With more than 22,000 kilometers of gas pipelines, Ukraine has been a key player in Europe's energy market for decades. But by the end of this year, these strategic assets could be stranded.

An agreement between Moscow and Kiev to deliver Russian gas to Europe is unlikely to be renewed before it expires in December, even as negotiations intensify ahead of the heating season. That would block gas flows to Europe at a critical time. “The end of gas transit through Ukraine really represents the end of an era that was slowly brewing,” said Margarita Balmaceda, a Seton Hall University international relations professor who specializes in energy politics in post-Soviet countries.

That means more uncertainty for the continent's tight energy markets, while Russia stands to lose one of its two gas pipelines into Europe. But Ukraine may be most at risk, as it stands to lose the money to maintain its energy infrastructure and its long-standing strategic position as a conduit for affordable energy to Western allies.

Gas flows have been a key feature connecting Russia, Ukraine and Europe for more than 50 years. Transit issues have been part of Russian-Ukrainian relations since the collapse of the Soviet Union. Disputes led to supply disruptions in 2006 and 2009, leaving several European customers without power for days during severe cold weather. The current transit agreement between Ukrainian state energy companies Naftogaz JSC and Gazprom PJSC was reached in late 2019, when Europe's energy map looked very different. Gas that passes through this route currently accounts for less than 5% of the continent's supplies, but that's still enough to have an impact on energy security.

The painful reality for Ukraine is that no one needs to renew its gas transit agreement more than Kiev. Financially, it could lose up to $800 million a year in transit fees, estimates Mykhailo Svyshcho, an analyst at Kiev-based ExPro Consulting. That’s only a third of what it used to earn.

While that’s a small change compared to the billions of dollars Russia has lost from European customers since the 2022 conflict, it may take more than a revival of the deal to get money flowing again after the Kremlin sought to weaponize energy ties. Most customers have managed to find alternatives. Germany, which relied on Russia for more than half of its gas needs before the Russian crackdown on Ukraine, has since increased pipeline deliveries from Norway and added facilities to import liquefied natural gas from around the world. It now doesn’t need pipeline imports through Ukraine. That said, the door isn’t completely closed.

With Germany's manufacturing sector under pressure, some opposition parties and business leaders have called for a resumption of cheaper gas deliveries from Russia. The Ukrainian route would be the most viable after the Nord Stream gas pipeline to Germany was sabotaged in September 2022. Austria and Slovakia, the main recipients of fuel still transported through Ukraine, have said they are ready to abandon pipelines connected to Russia. SPP, Slovakia's largest gas supplier, said the situation was better before the arrival of winter. Austria is working on the assumption that Ukrainian gas will stop flowing in January next year, which the government in Vienna hopes will allow it to unwind its contract with Gazprom.

Moscow has other routes to sell its gas, though, including pipelines through Turkey, expanded ties with China, and liquefied natural gas cargoes. But pipeline routes to Europe are limited as networks shut down due to sabotage or sanctions, and Ukraine loses about the equivalent of $6.5 billion a year in gas at current prices, according to Bloomberg calculations. That’s a strong incentive for the Kremlin to renew the deal. Russian President Vladimir Putin left the door open last week, saying he was ready to keep pumping gas through Ukraine after 2024.

While Ukraine is eager to maintain the network, it is trying to hold red lines. Zelensky has vowed to exclude "Russian elements" from the country's transit network in an effort to cut off the flow of money to the Kremlin. Instead, Kiev is looking for other suppliers to help it tap into the assets, but the lack of Russian gas in the system could make the network an even bigger military target than it already is. Ukraine has held transit talks with Azerbaijan, which already supplies gas to eight countries in Europe, and is in discussions to deliver the fuel to at least three more markets in Europe.

Anne-Sophie Corbeau, a fellow at Columbia University's Center on Global Energy Policy, said the reality is that Azerbaijan's gas production is not enough to fully replace Russian gas in the short term, and any replacement deal would likely include a shift back to Russian gas.

“Slapping Azerbaijan with a label at the same price level would be pure whitewashing of Russian gas,” she said. Supply deals with Kazakhstan and other Central Asian suppliers could also be an option, but time is tight to develop plans before the deals expire.

With the energy supply and demand balance still tight, Russian gas will almost certainly lose its route via Ukraine, which could trigger volatility in European markets. A gas supply disruption from Norway or problems with the transport of liquefied natural gas could combine with a cold snap to cause a price spike. "There is still a chance of shortages in this heating season. In reality, we haven't been tested yet, given that the previous two winters were mild," said Frank van Doorn, head of trading at Vattenfall Energy trading GmbH.

Article forwarded from: Jinshi Data