The future of Gazprom’s supplies to Europe remains in doubt

Ten months before the end of the contract for gas transit between Russia and Ukraine from the remaining European buyers and Gazprom (MOEX: GAZP) there are no ideas on how to advance the negotiation process on continuing Russian gas supplies to the EU. The two most likely options: sell gas through a hub in Turkey, directly or through a swap with Azerbaijan, or deliver it to European companies on the border with Ukraine. But there are no substantive negotiations on them. The European Commission, meanwhile, confirms plans to completely abandon transit, discussing alternative supply routes with the remaining buyer countries.

The potential free capacity of the gas pipeline infrastructure from Russia to Turkey in 2023 amounted to 11.2 billion cubic meters, or almost 35%. As the Turkish regulator EPDK revealed on February 28, Gazprom’s supplies to Turkey decreased by 1%, amounting to 21.34 billion cubic meters, while the total capacity of the first line of the Turkish Stream and the Blue Stream gas pipeline is 32.5 billion cubic meters. This spare capacity could potentially be used to supply Europe if Russia and Turkey come to an agreement to create a gas hub.

There is little time left – on January 1, 2025, Gazprom’s transit contract with Ukraine, concluded at the end of 2019 with a minimum volume of 40 billion cubic meters per year, ends. After the outbreak of hostilities, pumping volumes decreased significantly, and the Ukrainian side has repeatedly stated that it does not intend to discuss the extension of the contract. On February 28, European Commission representative Tim McPhee said that various alternative supply routes were being discussed with EU countries that would be affected by the cessation of Ukrainian transit, but continuation of transit was not being considered.

“Slovakia, Austria, the Czech Republic are the most affected, and to some extent Italy,” he said at a briefing in Brussels. At the same time, there are more European countries buying Russian pipeline gas than Mr. McPhee listed. Thus, gas continues to flow in transit through Ukraine to Transnistria and Austria, and through the Turkish Stream to Hungary, Croatia, Serbia, Bosnia and Herzegovina, and North Macedonia. In addition, Ukraine itself, which now receives Russian gas through a virtual reverse scheme from neighboring countries, will also be left without supplies. In total, Gazprom supplied about 11.85 billion cubic meters to Europe through Ukrainian transit in 2023, compared to 16.7 billion cubic meters in 2022. Supplies through the second line of the Turkish Stream amounted to about 12.23 billion cubic meters, an increase of 5%.

In theory, there are two options for maintaining supplies – continuing transit through Ukraine (with which the Europeans will take over) or supplying these volumes through Turkey. However, negotiations on the creation of a gas hub in Turkey are not in an active phase; the initiative comes more from the Russian side, Kommersant’s interlocutors in the Russian government say. As for the delivery of gas on the border with Ukraine, there are also no substantive negotiations going on yet.

Maria Belova from Impliment believes that Ukrainian transit remains the main option. So, starting from 2025, European companies will either carry out transit through the territory of Ukraine themselves, or will reserve the capacity of the Ukrainian gas transportation system at auctions in the interests of Gazprom, she believes. “In the face of a significant decline in exports, Gazprom should be interested in continuing gas supplies along this route,” Ms. Belova believes. As for the Turkish route, in her opinion, maintaining direct supplies to Turkey looks more preferable than selling gas at a future Turkish hub, the attractiveness of which will increase only if the EU imposes an embargo on the purchase of Russian gas. Also, the analyst recalls, Gazprom has the option of implementing swap gas supplies to Europe through Azerbaijan.

Gazprom is interested in continuing transit through Ukraine; this scenario is most realistic with the participation of European companies, but it may turn out to be unprofitable if the tariff for pumping from Kyiv increases, believes Sergei Kondratyev from the Institute of Energy and Finance. He is still skeptical about the prospects for the Turkish hub, including due to the low capacity of the infrastructure that does not pass through Ukraine.

Tatiana Dyatel