Slovakia leads fight to keep Russian gas flowing via Ukraine [Global Gas Perspectives]
Ukraine may stop transiting Russian natural gas to Europe in two weeks’ time, bringing an end to a key role in regional energy trade that the country has held for almost half a century. While this cessation is not yet a foregone conclusion, continuing transit beyond December 31 relies on several critical success factors. And judging by the climb in European gas prices over recent months, it is clear that this is what the market expects to happen.
Slovakia, as the country that will be hardest hit by an end to transit, is the most active player in trying to avoid this outcome. The country's main gas company SPP announced on December 17 that it had signed a declaration on continued gas transit with Slovakian pipeline operator Eustream, Hungary's MVM and MOL and several other industry groups from Italy, Austria and Hungary.
Ukraine transited 14bn m3 of Russian gas to the EU in 2023, which was equivalent to just under 5% of the bloc’s total gas consumption that year, and about 55% of its remaining Russian pipeline gas imports. While the end of Ukrainian transit would be less disruptive now than several years ago, when Russian flow through the country was much higher, it will still have a considerable impact on future gas prices, given how tight the market is.
Russia has expressed willingness to continue transit, including through a renewal of the existing agreement. But Ukraine has ruled this out as an option, although it is open to interpretation how willing Kyiv would be to facilitate continued Russian gas supply if it does not have to deal directly with Moscow.
With domestic production in decline and limited scope for increasing non-Russian pipeline imports, Europe will have to resort to increased LNG to cover the shortfall. And until the next wave of global supply arrives, it will have to compete for that LNG with Asia.
Still, throughout the year the European Commission has said it does not view an extension of the five-year transit agreement between Russia and Ukraine that expires after December 31 as necessary. In an assessment released last year, the Commission said it expected a “negligible” impact on prices from the end of transit, although it acknowledged that the halt in flow had already been “internalised in winter gas prices.”
As such, it has largely been left up to the affected member states to make efforts to ensure continued transit. And Slovakia is leading this charge.
Slovakia’s lone efforts
Slovakia’s prime minister Robert Fico told a press conference on December 13 that his government was in “very intense” negotiations on continued Ukrainian gas transit in 2025. He added that he was “confident that a solution can be found for [gas supplies] to several EU countries and the territory of Slovakia and Ukraine to be maintained.”
Slovakia relied on Russian gas via Ukraine for 60% of its gas supplies in 2023. Its main gas company SPP, which covers about two-thirds of national consumption, has a take-or-pay deal with Russia’s Gazprom for around 3bn m3 of gas annually.
SPP has taken steps to prepare for the shock from transit ending, investing in cross-border pipelines to Hungary and Slovakia and increased reversed flow capacity from the Czech Republic and Austria. It also signed various new, flexible supply contracts before this year with BP, ExxonMobil, Shell and RWE to ensure it could cover 70% of customer demand without Russian gas. The country’s second-biggest supplier ZSE also struck a deal with Poland’s Orlen for LNG deliveries from January next year.
Even so, Slovakia shares borders with other countries that would be affected, and is landlocked, far away from Europe’s LNG regasification terminals, putting it in a precarious position. It would also lose out on revenues for transiting Russian gas from Ukraine to Austria if flow stops.
Austria relied on Russian gas to cover almost three-quarters of its demand between 2022 and 2024. Its reliance even increased this year as a result of Germany introducing a storage levy that jacked up prices for supply from the country. Gazprom notably cut off gas supply to its main Austrian customer OMV in mid-November in a dispute over past contract violations, although this has not had a discernible impact on import volumes. Gazprom appears to be supplying a similar amount of gas to Austria, but through sales to other companies.
Austria therefore also has a strong interest in continued transit. But unlike Slovakia’s government, which is more than happy to maintain energy trade with Russia, this is more politically controversial in Vienna. As such, Austria’s new coalition government does not appear to be playing an active role in efforts to reach an agreement, although it may tacitly support transit continuing.
Hungary is another big buyer of Russian gas, but since autumn last year has been receiving almost all its supply from Gazprom via the TurkStream pipeline. This said, having diversified supply routes is still in Budapest’s interest. Other Russian gas customers such as Italy and the Czech Republic have even less risk exposure to transit ending.
Outside the EU, Moldova declared a state of emergency in its energy sector earlier this year because of the risk that transit ends, which would disrupt supply to its main power plant in the breakaway region of Transnistria. But depending on the outcome of negotiations with Gazprom, the country may be able to get the needed Russian gas through Turkstream and then Bulgaria and Romania.
What are the options?
Media attention has focused significantly since the summer on the prospect of Azerbaijan facilitating continued gas transit through Ukraine. But there are almost no clear details on what this role would entail.
In July, Azeri President Ilham Aliyev said Baku had been approached by Ukraine’s government and the EU to support a prolongation of the transit deal, adding that he believed this was possible. Subsequent media reports that a deal was imminent were quickly walked back.
Azerbaijan has little to no spare production capacity to deliver its own gas through Ukraine, and all evidence suggests that this option would involve Baku handling Russian gas. Likely, it would involve Azerbaijan purchasing gas at the Russia-Ukraine border and then selling it to European buyers straight away, leaving them to take responsibility for transit through Ukraine, or transiting the gas itself and then selling it to buyers at the Ukraine-Slovakia border.
But these arrangements seem overly complicated compared with the prospect of Slovakia and potentially other buyers simply fulfilling the potential role of Azerbaijan themselves. They could buy the gas at the Russia-Ukraine border and either book capacity to ship it through Ukraine with Ukraine’s gas transport operator GTSOU, or agree to leave it to Ukraine’s Naftogaz to ship it and book the capacity with GTSOU, as is currently done.
However, Russia and Ukraine will still need a border interconnection agreement in place. This would be less difficult to reach than a complete transit deal, but could still prove potentially politically unacceptable to Kyiv.
It is hard to gauge how actively other parties besides Slovakia are actively pushing for transit to continue. But based on publicly stated positions, Bratislava is for the most part alone in this pursuit. And this does not bode well for a deal being reached in time.
It is possible that an agreement will not arrive by December 31 but will be reached at a certain point in the future to resume transit. But there is no gas transit, the less likely it is that a deal will eventually emerge. The longer there is no flow, the more Slovakia and other affected European countries will be driven to make alternative arrangements for gas supply and the greater incentive Ukraine will have for decommissioning its transit infrastructure instead of paying to maintain it.