Aura Sabadus
Good morning, good afternoon, and good evening, and thank you for joining us for a CEPA virtual event. My name is Aura Sabadus. I’m a non resident Senior Fellow with the Democratic Resilience Program at the Center for European Policy Analysis, and I’m delighted to welcome four distinguished speakers to discuss the future of the Russian gas transit to Europe by Ukraine. Ukraine has been the main transit route for Russian gas for the last 60 years, a partnership that was often used by Russia either to blackmail Ukraine, extract political concessions or intimidate European consumers. At the end of this year, the current transit contract is coming to an end, and Ukrainian officials insist it would not be renewed. However, a number of countries and companies in Europe, particularly in Austria, Slovakia and Hungary, are still keen to continue this transit, and may even pressure Ukraine to reach a compromise in exchange for aid or support in its negotiations for EU membership. Even companies that do not hold long term Russian supply or transit contracts appear interested and impatient to resume business as usual amid concerns of industrial decline caused by rising energy costs recently. Russia itself may be keen to recapture some of the lost market share, after it deliberately cut more than 90% of its supplies to Europe, expecting to undermine Western support for Ukraine following its invasion of 2022. The loss of revenue from gas exports may have a profoundly negative impact on the Russian economy. Russia itself may be, nevertheless, Russia’s recent missile and drone attacks on Ukrainian electricity power plants, as well as gas storage facilities, raises serious concerns and questions about the risks associated with transiting gas in Ukraine, as long as Ukraine does not benefit from air defenses, or the war rages on. With less than a year to go there are now questions that are still unanswered. Should Ukraine end its historic role as Europe’s main supply route, and potentially jeopardize its EU accession process by alienating some member states keen to continue buying Russian gas? Or, should it bow to pressure and negotiate with this aggressor? Is Europe still committed to phasing out Russian gas in 2027, as initially stated after the Russian invasion of Ukraine in 2022? Can companies that are currently dependent on Russian gas diversify away? And if so, how will Europe’s supply dynamics shape up after the first of January 2025? These are very important questions and with me to discuss them and to expand on the future of this transit and how the supply dynamics will look like from 2025 have four distinguished speakers. First, Mr. Walter Boltz, Senior Energy Advisor at Baker McKenzie Rechtsanwälte, and former Executive Director of the Austrian Energy Regulatory Control. Dr. Craig Kennedy, Center Associate the Davis Center for Russian and Eurasian Studies at Harvard University. Mr. Sergiy Makogon, former CEO of the gas grid operator of Ukraine, GasTSO, and one of the negotiators of the current transit agreement. And Dr. Benjamin Schmitt, my colleague at CEPA, Senior Fellow for the Democratic Resilience Program for the Center for European Policy Analysis. Gentlemen, thank you so much for joining us today. I would start with first question to Mr. Boltz. Europe has been talking about phasing out Russian gas, as I said, by 2027. But so far, we have not seen any clear actions in that direction. In fact, some countries such as Austria and Slovakia are very keen to continue their imports, even after the expiry of this transit contract. Why do you think Russian gas imports have not been sanctioned? And to what extent could these countries diversify away from Russian gas from next year?
Walter Boltz
I think those are very good questions, and I think we have to make a wager that a number of countries have basically stopped importing Russian gas after the war started. And that was done on a, let’s say national level without, in many cases, a legal basis. But just in countries where the government owns 100% of the gas company and basically told them you stop importing and don’t extend existing contracts. Now in the first year in 22, and early 23, obviously, the very quick reduction in gas imports from Russia created huge problems in the market. In the meantime, the global markets have rebalanced, European regulators rebalanced, we have reduced gas consumption quite a bit, and so at the moment, we have a situation that some countries still buy quite a large share of Russian gas, and that’s Austria, Slovakia, Hungary. But honestly, there is not a huge problem with [unintelligible] from first of January next year, because there is so much gas on the global market and sufficient storage levels. And also, as in the European market, that if rates would be there, prices would go up, but they wouldn’t go up a lot. And I think within, let’s say, three to six months, probably, Europe would be able to get all the gas they need at reasonably market based prices, not much higher than what we would have if the price increase continues. Having said that, there is still in some countries, a certain reluctance to completely stop imports from Russian gas. And it’s, I think, a combination of hoping that somehow a political reprogramming will happen, and you know, we will go back to doing good business with Russia. And also the fear that maybe something really might happen, and there might be a tight gas market. I think most of those fears are unwarranted at the moment, as I’ve said before, but nonetheless, some countries are reluctant to, you know, stop importing gas, and it’s kind of a combination of some countries that are closed, right, like, Hungary or Slovakia, and the other countries that are more relaxed about that, like Austria is not in any way very close to Russia. There is the economy and some of the importing or buying companies will be limited. So in some places, I think, there is a reluctance to take the first step, but I think in most countries, it would not be a big deal even Russian gas flows stopped. In Europe, and also those countries that are currently buying a lot of Russian gas, they would probably be able to survive reasonably well, even with the exception of Hungary, which doesn’t have all the infrastructure they need. And those couple of countries have also blocked sanctions, you know, that, you know, in the support, and there was never an anonymous support for sanctioning Russian gas imports. And I think we should not forget that many other European countries are not talking about the progress, abide by some Russian LNG. And there has not been a lot of discussion about limiting or reducing these LNG imports from Russia, although relatively small compared to the pipeline imports. So in summary, we are much less dependent on Russia, but there still is the feeling okay, maybe if we stopped too abrupt, it could cause a problem. And therefore, I would say a couple of countries are rather hoping that somehow there will be a solution to continue buying gas in Russia. And even if there is no transit contract, there can of course be other models how these guys could be brought to Europe, and I’m sure Sergiy will expand.
