Ukraine will stop the transit of Russian gas to Europe: who punished whom?

Ekaterina Maximova

In early June, for some reason, not the first persons of Ukraine, but the ex-head of the Austrian oil and gas company OMV Gerhard Reuss announced that Kiev does not intend to extend the contract on the transit of Russian gas. He made such a statement with reference to the position of the Ministry of Energy of Ukraine. Later, the Ukrainian Minister German Galushchenko himself said his word: the chances that Kiev and Moscow will agree on the extension of the five-year transit contract are small.

The current transit contract with PJSC Gazprom expires at the end of 2024. The Ukrainian side believes that by this time Europe will finally overcome its dependence on Russian gas (due to alternative sources of imports and increasing LNG supplies). And Ukraine itself will simply lose part of its income.

The five-year agreement on the transit of Russian gas, we recall, brought Ukraine about $ 7 billion, as stated by the country's president Vladimir Zelensky in 2019. Gazprom paid Ukraine about $1.2 billion annually, but taking into account the maintenance of the pipe itself, Naftogaz's revenues reached about $ 400 million a year to the Ukrainian budget. And these «pennies» falling out of income are not at all the amount that will finish off the Ukrainian economy, tormented by its own.

So who is blocking gas to whom: Russia to Europe or Europeans to Gazprom?

Experts of the Institute of Energy and Finance believe that the whole nuance is that Gazprom did not plan to extend the contract. And the «friendship» of Gazprom and Naftogaz is a frank vestige of a bygone era. And there are several explanations for this position.

«The current contract is being executed by about 35% (instead of 109 million cubic meters through Suju in Ukraine receives, on average, 38-40 million cubic meters per day), while no one has canceled the „download or pay“ rule. In conditions of falling demand and possible switching to spot supplies, it will be more profitable for Gazprom to book capacity on a short—term basis — within a month in advance. This practice has already been with Yamal-Europe (it ended, however, with a complete stop of transit, but still for a different reason),» the Institute of Energy and Finance notes.

But if Ukraine does close the gas hut for a stick, then for Gazprom this means a further reduction in supplies. And the daily transit of gas through the Ukrainian GTS in recent years has been only about 40 million cubic meters (that is, only about 15 billion cubic meters per year).

In general, it is impossible to lose what is already actually lost. And the times when Russia annually exported about 170 billion cubic meters of pipeline gas to the premium European market are irrevocably gone. Taking into account everything that happened last year, including the exploded «Northern Streams», in 2023 deliveries to Europe are likely to amount to no more than 50 billion cubic meters. That is, Russia, for which Europe has been a guaranteed market for decades, will lose about 1 20 billion cubic meters of exports.

Today, the transit line through Ukraine with the current capacity of 38-40 million cubic meters per day remains the only route for the supply of our gas to the countries of Central and Western Europe. Turkey and the southern part of Europe (Greece, North Macedonia, Romania, Hungary, Serbia) are supplied with «Turkish» and «Blue» streams. According to Entsog, Turkish Stream accounts for about 35 million cubic meters more.

«Ukraine, of course, can completely block Russian transit for political reasons. But it is unlikely to do this in 2025 — Slovakia and Austria (the key countries tied to this route) will put pressure on it. In 2025, they will still need Russian gas. Without Ukraine, the gas supply with Russian gas and Moldova is unsolvable. However, Moldova itself is likely to abandon Russian gas until 2030 in favor of supplies from the EU (via Romania and western Ukraine), but it is not yet obvious that it will be able to do this already in 2025,» analysts at the Institute of Energy and Finance add.

And if Gazprom technically (with the booking of capacities at auctions) can retain the ability to «give» gas to the center of Europe, then the Europeans themselves will have to prepare for difficulties, says Alexander Frolov, Deputy Director General of the Institute of National Energy.

He recalled the position of the energy adviser to the Austrian government, Walter Boltz, who believes that Europe is already ready to abandon not only Ukrainian transit, but also pipeline gas supplies through Turkey. The landmark of the final and irrevocable gas divorce is 2027. But, according to Boltz, this can be implemented much earlier.

According to Frolov, this year from Russia will be supplied to the European Union (while maintaining the current pumping level) with 20-25 billion cubic meters of pipeline gas and a similar amount of LNG.

«Hence the question arises: does the Austrian official assume that there will be a surplus of LNG in the world from 2024, which can replace the „Russian“ volumes, or does he believe that gas consumption in the EU will continue to fall rapidly? One thing is for sure: this official clearly does not count on the recovery of demand. This means that economic growth can not be expected in the near future,» he concluded.

Vice-Chancellor, Minister for Economic Affairs and Climate Protection of Germany Robert Habeck («greens») says the same thing. He said that Germany, even if only Ukrainian transit is blocked, will have to significantly reduce production capacity. Germany may try to create a gas reserve, but in any case, until the completion of the process of creating a new energy balance (and this is at least 2027-2030), the deficit will seriously affect the German economy.

Well, in the meantime, Europe is holding on. According to Gas Infrastructure Europe, currently underground gas storage facilities in Europe are 75% full. European politicians continue to insist that the shortfall from Russia's gas volumes can be replaced with liquefied natural gas.

It is also worth recalling that Gazprom's revenue by the end of 2022, when supplies to Europe have not yet been interrupted to such an extent, amounted to 11.7 trillion rubles (10.2 trillion in 2021). In the structure of the giant's revenue, the European market (non-CIS countries) formed about 73%. Gazprom's net profit at the end of last year amounted to 1.3 trillion rubles, and for the first half of the year it was 2.5 trillion, i.e. the Russian company ended the second half of the year with losses of 1.2 trillion rubles. The loss is explained by the excess payments on the mineral extraction tax. Without this, Gazprom would have reached zero in the second half of 2022.