Gas transit: what scenarios are possible for the agreement between Russia and Ukraine

At the end of 2024 , the agreement on the transit of Russian gas to Europe through the territory of Ukraine will be completed. Officially, negotiations on its extension are unknown. RBC, together with analysts, assessed its current status and possible scenarios

What contract are we talking about?

The current contract is the result of negotiations between RUSSIA, the EU and Ukraine that took place at the end of 2019. Then Moscow and Kiev signed a package of documents on the settlement of legal disputes and mutual claims between Gazprom and Naftogaz, as well as on a new transit agreement for a period of five years.

According to the terms, Gazprom guaranteed pumping a total of at least 225 billion cubic meters. m of natural gas: 65 billion cubic meters. m - in 2020, 40 billion cubic meters each. m - in 2021–2024. These volumes were subject to the ship-or-pay rule (“pump or pay”), and Naftogaz booked the corresponding capacities from the Ukrainian GTS Operator (OGTSU) company, created as part of the transition to European rules. The size of the tariff was not announced, but Ukrainian President Vladimir Zelensky estimated the total income at least $7 billion, that is, about $31 per 1 thousand cubic meters. m.

In the first year of the contract, Gazprom used only 86% of the guaranteed capacity, pumping 55.8 billion cubic meters to Europe. m. Compared to 2019, transit decreased by 38%; the covid-19 pandemic played a significant role in this . In 2021, Gazprom announced in mid-December that it had fulfilled all its obligations to pump 40 billion cubic meters. m. According to OGTSU, the total transit of Russian gas to Europe amounted to 41.6 billion cubic meters. m.

In 2022, after the start of a special military operation, Russia , in response to sanctions , introduced a new system of payment for gas in rubles, a number of consumers turned to alternative sources, and Ukraine blocked one of the entry points to its gas transportation system (GIS Sokhranovka). Because of this, daily volumes of Russian gas supplies fluctuated greatly.

According to estimates by Alexey Belogoriev, DIRECTOR of research at the Institute of Energy and Finance (IEF), in 2022, the Ukrainian gas transportation system received about 19 billion cubic meters from Russia. m of gas, in 2023 - about 14 billion cubic meters. m.

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What is the current official position of the parties?

Ukraine. Back in 2023, the head of the Ministry of Energy of Ukraine, German Galushchenko, said that Ukraine would not negotiate with Russia on extending the transit contract. But in January 2024, Slovak Prime Minister Robert Fico, after negotiations with his Ukrainian counterpart Denis Shmygal, allowed the continuation of transit in 2025 (later Kyiv again stated that there would be no extension of the contract). At the same time, the Ukrainian government admitted that Ukraine could discuss with an EU member state the issue of “using its gas transportation network.” Thus, Kyiv is not ready to extend the current agreement, but does not exclude the main thing - the very possibility of supplying Russian gas through its gas transportation system after 2024.

Russia. There is no talk about official negotiations on the Russian side either, although this option is possible. The head of the Ministry of Energy, Nikolai Shulginov, in particular, admitted that with the participation of intermediaries, a solution for transit through Ukraine could be found. “We believe that the European countries that currently receive gas are interested in extending [transit], so, probably, some decisions will be agreed upon in order to continue transit [through Ukraine],” the minister noted.

European Union. Last week, on February 15, European Commissioner for Energy Kadri Simson said that she had notified Ukraine of the EU's lack of interest in extending the transit agreement. She promised to find solutions for states that receive Russian gas via the Ukrainian route. “We will be able to use the gas storage system in Ukraine to store gas and for reverse supplies,” she said. Simson did not specify to what extent this position is coordinated with other EU countries - consumers of Russian gas. The European Commission told RBC that “there is nothing to add to Kadri Simson’s words.”

As Alexey Belogoriev explains, from the Ukrainian GTS, Gazprom gas directly goes to Slovakia (86.8%, according to 2023 data) and Moldova (13.2%), mainly to Transnistria. “From Slovakia it goes further to Austria, to one of the largest European gas hubs, Baumgarten, from where it is partially sent to neighboring Hungary and Italy. But the main volume is consumed in Austria and Slovakia,” the expert recalls.

Gazprom's supply contracts with some of these consumers last until 2040, in particular with Austria. However, the oldest buyer of Russian gas also issued a statement this week. Austrian Minister for Climate Action Leonor Gewessler announced the country's intention to consider withdrawing from gas contracts between OMV and Gazprom. The Austrian concern reacted with restraint, recalling that Russian natural gas is not subject to sanctions in Europe, and a legal basis is needed to refuse it.

Research director of the Implementa company Maria Belova believes that the European Commission , apparently, wants to abdicate responsibility in advance, declaring that it is not interested in extending the transit agreement. “The fact is that 15 years ago there were already proposals for European companies to resolve issues with pumping gas through the Ukrainian gas transportation system themselves. The companies, in turn, requested financial guarantees from the commission, and they, naturally, were not provided,” she recalls.

RBC sent inquiries to the office of Deputy Prime Minister Alexander Novak, the Ministry of Foreign Affairs, Gazprom, as well as the EU Permanent Mission to Russia, the Ministry of Energy of Slovakia, Austria and Italy.