Aura Sabadus
Thank you very much. I will come back to you and probably to discuss specifically Austria’s situation and diversification of supplies, and the possibility of bringing gas from the west to Central Europe. But for now, I would like to go to Mr. Makogon and to ask him about the Ukrainian transit itself, because we’ve had, we have heard in recent weeks, very firm statements from Ukrainian officials that they would not sign a new agreement. So they will not renew the current agreement or even sign a new one. But we do see, as I said at the beginning of this presentation, that there is a lot of pressure from various companies, various countries to continue the flows. And I would like to ask you, what options does Ukraine have, and what are the risks that, if for example, there is an alternative arrangement so some companies may be allowed to take the gas themselves and transmit it themselves. This could actually open the floodgates and allow for even more gas to come in, not just the gas that is currently tied up on the long term contracts. So maybe companies to book capacity on a on an ad hoc basis, and import more and essentially allow Gazprom to rebuild its market share in Europe. So I’d be very curious to hear your view, Mr. Makogon.
Sergiy Makogon
Thank you very much for your very interesting question. So, first of all, I would like to say that actually, that Gazprom itself started to reduce the supply to Europe back in 2021. And, you know, it’s the majority of the current developments, they, of course, they related to the start of the war, but also they were related to the the gas war which Russia started against Europe back in 2021. Yes. And finally, they, I think they understood that actually, it was a mistake to lose the European gas market, and they started to rebuild their presence there. So what we hear about the I was… I was really impressed by the recent announcement from from some countries, European countries, like Hungary, Slovakia also, which are supporting the continuation of the transit, because I remember the negotiations between Russia and the European Union and Ukraine back in 2018, and 19, when actually the position of the Kremlin was very, very strict, they said they would never continue the transit through Ukraine in 2020. And the only reason why they were they were not able to, to switch to suppliers through Nord Stream was the sanctions of the United States, which were imposed on North Korea in December 2018. So, I can assume that everything was ready already in 2020. I mean, from the technical perspective, to supply those countries from other directions, like from Nord Stream or from TurkStream. And, I really dont believe that now there is some kind of technical issues which prohibits, for example, Slovakia, to start importing gas from another direction other than Ukraine. So it’s more about business as usual, it’s more about continuing business with Russia to buy Russian gas, and we know that the pricing of Russian gas for those countries not open have a lot of political corruption around that. And I don’t know if there is some direct relationship, but we see who are the main buyer of Russian gas, and we see the level of their support of Ukraine, like Hungary, for example, which receive almost the amount of gas from from Russia, and also Slovakia now also significantly depends on Russian gas. So gas always was for prevalently, not about money, mainly about political issues. Regarding the continuation on the transit, I mean, for Ukraine, it’s, it’s not a critical issue anymore. Because current revenue, or transit revenue, it’s about 0.4% of the GDP. And our methodology is a purely European one, which is cost based methodology. So it means that actually, the majority of money which we receive on transit, we actually spent on conducting this, Ukraine does not receive a lot of this money to divide. So last year, the Ukraine transited, about 14 point 5 billion cubic meters of gas to European countries, and probably received about $6 billion for that gas, which I believe, quite significant amount for, for Russia in this current situation. And I still don’t understand why why this situation should continue. Yes, considering the ongoing work. Regarding the position of Ukraine, I would like to clarify, so I never heard there is the clear statement, anybody from Ukraine that actually Ukraine will not transit? So what I’ve heard is that Ukraine will not be parted, it will not take part in direct negotiation with Russia. So it means that potentially, it could be, or it could mean that the other companies may book the capacities and transit gas through Ukraine. For me, it’s really doesn’t matter who pay for the transit like European company or Gazprom itself, the main, the main problem is that the Russian malleco will continue to flow into Russia to the Ukraine. And this is the biggest problem. Ukraine was, was, was, Ukraine managed to continue to transit during the these two years, so, like two and a half years of the war, just to give European countries some additional time to prepare alternative routes. And for me, it’s really, I don’t understand why the third year of the war, we’re still discussing the continuation of business with Russia. So I would like to say that for Ukraine, this transit is not critical. It’s not in the matter of technical aspects or from the commercial point of view. And also, I believe there is no constraints getting technological constraints in Europe, to start buying gas from other sources. There are, I fully agree with Walter, that there are a lot of gas available in Europe, new tech, new LNG terminals, coming in 2025, 26. So it’s just the just the desire to continue business with Russia, and for Russia, the big desire just to keep it presence in the European gas market and put political pressure on Eastern European countries.
