Russian gas supplies to Ukraine were halted early Wednesday morning after a transit agreement between the two countries expired following Moscow’s full-scale invasion.
The pipeline was one of the last two routes still transporting Russian gas to Europe, nearly three years after all-out war. EU countries stand to lose around 5% of their gas imports in midwinter.
Traders had long expected gas flows to stop, but the closure of the pipeline route through Ukraine will affect Europe’s gas balance at a time when demand for heating is high. Slovakia is the most affected country.
“You would think this volume decline is priced in, but initially it’s hard to imagine that prices could move much higher,” said Aldo Spager, senior commodity strategist at BNP Paribas.
The deal allowing Russian gas to pass through Ukraine was agreed at the end of 2019 and signed a day before a previous 10-year contract between the state gas companies was set to expire. At the time, the European Commission strongly promoted this agreement.
However, following Russia’s full-scale invasion of Ukraine in 2022 and Ukraine’s move to withdraw from Russian fossil fuel imports, the commission encouraged member states to explore alternative supplies. The Moscow-friendly governments of Hungary and Slovakia are resisting the changes and are seeking to extend the deal beyond January 1.
Ukraine’s government sent a cable several months ago saying it would not negotiate an extension of the deal, hoping to deprive the Kremlin of revenue from gas exports. According to the Brussels-based think tank Bruegel, stopping the flow will cost Russia $6.5 billion if it is not reversed.
But this would also be an economic blow to Ukraine. Ukraine was earning about $1 billion a year in gas transportation fees, but only one-fifth of that was gross profit. Analysts have suggested that without Russian gas flowing, Ukraine’s vast gas pipeline infrastructure could face increased Russian attacks.
Russia’s Gazprom announced in a Telegram post on Wednesday that the transit agreement had expired after Ukraine “repeatedly and unequivocally refused” to extend the deal. “Since 8 a.m. Moscow time, there have been no supplies of Russian gas for transport within the territory of Ukraine,” the ministry said.
Slovak Prime Minister Roberto Fico visited Moscow on December 22 to discuss gas transportation contracts. He questioned whether Ukraine had “the right to undermine the economic interests of (EU) member states” and criticized Ukraine’s intransigence on the deal.
“Gas transportation options other than Russian gas were presented to our Ukrainian partners, but these were also rejected by the President of Ukraine,” Fico said on Facebook shortly before the agreement expired. The Slovak prime minister also threatened to cut off Slovakia’s backup electricity supply to Ukraine in retaliation.
Hungarian Prime Minister Viktor Orban is similarly seeking a workaround to allow Russian gas imports through Ukraine. The administration has also turned to the last remaining pipeline to transport Russian gas through Turkey and neighboring Romania to supplement supplies.
Austria continued to import Russian gas throughout 2024, but switched to alternative sources such as importing liquefied natural gas. Its energy company OMV ended its long-term contract with Gazprom in mid-December, citing legal disputes.
The gas supply outage will also have a major impact on neighboring Moldova. Moldova imposed a state of emergency in its energy sector in mid-December, citing uncertainty over Russian gas shipments.
The suspension of Russian gas supplies through Ukraine is likely to increase European demand for more expensive LNG, with which Asian countries also compete.
EU officials are adamant that the region can survive without Russian pipeline supplies, even if it means receiving more expensive transport gas from other countries.
The European Commission said on Tuesday that it did not expect any disruption. “Europe’s gas infrastructure is flexible enough to supply non-Russian gas to Central and Eastern Europe through alternative routes.” “From 2022 onwards, significant new LNG import capacity has been strengthened.”
Turkish pipelines still transport Russian gas to Europe, contributing around 5% of the EU’s imports. The United States recently imposed sanctions on Gazprombank, Russia’s main pipeline for energy payments.
However, to reduce the impact of sanctions, Russian President Vladimir Putin in early December lifted the requirement for foreign buyers of Russian gas to pay through banks. Countries such as Türkiye and Hungary also said they had been granted exemptions from U.S. sanctions.
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Natasha Fielding, Head of European Gas Prices at Argus Media, said: “As we enter the new year, sanctions add further uncertainty to the fate of Europe’s remaining Russian gas supplies, resulting in volatile gas prices. It continues,” he said. Agency. The US exemption means “purchasers of Russian gas delivered through the Turkish Stream pipeline can breathe a sigh of relief,” she said.
Traders do not rule out the possibility of increased gas flows from Russia to Europe in the future. One senior trader said European companies reeling from soaring gas and energy prices and forced to cut production would return to buying Russian gas, which is inherently cheaper than LNG.
“At some stage there will be a peace agreement. People will want to end the war, so they have to sign a peace agreement. One of the things that Russia will gain is that Europe will The ability to resupply gas, traders said.
The trader said restrictions could be imposed to prevent the continent from becoming overly dependent on Russian gas again, but that “fundamentally the geography has not changed, so some Russian gas will return to Europe”. You can expect that.”
Additional reporting by Andrew Bounds