Russia generates approximately $11bn annually from exporting oil and gas through Ukraine, while Ukraine earns only $1bn from transit fees, according to Serhiy Makogon, former Director of the Ukrainian Gas Transmission System (GTS) Operator, cited by UBN.

As part of Ukraine’s Kursk incursion that began on August 6, the gas pipeline metering station at Sudzha was captured and is now under the control of the Armed Forces of Ukraine (AFU). Sudzha controls all of the approximately 42mn cubic metres of gas a day that transits Ukraine on its way to Hungary, Slovakia, Austria, Italy and Moldova. In total, Ukraine sent some 13bn cubic metres (bcm) to Europe last year – less than half of what was sent pre-war.

The energy transit capacity through the Sudzha hub amounts to around $6bn in oil and $5bn in gas. However, due to ongoing hostilities in the Kursk region, there are risks that gas transit through this hub could cease.

Makogon says there are two main risks to the transit business: military risks and commercial risks.

The Sudzha area is criss-crossed with gas pipelines, and should Russia deploy heavy artillery or aerial bombs, the risk of infrastructure damage is “very high,” says Makogon.

The commercial risks include the loss of proper gas accounting, says Makogon. “Gas transported through Ukraine without proper documentation would be considered smuggling,” according to Makogon.

Makogon stated that he does not foresee significant risks for Ukraine or Europe if the transit stops. Ukraine has not imported gas from Russia since 2015 and has been preparing to operate without transit since 2019. Additionally, the European Union receives only 4% of its gas imports via Ukraine today, down from about 35% pre-war. Much of Ukraine’s deliveries to Europe have been replaced with imports of LNG.

Currently neither side in the conflict plans to shut the gas transit business down amid fighting in Kursk Oblast. Kyiv and Moscow plan to continue transmitting gas to Europe despite Ukraine's incursion in Kursk Oblast near the key cross-border transit point for the fuel, Bloomberg reported on August 12, citing its undisclosed sources.

Nevertheless, fears of a shutdown sent European prices surging in the middle of what is typically a low-demand summer season.

At the same time, European gas traders are shunning Ukrainian storage facilities after Russian attacks, the largest in Europe.

Ukraine’s national gas company Naftogaz said it is operating as usual, but this summer, European traders have contracted only a small portion of Ukrainian gas storage capacity following Russian attacks.

According to Argus, in June and July, European companies sent 15.4mn and 51.9mn cubic metres to Ukrainian gas tanks, respectively, against 102.7mn and 586.6mn cubic metres in June and July 2023, when traders stored gas in the summer, speculating that prices would rise once the heating season began.

This year, although the gas reservoirs themselves are located deep underground, damage to the above-ground injection facilities is a significant risk that worries traders. Russia’s missile attacks have largely targeted power generation capacity, but some missiles have been aimed at the underground gas storage facilities, without causing much damage.

European underground storage facilities are currently just below 90% full ahead of the start of the heating season in November, according to data from Gas Infrastructure Europe (GIE) and on track to meet EU storage directives before the weather turns cold.

Gas price on the European exchange is about $450 per 1,000 cubic metres due to the situation with gas transit through Ukraine amid the attack by the Ukrainian armed forces on Russia’s Kursk region. On August 10, gas injection into gas tanks in EU countries amounted to 270mn cubic metres, while withdrawal was equal to 32mn cubic metres.

A potential solution is a gas swap with Azerbaijan that would swap Russian gas imported by Azerbaijan with Azeri gas that could be exported to Europe via Ukraine’s pipeline network. Discussions are ongoing and Russian President Vladimir Putin was in Baku on August 19 to meet his counterpart President of Azerbaijan Ilham Aliyev.

The possible deal means that Russia has a commercial interest in preserving Ukraine’s pipelines and is less likely to damage the pipeline infrastructure, experts say.

Central Europe still heavily dependent on Russian piped gas

Norway is now the main external gas supplier to the EU, delivering most of its gas via pipelines, but Europe is still hooked on Russian gas exports, especially Central Europe. In 2023, the EU was the largest buyer of Russian gas exports, purchasing 41% of Russia's pipeline gas, followed by Turkey (29%) and China (26%). No sanctions are imposed on Russian pipeline gas imports into the EU.

The top five pipeline consumers of Russian gas are Germany, Italy, Belarus, Turkey and the Netherlands. Germany stopped directly importing Russian gas during the summer of 2022, months after the full-scale invasion of Ukraine, but substantial amounts of Russian continue to find their way into the country through supplies from its neighbours; Germany continues to import Russian natural gas through Belgium and the Netherlands, although much of this is in the form of LNG, according to a report by Bruegel.

Hungary is especially dependent, importing 75% of its gas from Russia, 60% of its oil and all of its nuclear fuel. Hungary remains by far Russia’s biggest piped gas customer in Europe.

Likewise, Slovakia is equally dependent on Russian gas imports. Since summer 2022, the share of imports of natural gas from Russia fell from 85% to about 50% in 2023, which “remains nonetheless significant” according to an EU report. The reduction was achieved by supplies from a new Poland-Slovakia cross-border gas pipeline in late 2022 which connects to the Norwegian gas fields and delivers up to 5.7bcm per year and also is now connected to LNG terminals in the Baltics.

More recently Slovakia has been in talks with Azerbaijan to replace its Russian gas imports. Slovakia's Prime Minister Robert Fico travelled to Baku in May to sign a broad memorandum with Azerbaijan that includes building cooperation on gas supplies. Fico has repeatedly said the country intends to keep importing Russian gas via Ukraine.

However, questions have been raised as to if the Azeri gas is not just Russian gas in disguise. Azerbaijan delivered about 13bcm of pipeline gas to Europe in 2023 but is supposed to increase that to 20bcm by 2027. But currently Baku doesn’t have the production capacity to meet that target and is relying on forecast increases from new field developments and upgrades to existing assets, But it also has the possibility of importing Russian gas via the backdoor to supply the domestic market that in turn will free up more Azeri gas for export, or simply reexport Russian gas to Europe.