Aura Sabadus
Thank you. There’s a very good point here, I again, I would like to get back to you as well, and to to ask whether you know whether you think that this could open the floodgates to for more guests coming in. I’ll get back and we can discuss a bit more in detail. But, I would go to Dr. Kennedy, until until Ben can reconnect. By cutting more than 90% of the volumes that it was supposed to deliver under contractual obligations with European buyers, Gazprom has also created major revenue problems on its own domestic market. Could you please explain how the loss of European market share is hitting Gazprom and the Russian domestic budget right now? And what conclusions can Ukraine and Europe and western partners draw from this context?
Craig Kennedy
Thank you. In the discussions going on in Europe right now around whether it makes sense to allow Russia to come back into the European marketplace or not, one of the pieces of the debate or the equation that are missing is what the impact of Russia’s own self sanctioning of its European exports is having on the Russian economy and on the Russian gas industry itself. Europe, of course, has stated that one of its objectives is to try to erode the resilience of the Russian economy and in particular constrain the ability of the oil and gas sector, by far and away the most important sector of the economy, from funding Russia’s war and wartime economy. And in this debate, a lot of focus has been given justifiably on the impact of gas, the lack of Russian gas into Europe on the European economy, but very little focus has been given on the topic that you mentioned, its impact on Russia itself. There is a narrative out there that says that Russia is doing okay, but this is it’s going to pivot to Asia, that China will step in to take over volumes from Europe that Europe is no longer accepting, or that Russia is cut off, depending on whose side you’re looking at. But the fact of the matter is, that is a very fanciful narrative, and the in the real situation is much more dire. Before I started my research on the history of the Russian oil and gas industry and following contemporary events, I worked for over 20 years in the in global finance as an investment banker, and one of my early deals was the IPO of Gazprom back in 1996, when we bought the company to market in London, and we took to investors around the world. And investors immediately looked at two things about Gazprom that worried them. One was that it was selling most of its gas domestically and at a loss. And the other thing that Gazprom was carrying a lot of debt, in particular foreign debt, and this concerned them, but Gazprom explained that this was all part of a broader agreement with the government that they would subsidize the, the domestic energy markets which depend 50% on gas as their primary energy supply, in exchange for having a monopoly on pipeline exports to Europe. And in effect, European revenues would subsidize not only Russia’s domestic energy consumption, but also make Gazprom the largest contributor to the Russian state budget. And that system was supposed to be phased out over time as domestic prices became liberalized. But here we are more than a quarter century on and nothing has changed. The model that was in existence until 2022, was still the same old subsidy model where 75 to 85% of Gazproms revenues came from exporting a third of its gas. And only a small portion came from the loss making domestic business which consumed two thirds of its gas production. And Russia continues to carry a very high debt load. So what’s happened is a result of Russia’s decision to try to blackmail Europe into not supporting Ukraine is a massive collapse in revenues domestically, and it’s leading to an insolvency issue at Gazprom itself. Now, this has been largely hidden from view by two things. First of all, Gazprom has been suppressing its financial statements, so we don’t have as much visibility as we did. However, some financial statements have been getting out, they give us some insight into what’s going on, if you know what to look at. The other thing that’s been masking, the cashflow, cashflow crisis at Gazprom has been the fact that as a result of some of the reduction in supplies, they were already beginning, as our earlier speaker noted in 2021, Gazprom had record revenues in the lead up to 2023, and created a $27 billion cash pile that it has been burning through to both subsidize its tax payments to the state, as well as its domestic loss making business. But that cash pile is largely exhausted now. And so Gazprom is having to resort to more extreme measures. First of all, they’ve been slashing capex, and they’ve been delaying wages. This has actually caused work stoppages in one field of when workers are dissatisfied that they’re not being paid on time. Gazprom has also gone to the government and asked for domestic prices to be liberalized. The government said in return, we will give you a small tariff increase, but we won’t do anything close to what you’re asking for, because we’re already fighting with inflation, which publicly is is is pegged at 7 to 8%. But some people estimate that inflation in Russia is already 10 to 12%. And if we saw gas price liberalisation, it would feel a massive uptick in inflation. Already, the central bank has had to raise the prime rate in Russia to 16% to try to tame inflation. This would push borrowing rates even higher if the government were to liberalize domestic gas market tariffs. So the only thing that’s left for Gazprom now is to go into the marketplace and borrow. And that’s what it’s setting out to do. But this is not a sustainable solution. Gazprom already has close to $70 billion in debt. 15 to 20 of that is due over the next couple of years to foreign lenders, that has to be re-, has to be refinanced in domestic markets, and then new additional borrowing needs to be taken from what are very thin and fragile domestic markets in the debt in terms of debt finance. So this is an unsustainable model for Gazprom, something we’ll have to give. And sooner or later, it’s going to start really putting pressure on the domestic marketplace. But it’s only one of a number of problems that Russia is facing on the energy front
Aura Sabadus
That was a very interesting, very interesting analysis. And of course, you’re saying that one of the options is to borrow money, but the other option is, of course, to go back to business as usual. And the question, the big question here is, are European companies going to help Gazprom wittingly or unwittingly in that respect? So I would go back to Dr. Schmidt, I hope he can hear us now, and reiterate the question that I asked earlier. You, as I said, you just returned from a conference in Germany, you were somewhat shocked to see that the vivid interest in returning to business as usual among companies among attendees. I’d like to ask you what exactly is driving that interest? And do you get the sense that these ties will be revived, rather than severed after these two years? After everything that we’ve seen over the last two years in the bid.
