Russia Gas Flow to Europe Via Ukraine Set to Halt as Deal Lapses

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(Bloomberg) — Russian natural gas flows to Europe via Ukraine appear set to stop on Wednesday, after a transit agreement expires, raising risks to energy security on a continent where it relies heavily on reserves.

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Initial gas orders at the Sudzha intake terminal on the Russian-Ukrainian border are set to reach zero on January 1, according to data published by the Ukrainian grid operator. The data can still be updated.

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This compares to usual levels of about 40 million cubic meters per day. The alleged nominations represent customer requests for gas, not physical supplies of fuel.

It is the first concrete sign that Russian flows through Ukraine – a major transit route for decades – will stop at 6am CET on New Year’s Day. The five-year transit agreement between Moscow and Kiev expires once the clock runs out in 2024, with no alternative available despite months of political wrangling.

The question now is whether this disruption will be permanent, and what impact it will have when Europe faces a tougher global gas market. Although the lost shipments from Russia represent only about 5% of its gas needs, the continent is still feeling the aftershocks of the energy crisis resulting from the Kremen’s all-out invasion of Ukraine. Europe also depleted its stocks at the fastest rate in years.

Record European gas prices reached 50 euros per megawatt hour, the highest level since November 2023, in anticipation of stopping flows.

In a final effort over the weekend, Slovak Prime Minister Robert Fico urged the EU executive to address the looming halt to supplies through Ukraine, saying the economic impact on the bloc would outweigh the impact on Russia. He estimated that European consumers could face up to 50 billion euros ($52 billion) in additional gas prices annually, and another 70 billion euros in higher electricity costs.

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EU officials have previously said that the bloc’s energy security is not at risk when the transit deal expires, and stressed political commitment to phasing out dependence on Russian fossil fuels. The European Union has diversified its supplies since 2022, increasingly turning to liquefied natural gas imports, especially from the United States.

However, Slovakia and some other Central European countries prefer discounted gas from the East when it is available. In recent months, major companies in the region have raced to build support for an alternative to the Russia-Ukraine deal.

Slovakia has said it can handle the loss of Russian gas, but bringing other supplies to the landlocked country will likely be costly. Russian gas was also flowing from Slovakia to Austria and the Czech Republic, although the latter two countries no longer buy fuel directly from PJSC Gazprom.

The unlikely solution

Filters only show supplies on January 1st. It is not clear what will happen after that date. Disagreements between Moscow and Kiev had previously disrupted gas shipments to European customers in early January.

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In 2009, Russian gas flows through Ukraine to Europe were halted for about two weeks, with more than 20 countries affected during freezing temperatures, until the two countries signed a gas deal ending their dispute. There was a shorter disruption in 2006. The expiring agreement, which was set for 2019, was also the result of last-minute negotiations.

However, the nearly three-year-long war makes a quick solution unlikely this time. Ukrainian President Volodymyr Zelensky earlier this month rejected any arrangement that would eventually send money to the Russian treasury while the conflict continues.

His Russian counterpart, Vladimir Putin, indicated last week that there was no time left to conclude an agreement before the end of the year. Separately, he said a lawsuit filed by Ukraine’s Naftogaz – which alleges Gazprom did not fully pay for transportation services – represented another obstacle.

Some European countries also warned against ideas that would describe Gazprom’s fuel as non-Russian. Energy companies in the region have previously put forward options such as taking ownership of the fuel when it enters Ukraine, or resorting to a complex swap involving the Azerbaijani energy company SOCAR as an intermediary.

Russia still supplies gas to countries such as Serbia and Hungary via another pipeline, TurkStream, which bypasses Ukraine. But this connection is not enough to fully compensate for the complete loss of the Ukraine route. Another route through Poland is now closed. The Nord Stream pipeline linking Germany to Russia was damaged in explosions in 2022, and Berlin never received a permit for the Nord Stream 2 pipeline.

—With assistance from Darina Krasnolotska, Daniel Hornak, and Ewa Krukowska.

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