From the editor: Ukrainian incursion into Russia raises transit risks [Global Gas Perspectives]
Ukraine’s surprise offensive into Russia and capture of a critical gas facility has raised the risk of an early termination in Russian gas flow through Ukraine, ahead of the expiry of Moscow and Kyiv’s transit contract at the end of this year.
On August 8, Ukrainian armed forces made an incursion into Russia’s Kursk region, and by August 13, they had seized some 1,000 km3 of territory, according to Ukraine’s top commander, and various reports indicate they are continuing to advance. Put in context, this is more territory than Russia captured in Ukraine in its grinding assault in the whole of this year.
The advance into Russia is a propaganda coup for Kyiv. After launching an invasion of Ukraine around 900 days ago that he claimed was in the interests of national security, Russian President Vladimir Putin must now explain why that war has now come home. Ukraine is likely also seeking to divert Russian troops away from the Donbass front, where Russia has been making incremental gains this year.
Whether or not this was a key strategic goal of the operation, Ukrainian television on August 14 showed troops taking down the Russian flag at the Sudzha gas metering station near the border. The station handles all Russian pipeline deliveries through Ukraine to Russia, amounting to around 14.7bn m3 last year, which is equivalent to roughly 4-5% of EU gas consumption.
Russian gas also used to flow through a second border point at Sokhranivka, but that route was closed in May 2022 when Ukraine declared a force majeure on its transit services, claiming Russian separatists were syphoning off gas supplies from the pipeline.
Fortunately for European countries like Austria, Hungary and Slovakia that depend on gas flow through Ukraine, flow rates have not been affected by the fighting in Russian territory and Sudzha’s capture. Gazprom confirmed on August 14 that transit remains at the maximum level possible, with 42.4mn m3 of gas requested by Ukraine for that day.
Nevertheless, fears that transit could be shut down triggered a fresh spike in European gas prices. From a low of €35.5/MWh on August 5, the front-month TTF contract climbed to €40.4/MWh, or $474/’000 m3 on August 9, which is its highest point this year. It has fallen somewhat since, and now hovers between €39-40/MWh. Planned maintenance at Norwegian gas fields was a secondary factor behind the price surge.
It is not immediately clear how Ukraine might benefit from control of the Sudhza plant, if indeed it can continue to hold it. On the other hand, it would give Russia’s Gazprom cause to declare a force majeure to cut off the gas, but this is not in Moscow’s interest at this stage. Beyond the revenues that this gas earns, a large portion of this supply goes to Hungary and Slovakia, which have both opposed sanctions on Russia and support for Ukraine.
The greater risk is that the facility incurs damage. Russia’s priority now is forcing Ukraine out of its territory. And given Moscow’s reputation for haphazard military strikes, this puts the station in jeopardy.
The price spike over the past week also shows how Russian supply remains a key part of the European gas mix, and how exposed the market remains to volatility, when prices can jump significantly even at only the risk of a disruption.
There is another threat to transit. In June, Germany’s Uniper was awarded more than €13bn ($14bn) in damages at a Stockholm court for Russia’s failure to provide gas volumes since mid-2022. The previous month, Austria’s OMV said its Russian gas supply might be halted, as it had received a notice from an unnamed European company seeking to potentially seize payments owed to Gazprom as part of a court ruling. That unnamed European company is widely believed to be Uniper.
Gazprom is very unlikely to honour the Stockholm award, and so Uniper might resort to seizing payments owed to the Russian company by its other clients. This might not only involve OMV but other major Russian gas buyers in central Europe. If payments cease, Gazprom would have every reason to cut off the gas.
Transit post-2024
Even if developments in the conflict and Uniper’s award do not affect gas flow, the next question is what happens after the Russia-Ukraine transit contract expires at the end of this year. It is increasingly being seen as a certainty, as Kyiv has repeatedly said it will not seek an extension, and the European Commission has said it does not see a renewal as necessary.
If transit stops, Rystad Energy estimates that Russian gas would need to be diverted to alternative routes, with an additional 7.2bn m3/year of LNG needed to replace lost gas transit volumes through Ukraine. But several alternative options have been suggested that would allow Russian gas to continue flowing through Ukraine with minimal direct dealings between Kyiv and Moscow.
One option could involve Azerbaijan transiting gas through Ukraine. The main problem is that Azerbaijan lacks spare gas production capacity, at least in the near term. It also lacks transport capacity unless it were to reroute the supplies through Russia, which would charge for the service. More likely, this option would involve a swap deal between Russia and Azerbaijan, whereby Azerbaijan acquires Russian gas at the Russia-Ukraine border, and in return, Russia acquires Azeri gas when it enters Turkey.
However, NGW believes the more feasible choice is for European buyers of Russian gas to group together and receive the gas at the Ukraine-Russia border, and take responsibility for its transit through Ukraine, paying Kyiv a fee. This would likely reduce the cost and be easier to negotiate as it would involve few participating countries.
Whatever option is chosen, Russia and Ukraine will still need to negotiate a border interconnection agreement.
Ukraine’s incursion into Russia complicates matters, however, as Moscow will be less willing to negotiate anything with Kyiv, especially while Ukraine controls the gas metering station that records how much Russian gas is delivered to Ukraine.
And with only four and a half months left before the transit contract expires, the stakes are high.