Breakup of Gas Transit via Ukraine: Stakes and Consequences for Europe and Russia

The expiration of the gas transit agreement between Russia and Ukraine highlights the energy and economic challenges for the European Union, Russia, and Ukraine, exacerbating Europe's dependence on Russian gas and geopolitical tensions.

Share:

The announcement by Alexander Novak, Russian Deputy Prime Minister, regarding gas transit via Ukraine reveals several strategic issues for Russia, Ukraine, and the European Union (EU). At the end of 2024, the current gas transit agreement between Russia and Ukraine is set to expire. While Russia is open to continuing supplies, Ukraine has repeatedly stated that it will not renew this agreement. This situation places the EU in a delicate position, as some European countries continue to rely on Russian gas flows for their energy consumption.

Despite the drastic reduction in EU imports of Russian gas since the beginning of the war in Ukraine, countries like Slovakia, Austria, and Hungary still depend on these supplies. Slovakia, in particular, is in a vulnerable position as it lacks solid alternatives. It might attempt to establish a reverse flow from Austria or import via liquefied natural gas (LNG) terminals in Germany, but this would incur additional costs.

Economic Impact for Ukraine

For Ukraine, the end of gas transit could have significant economic consequences. Currently, Kyiv generates approximately 714 million euros in annual revenue from Russian gas transit, which is below the initially projected 1.25 billion euros. However, maintaining this infrastructure is costly. The Ukrainian pipeline network, designed to transport large quantities of gas, requires high maintenance costs, estimated at around 892 million euros per year, to remain operational. If Russian transit stops, Ukraine will need to find alternative means to finance these costs while ensuring that the pipelines continue to meet domestic needs.

Repercussions for Russia and the EU

Russia could suffer a loss of 7 to 8 billion dollars in annual revenue, representing about 15% of Gazprom’s total revenue. These losses could not be offset by alternative markets for several years. The construction of the “Power of Siberia 2” pipeline to China is not planned before 2030, and an LNG terminal project on the Baltic Sea would not be operational until 2026-2027. Additionally, the end of this transit could trigger damage claims from European customers, some contracts of which extend until 2040.

For the EU, the loss of 15 billion cubic meters of gas transported via Ukraine each year would be a shock for some Central and Eastern European countries. Even though the EU’s overall dependence on Russian gas has been reduced, Russia’s share in total gas imports remains significant, accounting for about 15% in the second quarter of 2024, just behind the 19% from the United States. Countries like Hungary and Slovakia, which do not have access to the sea for importing LNG, would be forced to find other sources at a much higher cost.

Strategies and Perspectives

To attempt to circumvent the potential blockage, one of the options being explored is for European companies to sign transport contracts directly with Ukraine, rather than through bilateral contracts with Gazprom. This would allow Ukraine to continue to collect transit fees while aligning with European needs. However, any definitive cutoff of gas flow through Ukraine would significantly increase costs for EU countries that are already using reverse flow mechanisms to import gas at lower costs.

The situation remains complex and evolving. A definitive rupture of transit via Ukraine would harm not only Russian gas revenues but also the energy security of several European countries. Russia might turn more towards Asia, but these markets will not compensate for European losses in the near future. On its side, Ukraine could benefit from a reorganized transit system, but this would require significant investments to adapt its infrastructure. For Europe, finding alternative solutions remains limited by geographical constraints and high logistical costs.

The final decision will depend on negotiations between the EU, Ukraine, and Russia, as discussions have already been initiated to explore options via other routes, notably through Turkey and Azerbaijan.

Italian group Eni signs a twenty-year liquefied natural gas supply contract with US-based Venture Global, covering two mn tonnes per year and marking a first for the company from the United States.
The discovery of the Gajajeira field marks a major step for Angola, strengthening its natural gas development strategy and diversifying national energy resources in a context of sector transition.
The Voskhod vessel, under US sanctions, docked at the Arctic LNG 2 plant in Russia, marking the second visit by a sanctioned ship to the site this year, according to maritime tracking data.
Japan has urgently secured several additional cargoes of liquefied natural gas from the United States to avert an imminent electricity supply shortage caused by rapidly declining national reserves expected at the end of July.
The European Commission has unveiled a proposal to prohibit the import of Russian gas into the Union, sparking intense debate on its feasibility, contractual impact and consequences for supply security among several Member States.
CNOOC Limited announces the discovery of a significant oil and gas reservoir in the buried hills of the Beibu Gulf, opening new opportunities for shallow water exploration off the coast of China.
TotalEnergies’ Mozambique LNG gas project is at the centre of a legal challenge in Washington, following the approval of a $4.7 bn loan by the US Exim Bank, amid security concerns and opposition from civil society groups.
Investors are closely watching U.S. midstream companies’ announcements regarding new gas pipeline expansions targeting promising markets in the West and Northeast, beyond traditional regions in Texas and the Southeast.
PPL Corporation and Blackstone Infrastructure announce a strategic partnership to develop new gas-fired power plants to supply electricity to data centers through long-term contracts in Pennsylvania.
Falcon Oil & Gas Ltd announces a new record initial flow test result at the Shenandoah S2-2H ST1 well and the start of its 2025 drilling campaign in the Beetaloo Basin.
Technip Energies has secured a contract to lead preparatory works for a floating liquefied natural gas unit in Africa, confirming its presence in the international gas infrastructure market.
The Slovak government is seeking guarantees from the European Union to secure its supplies as talks continue over ending Russian gas and adopting a new round of sanctions.
ArcLight Capital Partners announces the acquisition of Middletown Energy Center, a combined-cycle natural gas power plant, aimed at meeting the substantial rise in energy demand from data centers and digital infrastructure in Ohio.
The commissioning of LNG Canada, the first major Canadian liquefied natural gas export facility led by Shell, has not yet triggered the anticipated rise in natural gas prices in western Canada, still facing persistent oversupply.
Horizon Petroleum Ltd. is advancing towards the production launch of the Lachowice 7 gas well in Poland, having secured necessary permits and completed preliminary works to commence operations as early as next August.
European Union member states have requested to keep their national strategies for phasing out Russian gas by 2027 confidential, citing security concerns and market disruption risks, according to a document revealed by Reuters.
TotalEnergies becomes a member of PJM Interconnection, expanding its trading capabilities in North America's largest wholesale electricity market. The decision strengthens the company's presence in the United States.
Turkey has connected its gas grid to Syria’s and plans to begin supplying gas for power generation in the coming weeks, according to Turkish Energy Minister Alparslan Bayraktar.
Despite record electricity demand, China sees no significant increase in LNG purchases due to high prices and available alternative supplies.
US natural gas production and consumption are expected to reach record highs in 2025, before slightly declining the following year, according to the latest forecasts from the US Energy Information Administration.