Benjamin Schmitt
Well thank you. Thank you so much. And I would just editorialize a little bit to say that I don’t know if it was vivid interest in the sense that, you know, this wasn’t the top topic that was being discussed publicly. However, the vibe, certainly among the business community is not, you know, one where they have moved beyond working with the Russian Federation, for example, you know, we’ve seen headlines and continue to see companies like formerly Schlumberger, now called SLB, still operating in the Russian Federation in in providing a oilfield technical services. And so my, my message to the entire conference, when I was speaking on a panel was that, you know, many companies that that said that they would leave the Russian energy sector in particular technology, support for Russian oil and gas, said they would leave the Russian Federation after the large scale invasion began in February 2022, and they have, and many have said that they would leave and they have not. And, you know, I pointed out that, you know, some of them were sitting in the room, and it’s very much a case where, you know, when when the question of costs for these companies come up, it’s often couched in, you know, what, what are the future, technical resilience costs, the future security costs, all this sort of stuff. I push back a little bit, to kind of get out of just the technical side and point out to the political risks, because these companies that are still operating in the Russian Federation, or seeking to return to business with the Russian Federation, are doing a great certain disservice to their shareholders, because no one can say that they were not warned that sanctions or technology export controls can hit these companies. So the notion of a return to business as usual, I think, certainly companies would like to do this. And the point of the matter is, especially with acknowledging service provision, if we are engaging in what is effectively the largest export controls regime to degrade the Russian military, aerospace, and space sector, in the history of the world, simply given the size of Russia’s latent landmass and interconnectivity for the global economy, the idea that there’s no way of these technical service providers are ever going to get into a situation in which something that they have provided or brought into the Russian Federation for energy production services, somehow is supporting or seem to support at the level of a component or a system or subsystem, the Russian military machine. I think that there’s a high probability that will eventually happen whether they are you know, wanting to do that or not. And so, again, my message was, get out, you know, now, you know its long overdue, and do not have this return to business as usual as part of a future business plan. This is this is morally repugnant, to say the least. But also if you only care about shareholder value, the risks are far, far too high. And so we really need to see a concerted effort, you know, as we’re, as we’re talking about these issues, to curtail and end the ability of companies, whether they like it or not, to return to business as usual, with Putins Kremlin. I’ve talked to, you know, German academics who say, well, never say never, right. Never, never say never going back to business with, with Russia. Well, I’m not talking about Russia as a concept, obviously, in some sort of unlikely but possible future scenario in which Russia is a, you know, a well functioning democracy and part of the global, you know, liberal democratic world. That’s a different story. I’m talking about the Putin regime specifically. And no, the Putin, Putins Kremlin is not an entity, which even if there was a a ceasefire tomorrow, that we could return to business with. He has created too much risk over time, well before Russias large scale invasion of Ukraine, and he continues to create that risk in terms of hybrid threats in terms of energy weaponization, in terms of all of the gray zone tactics that we’ve seen Russia use vis a vis energy against the transatlantic community, against European democratic resiliency and, and national security risks in particular. So, so no, I don’t think that’s the case. I will say that speaking with German academics and in policymakers, there seems to be a pretty dramatic reaction to when I was raising concerns about these companies wanting to return to business as usual with Putin, and they said never, it will never happen. It’s simply impossible. The only political forces in Germany that are pushing for this are from Die Linke on the far left and AfD on the far right, none of the other political classes will support this. But, you know, I’d say what if there’s a snap ceasefire tomorrow? Well, this might be a different story, say some of them and others say, well, no, these companies would still say it. And I’m just simply not convinced by this, having seen the history of organizations like the old our shoes that dancin diksha in Germany, and similar organizations in Austria, who simply have time and time again, picked a cooperation with an authoritarian nation like Russia, over the democratic resilience of the transatlantic community. So no, I don’t think that it’s impossible, that there would be a push to business as usual, with Putin’s Russia. And I think it’s something that transatlantic political leaders need to take steps, with sanctions and export controls, to make sure that these companies cannot make the bad decision and put us all at risk yet again.
