Russian gas is about to stop flowing through Ukraine

The flow of Russian gas through Ukraine is expected to stop on Wednesday when a transit agreement between the two countries expires following Moscow’s full-scale invasion.

The pipeline is one of the last two routes still carrying Russian gas to Europe after nearly three years of full operation. war. EU countries will lose about 5% of their gas imports in the middle of winter.

While traders have long expected the flows to stop, the end of the pipeline route through Ukraine will affect Europe’s gas balance at a time of high demand for heating. Slovakia is the worst affected country.

“While people think the loss of those volumes [is] The initial strong price reaction was not unexpected, said Aldo Spanjer, senior commodity strategist at BNP Paribas.

The deal allowing Russian gas to pass through Ukraine was agreed at the end of 2019, 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 full-scale invasion of Ukraine in 2022, the commission encouraged member states to seek alternative sources of supply as the bloc moved to stop importing Russian fossil fuels. The Moscow-friendly governments of Hungary and Slovakia have opposed that change and sought to extend the agreement beyond January 1.

The Ukrainian government announced months in advance that it was unwilling to negotiate an extension of the agreement because it wanted to deprive the Kremlin of gas export income. According to the Brussels-based consulting organization Bruegel, ending the flow would cost Russia $6.5 billion, unless the country can redirect the flow.

But it would also be a financial blow for Ukraine, which earns about $1 billion a year in gas transit fees, although only about a fifth of that is gross profit. Ukraine’s vast gas pipeline infrastructure could face growing Russian attack without Russian gas flowing through it, analysts say.

Slovak Prime Minister Robert Fico visited Moscow on December 22 discuss gas transportation contracts. He criticized Ukraine’s intransigence in the deal, asking whether the country had “the right to harm a country’s national economic interests.” [EU] member country”.

Fico said on Facebook shortly before the agreement expired that “other gas transportation activities option More than Russian gas was given to Ukrainian partners, but these were also rejected by the Ukrainian president.” The Slovak Prime Minister also threatened to cut off backup power supplies from Slovakia to Ukraine in retaliation.

Hungarian Prime Minister Viktor Orbán has also sought to find a solution to allow Russia to import gas through Ukraine. His government has also turned to the last remaining pipeline carrying Russian gas through Türkiye and into neighboring Romania to supplement supplies.

Austria, which will still import Russian gas throughout 2024, has turned to alternative sources such as liquid natural gas imports. Its energy company OMV in mid-December terminated its long-term contract with Russia’s Gazprom because of a legal dispute.

The gas cuts will also have a significant impact on neighboring Moldova, which in mid-December declared a state of emergency in the energy sector because of uncertainty surrounding Russian gas deliveries.

The suspension of Russian gas supplies through Ukraine will likely increase European demand for more expensive LNG, which Asia also competes with.

EU officials have been adamant that the bloc can survive without Russian pipeline supplies, even if that means accepting more expensive gas shipments from elsewhere.

The European Commission said Tuesday that it did not expect disruption. Europe’s gas infrastructure is flexible enough to supply gas of non-Russian origin to Central and Eastern Europe via alternative routes. “It has been strengthened with significant new LNG import capacity from 2022.”

Türkiye’s gas pipeline still transports Russian gas to Europe, contributing about 5% of EU imports. The US recently imposed sanctions on GazprombankMain channel for Russian energy payments.

But to minimize the impact of sanctions, Russian President Vladimir Putin in early December abolished the requirement for foreigners buying Russian gas to pay through banks. Countries such as Türkiye and Hungary also said they have received exemptions from US sanctions.

Natasha Fielding, head of European gas pricing at Argus Media, said: “Previous sanctions have created additional uncertainty over the fate of Russia’s remaining gas supplies in Europe. Europe as we enter the new year, helping to stabilize gasoline prices.” company. The US waiver means “buyers of Russian gas transported through the Turkish Stream pipeline can breathe a sigh of relief,” she said.

Traders do not rule out the possibility that the amount of Russian gas flowing to Europe will increase in the future. European companies reeling from high gas and energy prices, forcing them to cut production, will return to buying Russian gas, which is cheaper than LNG, a senior trader said.

“At some stage there will be a peace agreement. . . People will want to end the war so they must sign a peace agreement. One of the things Russia will gain is the ability to supply gas to Europe, the trader said.

While European governments may impose restrictions to prevent the continent from once again becoming too dependent on Russian gas, the trader said, “you will see some Russian gas spinning back to Europe, because the geography essentially hasn’t changed.”

Additional reporting by Andrew Bounds