What are the scenarios?

I. Extension of the existing transit contract

Maria Belova, research director at Implementa : “Under normal market conditions, negotiations on extending gas transit begin more than a year before the expiration date of the contract. For obvious reasons, today there are no communications between Gazprom and Naftogaz, so most likely there will be no new transit agreement.” Sergei Kapitonov, analyst at Skoltech’s energy transition and ESG project center : “I don’t see the possibility of returning to the current status quo for Gazprom and Naftogaz to extend the agreement on the same terms. And in general we sat down together at the negotiating table . Rather, the negotiations could be more comprehensive, and representatives of Central Europe or Brussels as a whole for the EU will sit at the table.”

II. Completion of contract, termination of transit

Alexander Sobko, independent gas expert : “From a balance point of view, replace 12 billion cubic meters. m of Russian gas, which the EU received last year through the Ukrainian corridor, does not seem such a difficult task. Moreover, it remains possible to simultaneously slightly increase imports along the European line of the Turkish Stream. But if Russian gas is replaced by virtually reverse LNG supplies, questions arise about the availability of sufficient pipeline capacity.” Sergei Kapitonov: “The cessation of transit will put pressure on prices , but due to the fall in demand in the EU, gas saving measures and purchases from alternative suppliers, it is generally possible to overcome the situation. At the same time, certain niche markets will have to be saved, such  as Austria or Slovakia, which the Turkish Stream will not help. For Gazprom, at current gas prices, the loss of Ukrainian transit is $4 billion a year, plus the loss of Austria. But Gazprom is clearly already turning towards the East and is generally ready for this. But Ukraine remains in the worst situation. Even if we ignore the $1.5 billion that Kyiv receives from Gazprom, without Russian gas its gas transportation system can simply be cut up and scrapped. An important competitive advantage will be lost, and the plan to use Ukrainian underground gas storage facilities will not save the situation.” Alexey Belogoriev: “Slovakia, Austria and Transnistria will remain without gas. For Transnistria, Ukraine can physically provide supplies if it itself has a surplus of gas (the volume is not so large - 1.8 billion cubic meters in 2023). The situation in Slovakia and Austria is much worse. In an emergency, they can count on reverse gas flows from Italy, Germany and possibly Greece and Bulgaria, but it is unlikely that the deficit will be completely closed in 2025-2026, and exchange prices in the EU will undoubtedly rise. A catastrophe will most likely not occur, but for these two countries the situation will return to the worst months of 2022. Ukraine also loses a lot: if there is no transit, then the costs of maintaining the gas transportation system will fall entirely on the shoulders of domestic consumers with a corresponding rise in prices. In addition, Russian transit leaves Ukraine the opportunity to virtually reverse gas, which reduces overall import costs and simplifies its logistics.”

III. Completion of the contract, preservation of transit on new terms

Alexander Sobko: “If Russian supplies continue, they will probably be based on European mechanisms for booking gas transportation capacities with much greater flexibility in terms of timing and volumes than now. Transferring the delivery and acceptance point to the eastern border of Ukraine is also a very likely scenario, which is politically convenient for all three parties.” Maria Belova: “In order for Russian gas supplies through Ukraine to Europe to continue, and all three parties should be interested in this, European companies will have to agree with Gazprom either to transfer the point of transfer of ownership of gas to the eastern border of Ukraine, or to terminate the contract.” . Sergei Kapitonov: “A scenario is possible in which a mechanism will be developed that would involve Gazprom delivering gas on the eastern border of Ukraine. And then European operators will negotiate with Kiev. At the same time, for Gazprom this option is a big risk, since gas supply contracts may be terminated due to a new transit contract and a change in delivery points, respectively, and the approach to pricing, since the company will be forced to supply gas cheaper.” Alexey Belogoriev: “Neither side is interested in a long-term agreement. We are talking about short-term capacity booking, most likely a month in advance on a general basis. The main question is whether Ukraine will agree to have Gazprom or, say, some Russian intermediary book the capacity? Apparently, the Ukrainian authorities want this to be a company or companies that are EU residents. Russia's consent to this condition is not yet obvious; the question will arise on what basis the reservation will be made if the gas passing through Ukraine belongs to Gazprom. That is, will there be attempts to change the points of transfer of ownership of gas, which under sales contracts are located in the EU?”

How the contract affects Gazprom

The question of how much Gazprom will EXPORT to Turkey and Europe in the future is very important for the value of the company's shares, notes senior analyst at BCS World of Investments Ronald Smith. Therefore, he considers the European Commissioner’s statement “at least moderately negative.”

“A complete loss of Ukrainian transit would mean a decrease in exports, unless this is compensated by the construction of new lines for the Turkish Stream, which, in turn, will only happen if Turkey agrees to create a large gas hub in the country,” says He.

At the same time, it is not possible to discuss how much the increase in gas supplies to CHINA will compensate Gazprom for the loss of the European market.

“The volume of Chinese contracts was recorded long before the Ukrainian crisis and was fully expected. Thus, the loss of European exports is just that: a loss. Only if Gazprom can sign a contract on Power of Siberia-2, will we be able to say that Chinese pipeline exports will “compensate” for the losses of European exports,” the expert concludes.