Gas ghost: prospects for Ukrainian transit are becoming increasingly dim

Ukrainian President Vladimir Zelensky generally calls for cutting off all Russian gas supplies to Europe, including the Turkish route.

A number of European officials are also against Russian gas supplies through Ukraine. Thus, European Commissioner for Energy Kadri Simson warned on February 15 that she had notified Ukraine of the EU’s lack of interest in the transit agreement. She is confident in the effectiveness of alternative solutions: “We will be able to use the gas storage system in Ukraine for gas storage and for reverse supplies.” Simson did not specify whether this position was agreed directly with the countries that consume the remaining volumes of Russian gas.

However, Austrian Climate Action Minister Leonor Gewessler announced her government’s plans to consider withdrawing from gas contracts between OMV and Gazprom, some of which run until 2040. However, the Austrian concern rightly reacted with restraint, recalling that Russian natural gas is not subject to European sanctions.

The Russian government, for its part, does not reject negotiations out of hand, but at the same time is waiting for proposals from the Europeans. Russian Energy Minister Nikolai Shulginov has repeatedly explained that “European countries should take care of themselves and try to come up with some kind of proposal on how to maintain transit, because they are interested in this.”

In principle, waiting for a transit offer from European consumers is not so hopeless. On January 24 of this year, Slovak Prime Minister Robert Fico held talks in Uzhgorod with his Ukrainian counterpart Denis Shmygal, during which the topic of gas transit was touched upon. The outcome assessments were exactly the opposite. Fico expressed hope that transit will survive in 2025. Shmygal – there will be no contract extension. But still, the Ukrainian prime minister admits the possibility of discussing with any EU country the issue “of using its gas transportation network.” We can conclude: Kyiv is not ready to renew the current agreement with Gazprom, but does not exclude the possibility of supplying Russian gas through its gas transportation system after 2024.

However, in order to predict either the death of the gas project or its resurrection in 2025, it is necessary to understand what the Russian-Ukrainian gas agreement of December 2019 is.

Then, as a result of fleeting negotiations between Russia, the EU and Ukraine, a package of documents was signed on the settlement of legal disputes and mutual claims between Gazprom and Naftogaz of Ukraine, as well as a new transit agreement between the companies for a period of five years.

Under its terms, Gazprom guaranteed pumping a total of at least 225 billion cubic meters of natural gas: 65 billion in 2020, 40 billion each in 2021–2024. These volumes were subject to the ship or pay rule, and Naftogaz booked the corresponding capacities from the Ukrainian GTS Operator (OGTSU) company, created as part of the transition to European rules. The size of the tariff was not announced, but, judging by unofficial data, we are talking about $3.1 per 1 thousand “cubes” per 100 km. In total, as Zelensky also confirmed, the total income of the Ukrainian side from transit for the entire period of the contract should have reached $7 billion.

Kyiv’s gain from the agreement is obvious. In addition, Zelensky simply complied with the demands of Brussels, which at that time was not ready to give up Russian gas.

Gazprom also had advantages. Naftogaz, under pressure from the EU, withdrew all legal claims against the Russian gas company, which in total exceeded $17 billion. Kiev disputed the take or pay principle, according to which the gas buyer must choose the entire gas ordered or pay for its delivery fully. For a long time, Gazprom concluded all export contracts on this basis, including Ukrainian ones. But starting in the mid-2010s, Western and then Ukrainian companies abandoned this scheme through arbitration. So Naftogaz had prospects of winning the case in the Stockholm arbitration. Ukrainians also believed that under the 2009 agreement, which was in force until 2015, they significantly overpaid for Russian gas.

In addition, Gazprom had no other choice to supply the full volume of gas contracted in Europe, while the construction of Nord Stream 2 was not possible due to the protracted approval of the gas pipeline route through the special economic zone of Denmark and American sanctions completed.

In general, the transit agreement that is still in force for Russia turned out to be forced. It is no coincidence that Gazprom was initially unable to ensure full contractual utilization of the Ukrainian gas transportation system. Thus, in 2020, only 86% of guaranteed capacity was used – 55.8 billion cubic meters. m. Compared to 2019, transit decreased by 38%. In 2021, total transit, according to OGTSU, amounted to 41.6 billion cubic meters. m.

In 2022–2023, after the start of the SVO, daily volumes of Russian gas supplies fluctuated greatly, including due to Ukraine’s blocking of the Sokhranovka-Slovakia pipeline.” At the end of 2023, gas transit did not exceed 14 billion cubic meters.

It turns out that the $7 billion designated by Zelensky for gas transit is melting away before our eyes. However, the Ukrainian side demands that Gazprom pay in full according to the “pump or pay” principle that forms the basis of the latest contract. But “Gazprom” refuses to pay for the “Sokhranovka” pipeline, which was blocked by the Ukrainians – the eastern border of Slovakia.” And, most likely, Gazprom will never pay for air to anyone again. And such a contract is especially not interesting for Ukraine.

Thus, the prospects for Ukrainian gas transit are more than illusory. Most likely, there will be no actual extension of the previous agreements. But it is possible to conclude a trilateral agreement with Austria and Slovakia, which are almost 100% dependent on Russian gas supplies. Hungary, the Czech Republic and Italy are also interested in receiving our hydrocarbons. The first country, however, mainly receives Russian gas through the Balkan pipeline, a continuation of the Turkish Stream. Italy replaced Russian pipeline gas with American and Qatari LNG, as well as pipeline gas from Algeria.

However, here too there are insurmountable difficulties. Qatar requires ultra-long-term contracts, at least 20 years. US President Joseph Biden in January banned the construction of two new LNG export terminals in Texas. This could limit US LNG supplies in the near future.

Therefore, the cessation of gas supplies along the Ukrainian route, despite their current limitations, could lead to a fuel shortage in Europe and, accordingly, to another surge in prices. German Economics Minister Robert Habeck recently admitted that it was not possible to completely replace gas from Russia. Thus, in his country, according to a number of estimates, 26 billion cubic meters of gas have not been replaced in annual terms. Fertilizer factories had to be closed.

Therefore, it is still possible to conclude a Russian-European agreement on the sale of gas on the Russian-Ukrainian border. Then the European consortium will book the capacity of the Ukrainian gas transportation system on a monthly basis.

But the prospects for such an outcome are also unclear. Firstly, the Ukrainian gas transportation system is extremely worn out, and no one is going to repair it there. And secondly, in 2021, the Polish part of the Yamal-Europe pipeline operated on the basis of a monthly auction reservation. Volumes were constantly falling, and on April 26, 2022, Warsaw completely requisitioned this pipe.

So the prospects for launching the surviving branch of Nord Stream 2 may be greater than that of extending the Ukrainian route. Unless, of course, the authorities in Kyiv and Washington change by the beginning of 2025.

By the way, the Ukrainian gas mine was laid back in 1970. Germany then concluded a gas “contract of the century” with the USSR, subject to the construction of a network of pipelines through Ukraine and Czechoslovakia in order to bypass the GDR.