Author: Anna Khomasuridze
The expiration date of the Ukraine-Russia gas transit agreement looms at – 06.00 am CET on 1 January 2025. Accordingly, Europe faces significant energy security challenges. The five-year deal, signed in 2019, allowed Russian natural gas to flow through Ukraine to various European countries, maintaining a vital energy lifeline for the continent. However, with Ukraine’s decision not to renew the contract, the geopolitical landscape of energy in Europe is on the brink of a dramatic shift. This blog delves into the potential consequences of the deal’s expiration, the alternatives being explored, and the broader implications for the European Union (EU), Russia, and Ukraine.
The Significance of the Ukraine-Russia Gas Transit Route
The Ukraine-Russia gas transit route has long been a cornerstone of Europe’s energy supply. Established during the Soviet era, the pipeline network extends across Ukraine, facilitating the flow of Russian gas to Western Europe. Before Russia’s full-scale invasion of Ukraine in 2022, approximately 150 billion cubic meters (bcm) of natural gas passed through Ukraine’s pipelines annually. However, the war has dramatically changed the current dynamics. EU countries have stopped relying on Russian mineral resources, and Russia has reduced gas supplies through Ukraine from 40 billion cubic meters (as per the 2019 agreement between the parties) to 15 billion cubic meters in 2023.
Despite the ongoing conflict, the transit route remains operational under the 2019 agreement. This deal is the last remaining trade and political link between Moscow and Kyiv, symbolizing the complex interdependencies between the two nations. As the end of 2024 approaches, whether this route will continue functioning is becoming increasingly urgent.
Ukraine’s Stance: A Firm ‘No’ to Renewal
Ukraine has made it clear that it does not intend to renew the gas transit deal with Russia. Ukrainian Energy Minister German Galushchenko confirmed in March 2024 that Kyiv has no plans to sign a new agreement or extend the current one. This decision is driven by several factors, including the ongoing war, and Ukraine’s desire to end Russian influence and manage its gas system without Russian transit. The end-of-contract scenario would allow the EU to accelerate its energy independence plan and break away from dependence on Russia by 2025, two years earlier than its current REPowerEU plan.
Ukraine’s gas transmission system has undergone stress tests to ensure its functionality without Russian gas. These tests have demonstrated that the country can maintain sufficient gas pressure for domestic needs, even if the flow from Russia stops. This shift would significantly depart Ukraine’s historic role as a key transit country for Russian gas to Europe.
Europe’s Response: Diversification and Alternative Routes
The potential end of the Ukraine-Russia transit agreement has prompted European countries to seek alternative gas supplies and transit routes. The EU has significantly reduced its dependence on Russian fossil fuels since the onset of the Ukraine war, increasing liquefied natural gas (LNG) imports from the United States and other countries, for instance from Norway.
Countries like Austria, Slovakia, Hungary, and Italy, which have historically relied on Russian gas via Ukraine, are exploring other options. Austria, for instance, is preparing to import gas from Italy and Germany, while Hungary has turned to the TurkStream pipeline for Russian gas. As for Italy, it has diversified its sources, importing gas from Algeria and Azerbaijan.
One of the most discussed alternatives is increasing gas imports from Azerbaijan. The EU has already opened negotiations with Azerbaijan to replace more Russian gas. Azerbaijan increased its gas exports to Europe by 56% in the first year of the Ukraine war and aims to double these exports by 2027. However, due to infrastructure limitations, experts question the feasibility of significantly boosting Azerbaijan’s gas supply in the short term.
Martin, Nik. – “How EU Could Use Ukraine’s Pipelines When Russia Deal Ends.” – Dw.Com, July 16, 2024. https://www.dw.com/en/how-to-use-ukraines-gas-pipelines-when-russia-deal-ends/a-69640265
Russia’s Strategy: Alternative Routes and LNG Exports
For Russia, the expiration of the Ukraine transit deal represents both a challenge and an opportunity. On the one hand, Russia will lose approximately $4.5 billion annually if it cannot continue exporting gas to Europe through Ukraine. On the other hand, Moscow is exploring alternative routes and increasing LNG exports to mitigate the impact.
One potential alternative is the TurkStream pipeline, which runs from Russia to Turkey and onward to Southern Europe. However, the capacity of this route is limited, and it cannot fully replace the volumes currently transiting through Ukraine. Russia is also focusing on increasing gas exports to China through the Power of Siberia pipeline, with ambitious plans to expand this route significantly in the coming years.
Additionally, Russia has shown a willingness to renew the transit deal if Ukraine agrees. Deputy Prime Minister Alexander Novak has stated that Moscow is ready to supply gas through Ukraine if Kyiv desires. However, given the current geopolitical tensions, such a renewal appears unlikely.
The Impact on Central and Eastern Europe
Central and Eastern European countries are among the most vulnerable to the potential disruption of Russian gas flows through Ukraine. In particular, Slovakia, Austria, and Moldova rely heavily on these transit volumes. In 2023, these countries imported 3.2 bcm, 5.7 bcm, and 2.0 bcm of gas through Ukraine, respectively.
Moldova, one of Europe’s poorest countries, faces a particularly challenging situation. While Moldova has started to diversify its gas supply, importing from Romania and other sources, it still depends on Russian gas for the breakaway region of Transnistria. Ending the transit agreement could force Moldova to reroute its gas supplies, potentially through the Trans-Balkan pipeline in reverse flow.
Slovakia and Austria would also need to find new sources of gas. Austria, which has relied heavily on Russian gas, would need to increase imports from Germany and Italy and potentially from LNG terminals in Poland and Germany. At the end of the gas flow chain, Slovakia may face significant challenges in securing adequate supplies.
The Role of LNG and New Infrastructure
With the looming end of the Ukraine transit deal, LNG is expected to play a crucial role in filling the gap. Rystad Energy estimates that Europe would need an additional 7.2 bcm of LNG per year to replace the gas currently transiting Ukraine. This would require expanding LNG infrastructure, including terminals in Poland, Germany, Lithuania, and Italy.
New infrastructure projects are also in the pipeline to enhance Europe’s energy security. For instance, the EU’s Central and South Eastern Europe Energy Connectivity (CESEC) Initiative is working on creating a Vertical Gas Corridor that would enable LNG imports from Greece and Turkey to reach countries like Slovakia and Hungary. Turkey and Bulgaria have also signed an agreement to increase gas entry capacity, potentially boosting supplies from Azerbaijan and the Caspian Sea region.
Rystad Energy. “Supply Shift: End of Ukraine Gas Transit Sets the Stage for LNG and Pipeline Diversions,” July 16, 2024. https://www.rystadenergy.com/news/end-of-ukraine-gas-transit-lng-and-pipeline
Conclusion: Navigating the Complex Energy Landscape
The expiration of the Ukraine-Russia gas transit agreement will change the energy landscape in Europe and beyond. This transition will not come without challenges. Central and Eastern European countries must navigate a complex energy environment, balancing the need for a secure fossil fuel supply while reducing dependence on Russian resources. The next few years will be crucial in determining how Europe manages this energy transition and whether it can achieve its ambitious energy diversification and sustainability goals.
As the geopolitical stakes rise, the ending of the Ukraine-Russia gas transit agreement could be a turning point in European energy policy, with significant implications for both global energy markets and international relations.
