession means that “buyers of Russian gas delivered via the TurkStream pipeline can breathe a sigh of relief.”
Traders do not rule out increased Russian gas flows to Europe in the future. A senior trader said that European companies suffering from high gas and energy prices, which forced them to reduce production, would return to buying Russian gas, which was inherently cheaper than liquefied natural gas.
“At some point there will be a peace agreement. . . People will want the war to end, so they should sign a peace agreement. One of the things Russia will get is the ability to resupply gas to Europe, the trader said.
While European governments may impose restrictions to prevent the continent from once again becoming overly reliant on Russian gas, the trader said: “You would expect to see some Russian gas return to Europe, because the geography has not fundamentally changed.”
Additional reporting by Andrew Bounds
