How times change.
Remember when the Kremlin insisted the Nord Stream pipelines must be built because the transit network passing through Ukraine was old and leaky (while oh so accidentally slashing that country’s budget revenues)?
Now it seems Russia has changed its mind, and that Ukraine’s transmission system may not be that old, nor terribly leaky after all.
At the start of June, deputy foreign minister Mikhail Galuzin warned Europe it may be in for more tough times if Ukraine refused to renew the existing contract, which is due to expire at the end of 2024.
That’s an empty threat. With additional gas importing capacity being deployed across the EU and a rising tide of liquefied natural gas (LNG) expected to reach global markets by 2025, Europe should, in fact, be heading for a period of oversupply and a return to cheap energy prices.
Not even countries such as Austria and Hungary, which currently rely heavily on Russian gas, should be at risk if they secure alternative supplies elsewhere and ensure optimal access to transport capacity, as explained in a recent CEPA article.
The only three countries that will suffer as a result of the transit contract expiration would be Ukraine, the Russian-occupied Transnistrian province of Moldova, and Russia itself.
For Ukraine, the loss of transit to European customers will mean a loss of revenue. Under the terms of the current contract, Russia is expected to pay around $1bn annually irrespective of whether it actually ships the gas.
However, since May 2022, when it reduced supplies via Ukraine, it has been paying around 30% less.
While Ukraine’s income from the gas transmission is much reduced compared to the substantial profit it made prior to the war, it still represents around 80% of the annual revenue of the gas transmission system operator, GTSOU.
This means that in the absence of a renewed contract, the Ukrainian gas transmission system operator will have to dismantle vast parts of its network and find new sources of revenue to survive.
One solution would include scaling up Ukraine’s production of biomethane, whose molecule is identical to natural gas, and ramping up east-to-west exports to Europe.
Thanks to its vast landmass, Ukraine can produce large amounts of biomass, which could be converted into 20 billion cubic meters (bcm) of natural gas annually.
However, those volumes will likely reach markets only by 2050. In the mid-term, a more realistic figure would be 3bcm by 2030.
The other option is to work with neighboring countries — Hungary, Slovakia, and Poland — to expand existing interconnection capacity to allow more natural gas sourced in central Europe to be imported and injected into Ukrainian storage, the largest in Europe.
Absolutely critical, however, would be Romania, with which Ukraine has the largest interconnection capacity of close to 30bcm/year, only 10bcm/year lower than the current annual transit capacity contracted by Russia’s Gazprom.
Nevertheless, although Romania holds five interconnection points with Ukraine — four on the south-eastern border with Ukraine close to the Black Sea and one in the north close to the Hungarian border — the Romanian gas operator, Transgaz, has freed up only one interconnection point with a north-south capacity of 5bcm/year. The capacity in the opposite direction is barely above 2bcm/year.
The additional interconnection capacity would be of tremendous utility, and not only to Ukraine, which could transit more gas to and from Romania and the region. It would also serve Romanian and Balkan traders looking to take advantage of Ukraine’s storage capacity.
As for Moldova, the impact would not be felt except by the breakaway Russian-controlled Transnistrian province.
Russia has historically exported 3bcm of gas annually, of which 1bcm was consumed by Moldova and 2bcm was shipped to Transnistria on the east bank of the river Dniester. Given its small population of under half a million, most of this gas has been used to generate electricity that is exported back to Moldova.
However, with Russia reducing gas supplies to Moldova twice over the last two winters, Chisinau has learnt its lesson and managed to diversify away, securing alternative sources of supply.
Nevertheless, Moldova will remain partially reliant until the second half of the decade when a new interconnection with Romania is completed.
Lastly, the end of Russian exports through Ukraine will hurt Russia.
With Gazprom cutting gas supplies to Europe last year by 80% of historic volumes, deliveries have now been easily overtaken by LNG and Norwegian pipeline imports.
Russia is expected to supply less than 40bcm via Ukraine and Turkey this year, less than a third of its exports at the start of 2021.
Once its contract with Ukraine expires, its transit options to Europe will be limited to Turkey since its Nord Stream pipelines were sabotaged in 2022.
That’s what makes the renewal of the Ukraine contract of supreme importance for the Kremlin.
This may explain why Russia spared Ukraine’s gas transmission network even as it saturated the electricity transmission system with missiles.
Its attempts to persuade China to buy more gas have so far failed, its ability to ship more LNG to global markets is strangled by sanctions, and the European market may now have closed forever after importers found alternatives.
A global gas glut is now looming. Western sanctions to paralyze its upstream production and Europe’s decision to switch away from fossil fuels in the long term could wreak irreversible damage on Russia’s gas industry.
The Kremlin will thus desperately seek to preserve its transit routes and, possibly, lock in more buyers.
It may even argue that the renewal of the transit contract with Ukraine is necessary to supply gas to Moldova and use this as a pretext to extend the transit agreement to other countries.
So Moldova needs to fast-track integration of the Transnistrian electricity and gas transmission systems with its own, attract more investment into renewable capacity, and work closely with Romania to ensure the electricity interconnection is completed on time by 2025.
Meanwhile, Ukraine should reject the temptation to agree on a new contract, even if its gas transmission system operator is heavily cash-strapped.
Europe must continue its unflinching support of Ukraine in finding viable alternatives, but Ukraine must play its part too.
Aura Sabadus is a Non-resident Senior Fellow with the Democratic Resilience Program at the Center for European Policy Analysis (CEPA). She works as a journalist specializing in European energy markets for the London-based Independent Commodity Intelligence Services (ICIS).
Europe’s Edge is CEPA’s online journal covering critical topics on the foreign policy docket across Europe and North America. All opinions are those of the author and do not necessarily represent the position or views of the institutions they represent or the Center for European Policy Analysis.
