Ukraine has delivered a stark warning that Russian gas transit via its territory, one of only two remaining routes that Russian gas can flow to Europe, is likely to cease at the end of next year with the expiry of a five-year deal with Russia.

It took great pains for Moscow and Kyiv to reach the current agreement in 2019, with the EU heavily involved in pushing negotiations towards a resolution. Ukrainian Energy Minister Herman Halushchenko told the Financial Times on June 22 that it was difficult to imagine the negotiation of a replacement contract in light of Moscow’s full-scale invasion of Ukraine last year.

Three of the Nord Stream pipelines from Russia to Germany have been rendered unusable for the foreseeable future following sabotage attacks last autumn. The surviving fourth, never used, would require significant political effort both in Moscow and Berlin to start flowing gas. Meanwhile, the Yamal-Europe pipeline running through Belarus and Poland to Russia is incapable of flowing gas westwards because of sanctions and counter-sanctions introduced by Moscow and Warsaw. 

In an apparent move to seal the fate of these routes, the G7 and EU have announced they will ban Russian gas imports along pipelines where supplies have already been cut.

That leaves only Ukraine and TurkStream as routes for gas into Europe, and only one of TurkStream’s two 15.75bn cubic metre per year strings is designated for the European market, while the other transports gas to Turkey. Ukraine, on the other hand, continues to account for around 5% of Europe’s total gas imports. Against the odds, this flow has largely been unaffected by the war.

On an annualised basis, Russia now delivers 22 bcm per year of gas to the EU by pipeline, compared with 155 bcm in 2021. Transit volumes via Ukraine are around 12-13 bcm per year. Under the existing contract, Gazprom is bound under a ship-or-pay requirement to send 40 bcm per year via the country between 2021 and 2024. But in September last year Ukrainian state gas company Naftogaz and gas grid operator GTSOU launched an arbitration case against Gazprom for failing to pay for the full contracted volumes.

What next?

The outcome of Ukrainian gas transit after 2024 will naturally depend greatly on how the conflict develops in Ukraine. The Ukrainian army is in the midst of a grinding counter-offensive that appears to have made only limited gains, in contrast to the successes of previous operations. But the Kyiv government publicly continues to state it will not negotiate any peace deal unless all its territory is returned, including Crimea, and Moscow equally looks unlikely to cede any territory willingly.

It is hard to predict how developments on the battlefield and on the diplomatic front will unfold between now and when the transit contract expires. But as it stands, it seems likely that the contract will end on December 31, 2024 without renewal. It is difficult to imagine the two sides being willing to engage in the kind of constructive discussions needed to make that happen. And in the meantime, with the war still raging, there is a risk that the pipeline infrastructure could be damaged.

With no more Russian gas flowing through Ukraine in 2025, that would leave only TurkStream as an option. Though its capacity is 15.75 bcm per year, it is currently delivering closer to 10 bcm per year.

The good news for Europe is that 2025 should mark the start of the end of the global gas market tightness, with significant new LNG supplies due to arrive from Qatar and the US. That should lessen the blow of a further cut in Russian pipeline supply. But a lot will also depend on temperatures over the next few winters, and LNG demand in Asia.

However, with Russian pipeline flow now at a fraction of its level prior to the war, Europe has far less to fear from a further reduction in flow. Were the transit contract not to be renewed, it would only serve to seal Gazprom’s fate in losing the European market, potentially indefinitely. On the other hand, European policymakers must remain vigilant and continue with programmes to reduce gas demand and increase efficiency. They must also carefully weigh decisions such as placing an embargo on Russian LNG, which has been delivered in healthy volumes over the past year in spite of the war.