Aura Sabadus
Thanks, Ben. And speaking of Germany, we in Europe, we have been following very interesting development in the sense that Germany introduced the tax on the gas that is exported, so imported from the west into Central Europe, either from Germany or transiting Germany and entering Central and Eastern Europe. And of course, one of the countries that is most, mostly affected is Austria, particularly at a time when there is a lot of pressure on Austria to diversify away and to bring gas from other sources than Russian sources. So I would come back to you, Mr. Boltz. I ask you, maybe if you could explain a little bit to what extent this tax is impacting Austria? And maybe do you think that this is a reason an additional reason that Russia could potentially use to justify the need to continue this transit via Ukraine?
Walter Boltz
I mean, first of all, I think the German storage levy is kind of a sad story, because it is, I would say before, to most people, obviously illegal, and the EU Commission has been very reluctant to do anything about it. They have now started a pilot procedure, and we expect to have a kind of a serious action by the European Commission, within let’s say, a month or two. Having said that –
Aura Sabadus
Forgive me, may I just clarify here for our listeners to say when you say that it’s illegal, probably in the sense that it comes against the European Union’s overarching principles of free trade.
Walter Boltz
Right, I mean, a member state cannot let’s say without very, very good reason, ask for an export tax, which he is. I mean, there are there have been similar cases in the past on electricity, and basically, every member state decides to subsidize something like the Germans, the building up of storage, which was very expensive, you know, to buy the gas for the strategic storage, then they have to make sure that the way they recover the cost is not impeding trade. And charging only German exit points to German distribution would be perfectly okay. But charging the exits to other countries, and also charging for the transit of gas, which has really no bearing on you know, the storage obligation in Germany, is most likely violating the EU law. But, you know, Germany is a big country, and so the EU Commission took quite some time to do anything about it. Also, I think the initial storage levy was relatively low, it was less than a euro, and at that time, when gas prices were really quite high, people felt okay, what the hell, you know, it’s like 50 or 50.8 euros per megawatt hour doesn’t make too much difference, but now we are basically down to 30 or even less of gas commodity price into storage levies, you know, two euros, so we are talking about serious amounts of money. Now, having said that, at the moment, it of course does limit the imports from Germany because right now it’s slightly less expensive to bring gas from normally more expensive Italian market to Austria then from Germany. But in summary, I think within six to eight months, I would expect that this will be a new situation, where the storage levy will no longer be applied. And we should not forget that the real driving force for gas prices is not the actual transportation cost. It’s more the competitive competitive situation in a country. And if you can buy gas for, let’s say, 29 euros in Italy, and transport it to the virtual trading point, no matter what the exit fees in Germany cost, you know, nobody will pay more for gas from Germany. So the price will be more determined by market forces than by this export levy, but it’s now being used also by the Russians, and some of the, you know, the friends of Russia to argue that oh, you know, we cannot stop importing gas from Russia, because it is more expensive to bring gas into Austria from Germany. I think we should also be aware that these price arguments are a little bit weak, because there have been several contracts for Russian gas, that one is still happening that goes to Austria and one that has the destination Germany, and the German contract was always slightly less expensive, not because it’s kind of cheaper to transport the gas to Germany, but because there’s more competition in Germany. And also in Italy, gas prices have been normally slightly higher than in Austria, not because there’s a lack of gas in Italy – Italy is probably one of the best connected places with connections to North Africa and to top pipeline and transportation through Switzerland. But you know, ENI has a very dominant market share that has been driving up prices. So I think this is more an excuse for some Austrian companies and some associations to say, ah I mean, we, we don’t want to, to, you know, increase the gas prices. But in principle, it is the storage levy is something that should go away as quickly as possible. I, as I said, I expect the European Commission to start, you know, full fledged proceedings against Germany soon. And I think there’s a good chance that by the end of the year or beginning of next year, there will be a solution there. And if there is no solution from the EU, then maybe Austrian government might even subsidize the import of gas from Germany to compensate for this storage levy. And then we collect on the exit of gas to Germany. And, you know, refund this something what the Italians also tried to do, or at least discuss for a while. So, in summary, it is a nuisance, it is, of course, is making a little bit more difficult to substitute Russian imports from, by energy from Northern Europe. But I think it’s more unexcused and a true hindrance, because demand is not too big, and at the end of the day, if the competition is is working, the price effect will be rather small.
