Russian gas flowing through Ukraine is set to stop on Wednesday when a flow agreement between the two countries expires following Moscow's all-out offensive.
The pipeline was one of the last two routes still carrying Russian gas to Europe for nearly three years to reach full scale. war. EU countries will lose about 5 percent of their gas exports in the middle of winter.
Although traders have been waiting for a long time to stop the flow, the end of the pipeline route through Ukraine will affect the European gas balance at a time when the demand for heating is high. Slovakia is the most affected country.
“While one might think that losing those volumes (has value) in it, a strong price response is not out of the question,” said Aldo Spanjer, commodity strategist at BNP Paribas.
A deal to allow Russian gas to pass through Ukraine was agreed at the end of 2019, signed a day before a previous 10-year deal between the country's gas companies expired. At the time, the European Commission was strongly promoting the agreement.
After a full-scale attack on Ukraine in 2022, however, the commission urged member states to seek alternatives as the bloc moves to wean itself off buying Russian fossil fuels. The Moscow-friendly governments of Hungary and Slovakia have opposed the changes and want to extend the deal beyond January 1.
The Ukrainian government had telegraphed months earlier that it did not want to negotiate an extension of the agreement, as it wanted to deprive the Kremlin of its income from gas exports. Ending the flow will cause a loss of 6.5bn for Russia, unless it can redirect them, according to Bruegel-based think-tank, Bruegel.
But it would be a financial blow to Ukraine, which receives about $1 billion a year in gas transportation fees, although only a fifth of that was gross profit. Analysts have suggested that Ukraine's gas pipeline infrastructure could face a Russian attack, if there were no Russian gas flowing through it.
Slovak Prime Minister Robert Fico visited Moscow on December 22 to negotiate a gas transit agreement. He criticized Ukraine's non-compliance with the agreement, asking whether the country “has the right to harm the economic interests of a member state (EU)”.
Fico said on Facebook shortly before the deal expired that “another thing to go with gas options more than Russian gas was offered to Ukrainian partners, but these were also rejected by the Ukrainian president”. Slovakia's prime minister has also threatened to cut off electricity from Slovakia to Ukraine in retaliation.
Hungarian Prime Minister Viktor Orbán has also sought a way to allow the import of Russian gas through Ukraine. His government also turned to the last remaining pipeline that carries Russian gas through Turkey and into Romania to help things.
Austria, which still imports Russian gas until 2024, has switched to other areas such as liquefied natural gas imports. Its energy company OMV in mid-December terminated its long-term contract with Russia's Gazprom due to a legal dispute.
The gas cut will have a significant impact on neighboring Moldova, which in mid-December declared a state of emergency in the energy sector due to uncertainty over Russian gas flows.
The suspension of Russian gas flowing through Ukraine could increase European demand for LNG prices, with which Asia competes.
EU officials maintain that the bloc can survive without Russian pipelines, even if that means accepting more expensive gas shipped elsewhere.
The European Commission said on Tuesday it did not expect disruptions. “European gas infrastructure is flexible enough to supply gas of non-Russian origin to central and eastern Europe via alternative routes,” it said. “Boosted by new LNG import capacity from 2022.”
The Turkish pipeline still transports Russian gas to Europe, contributing about 5 percent of EU exports. The US recently imposed sanctions on Gazprombankthe main conduit for Russian energy payments.
But to reduce the impact of sanctions, Russian President Vladimir Putin in early December dropped the requirement that foreign buyers of Russian gas pay through a bank. Countries such as Turkey and Hungary have also received exemptions from US sanctions.
“The previous sanctions have added an extra layer of uncertainty about the future of Europe's remaining Russian gas supplies as we enter the new year, which is helping to keep gas prices volatile,” said Natasha Fielding, Argus Media's head of European gas prices, prices. agency. The US withdrawal meant that “customers of Russian gas delivered through the Turkish Stream pipeline can breathe a sigh of relief,” he said.
Traders are not ruling out an increase in Russian gas flows to Europe in the future. European companies, which have suffered from high gas and energy prices, forcing them to cut production, will return to buying Russian gas, which was cheaper than LNG, said one major trader.
“At some point there will be a peace agreement. . . People will want to end the war, so they must sign a peace treaty. One of the things Russia will gain is its ability to resupply” Europe with gas, the trader said.
While European governments may impose restrictions to prevent the continent from becoming dependent on Russian gas again, the trader said, “you can expect to see Russian gas coming back to Europe, because basically, the geography has not changed”.
Additional reporting by Andrew Bounds