Aura Sabadus
Plus, I would say that the regulator has shown sound some goodwill in the sense that they are now looking to reduce the tariffs at entrance, at entry points from from Germany. And that shows that there is some some element of willingness to allow the diversification of supply. So that, I suppose, is an encouraging sign. I would go back to Mr. Makogon, and ask you about the perception of risk regarding the Ukrainian transmission system. And, of course, we have seen, sadly, that the storage facilities in western Ukraine have been hit by missile and drone attacks. These have been spared since the start of the war, but over the last month, Russia actually hit these facilities twice. And now the question is, how reliable or what what are the risks involved in bringing gas in storage in Ukraine, but also continuing the transit from next year? So my question to you, do you think European buyers will be deterred from continuing the transit if this perception of risk is now exacerbated?
Sergiy Makogon
I would like to say that the recent attacks on our storage, I think it’s more about Ukraine, Russia. It’s not about the broader perspective, because actually, what they tried to do is actually to to complicate the preparation of Ukraine for the next heating season, because the the Ukraine already started the injection season, and actually, we already have to inject our storage. And this attack on the storage is actually it’s more about Ukraine. So, they would like to show by attacking our thermal energy plants and other electricity generation. So they would like to show us that they can be they they would like to put us in darkness and cold. So the storages is more about the Ukrainians storage just to improve their negotiation position. Before I mean, expected negotiations, yes. Regarding the the perception, perception of risk, I mean, for me when the country is at war, it’s already huge risk, yes? And I really appreciate the companies which still request Ukrainian storages and probably they have quite significant financial reasons that, yes, because of spread, and the price that Ukrainians purchase, but I mean, the war is ongoing for two years, and I doubt there will be some new risks with the setbacks. But what I would like to say that I was really impressed that some countries they still, like Slovakia and Austria, still rely like 40% of all the gas deliveries through on the transit through Ukraine. So for me, it’s kind of if I will be the citizen of those countries, I would like to ask my government support, how can we rely on our how we can build our energy security on the on the transit to the country, which is at war, actually full scale war? And the rocket can hit the compressor station any time and actually the [unintelligible]. Yes, it has not happened yet, but we see the level of escalation continuously growing, and I you know, I cannot say that it is not possible. Regarding the transit to Ukraine, yes, I mean, this is the very important question, because Ukraine, still, I mean, Ukraine industrialization series is still capable to transit, probably 90 or even 100 billion cubic meters of gas, Russia towards Slovakia and other European countries. So the Ukrainian system still is like twice more than Nordsteam. So it’s huge possibility to ramp up the transit from Russia to European countries. And technically, it could be done. Regarding your question about if other shippers might be interested, yes, of course, this is the business of shippers just to buy cheap. And so yes, and so they will be interested. I, I really don’t understand how Ukraine can allow some countries, the capacities and other countries or other companies not to have the capacities, yes. So it means that technically any company can, the capacities can be great if such capacities will be offered. And then it actually do be up to Gazprom to decide which companies they will give gas at the eastern border of Ukraine or for each country’s they will not give bigger. So I believe the continuation of this transit it will be a constant threat even for for American suppliers of LNG gas, so it means that SSS so you can still can manage like 100 billion cubic meters of transit, which actually could easily fully substitute the new LNG which is coming from from other markets. So that’s why for me, it’s politically important to make the final decision. Do we, I mean, Europeans, do we still want to have business with Russia? Especially when the lot of generals from the NATO saying that we are, I mean, the European, Europeans, they are, they may may face the military conflict with Russia and three, five years. So the question is do, do Europeans want to continue business with Russia or actually it’s time we said that sorry, this is the this is the end. And unless there is a new Russia, as Benjamin said, there is no no Putin anymore, there is new democratic government, so before that, Europe will not continue any business relationship with Russia with a view to its military.
Aura Sabadus
Um, just related to what Mr. Makogon just said. I mean, obviously there is a perception of risk, and it has been all along. Maybe now, it’s exacerbated, maybe not. But people are thinking more about it. Do you, Dr. Schmitt, do you think that some companies might be even incentivized to push things further and say, look, we still need Russian gas. The Ukrainian transit system is too risky right now, let’s revive Nord Stream 1 and even Nord Stream 2. I mean, we’ve seen recently that Russia has been discussing, I mean, there were there were some stories in in the media suggesting that it might cost 1 billion, 1 billion and a half to repair the pipelines. Do you think we will ever get to that point where Nord Stream could make the comeback?
Benjamin Schmitt
Yes, I think so. I think part of it is news. There’s insurance claims currently going on with Lloyds of London, that I read in the media for more than I think around half a billion euros. So, you know, this is this is something that I think there’s a lot of companies that if if a Nord Stream 1 or 2 were repaired contractors put out they would bid on it from Europe. I think a Nord Stream 3 was announced they would bid on it, you know, right now, frankly. And so I again, I think the the concerns that are out there are, you know, are founded, in the fact that there is a historic relationship with some of these companies, for decades, with, with Russia, right. With, in particular with Gazprom. And so I think that this is why, you know, in terms of sanctions and technology export controls, especially with respect to sanctions, there’s got to be a point at which the EU actually cuts itself off from these pipeline routes, and passes permanent blocking sanctions on projects, like Nord Stream 1 and Nord Stream 2, albeit them, you know, albeit, you know, not operational right, now, aside from one of the four lines, on TurkStream, line two on these, these lines. And I think part of the reason you know, we’ve seen, you know, this this risk remain on the Ukrainian route right now is that Russia can use this as a, you know, Sword of Damocles without having these other routes, significantly operational outside of Ukraine, come to you and say that, okay, so if you’re still getting gas through the Ukrainian gas transmission network, we’ve demonstrated for almost two years, we being the Russian military, that we can reach out and destroy critical domestic energy infrastructure in the sense of, you know, thermal power plants and electricity grid infrastructure, and things like this, transformers, that are exacerbating the humanitarian crisis early on going across Ukraine, notably, the Ukrainian gas transmission, pipelines and compressor stations, for the most part have been on target. And part of the reason I believe for that is that they, Russians, can continue to say it, and if you, you know, to the Europeans, we can obviously reach out and touch that very, very easily. The targeting of the gas storage networks is a little bit different, as its survey said, you know, part of this is, I think, a, you know, trying to exacerbate that humanitarian crisis by by throwing down the ability of Ukraine to build up storages and feedstocks for, for heating for next winter. Like it’s also trying to get in the way of Ukraine being a battery for Europe in terms of storage, there’s a lot of proposals to try to use those Western Ukrainian gas storages to basically inject gas from Europe and draw on it during the winter for the entire continent and increasing Ukrainian strategic role in energy to Europe without Russia being in the middle. And so I think that’s there as well. But yeah, I think that the the risks to Ukrainian, the Ukrainian gas transmission lines themselves is all unfortunately, in the hands of the Russian military, I mean, in Putins hands because it’d be very easy, given what we’ve seen, for Putin to start taking out this entire network. It’s a massive network, but it’s something that a survey said, you know, you get one or two compressor stations that’s gonna get the the lines down for quite a while. And so the fact that we haven’t seen that really telegraphs prevalent intention, I think to put pressure on Europe, too, as Europe still relies on gas through that system that Ukraine itself and to, you know, to basically try to mitigate whatever the latest sanctions or or military support or pushback that Europe and the United States may be having on the Russian Federation. I think that’s, that’s part and parcel to what we’re seeing there in terms of in terms of the models themselves.
Aura Sabadus
So, of course, the Ukrainian system remains vulnerable, as long as there is, it doesn’t have any air defenses, and let’s not forget that some of this gas stored in Ukrainian facilities is also gas that belongs to European companies. But I would like to go to Dr. Kennedy and ask him about Ukraine’s own offensive against against Russian infrastructure, and we’ve heard in recent days, several US officials warning Ukraine to refrain from striking Russian oil refineries and depots amid fears that this would push the price of oil up. Is this argument actually justified and what are Ukraine’s options with regards to limiting Russia’s ability to inflict damage on its vital energy infrastructure.
Craig Kennedy
So I think Ukraine has shown that it has asymmetrical abilities to severely damage, some key energy infrastructure. It’s been relatively restrained, so far, in using that it hasn’t gone after any of the major oil export terminals, which could have an impact on pricing, by cutting off supply into the marketplace. But I think there’s a very simplistic analysis that’s going on right now, unfortunately, around Russian refined product and the drone strikes on refineries. To start with, refineries in Russia aren’t simply struggling because of drone strikes, they’re struggling because they’re highly reliant on Western technology. If you look at the 40 top refineries, in Russia, all 40 of them have critical pieces of units that were bought and installed, bought from and installed by Western companies in order to comply with Western export standards. And these are wearing out and breaking down. At North Sea, for example, the fourth largest refinery in Russia and one of the most advanced, it suffered 11%, it suffered a loss of its gasoline refining capabilities equal to 11% of Russia’s total output, and it had nothing to do with a drone strike. It’s because critical equipment that was imported wore out and they can’t fix it. So, there’s a broader question of erosion of its infrastructure as a result of its being cut off from the west. Now, when it comes to the question of the impact of pricing, yes, we could see higher prices for certain oil products like diesel and gasoline, depending on how far the airstrikes go, and what the broader market dynamics are around those products. But we have to realize that if Russia can’t refine its crude, it’s not going to leave it in the ground, it will simply export it as crude, which means that there’ll be a greater glut of urals in the marketplace, which is likely to actually widen the discount in which urals sells. So while you may have gasoline prices going up a bit, you actually have urals prices going down and pulling down the rest of the crude market. So things are more complicated than I think the headlines suggest. But or I wanted to come back to this question of risks that we were discussing a moment ago, we were talking about transit risk through Ukraine. But I think there’s a much more profound risk issue that’s not being factored into the debate in Europe about whether it makes sense to allow Russian gas to come back in. I mean, Ben had it exactly right, that if you look at both the the mittelstand companies that are supplying technology, to the Russian gas industry, or the larger industrial users of gas in Europe, many of them are making the case that we’re losing out because we’ve lost access to what has for them been a very lucrative market historically, starting in the 1960s, they provided the technology, European banks provided the financing for the Russian gas industry, and they provided the market for the molecules that were being extra- that were discovered at that point. So it’s been, these companies have been deeply involved in the gas industry, and they’ll want to go back in. They are amoral actors, and I know them because I banked them for many years. They are not the ones, even if we try and frighten them into thinking that they haven’t managed the political risks properly, they’re not the ones who are going to stop this. They’re going to keep pushing for it. If there’s going to be a counter argument put forward and disciplined put on them, it’s going to have to come at the political level. And here it’s very important for the politicians to understand that when these companies say our industry is being hurt, they are mispricing risk. And let me explain what I mean by that. So, yes, a German utility may get cheap gas from Russia, or a German exporter may be able to sell its technology in Russia. But what’s actually happening more broadly to the European economy and the European taxpayer? The big political risk here is not transit through Ukraine, it’s Russia risk. Will Russia shut the gas off again, because when they did it this time, the cost to the European taxpayer were immense, and it was all Russia risks. They cut off the gas. And suddenly Russia had to scramble to, excuse me, Europe had to scramble to find new supplies, and had to subsidize pricing for domestic consumers within Europe. This was immensely costly, and it was a risk which had been outsourced or sloughed off by the industry, to the broader cost to the broader taxpayer. So if the industry is going to say, we want to buy that cheap Russian gas again, then what they need to do is they have to pay a risk premium, because this is as unreliable as the wind or the sun. When it comes to energy. Yes, it’s a source of energy, but we have to have all sorts of additional backup that we have to pay for on the off chance that the wind stops blowing, the sun stops shining, or Putin turns off the taps again. And that risk isn’t being factored into the to the overall debate right now. The other thing, of course, it’s not being factored in, and coming back to my earlier comments are, if we let Russian gas back into Europe, there are huge benefits that gives to the Russian economy, at exactly the time that we don’t want those benefits to be available to fund the war. So both of those economic factors are real, they can be measured, but they’re not being factored in by the advocates of a restoration of trade ties. They’re simply thinking about their taxpayer, their own shareholders, not the broader taxpayer.
Aura Sabadus
Excellent point. And of course, there is the security element, the geopolitical element if you wish that is not being priced in, and unfortunately, hasn’t been priced in all along. But I would like to wrap up with just a very brief question to you all. And I’d like to ask you, how realistic is it to expect a complete phase out of the Russian gas? Of course, we don’t know what will happen with the transit. But we do know that what the European Union said, 2027 is a phase out deadline for this Russian gas. But we also know that there’s EU elections coming up and US elections coming up. So very briefly, I would like to hear your thoughts on what to expect by 2027 in terms of complete Russian phase out, and I’d go back to Mr. Boltz and ask him this question, and then to Mr. Makogon, to Dr. Kennedy, and Dr. Schmidt, and then we’ll wrap up.
Walter Boltz
Now, I do not think that the European member states will have the political strength to do this on a voluntary basis. So I don’t think there will be sanctions against Russian pipeline gas imports, and, you know, much less against Russian gas imports, because that would include also, you know, the quite significant number of countries who were importing Russian LNG. But I think there is a fair chance that somebody will think that, you know, the best way to rid Germany of Russian gas was to blow up Nord Stream 1 and 2. And given the current situation in Ukraine, it doesn’t seem to be that difficult to imagine that somebody has the same idea about the transit route. So I think it’s more likely that something happens to the physical infrastructure than that the EU member states get altogether, understand these geopolitical concepts and arguments that you know, Craig explained very well, and sanction Russian gas. I don’t think that will happen. Thank you so much.
Sergiy Makogon
I mainly agree with Walter on this message. I also believe that unfortunately, the governments, especially in some countries, they will not be brave enough to introduce any sanctions, and I also I cannot expect in sanctions on EU level because it requires anonymous support from all my member states. But, I believe there are, I mean, but I also think that it’s not right when they in some member states also, as members of the NATO, they expect the support of military protection from the United States, but still want to continue paying billions and billions of dollars to the Russian budget. So for me, it’s kind of nonsense. Now it’s it should be somehow resolved on the political level. And I hope that one way or another, the political decision will be made. And of course, they, some LNG market, it’s a little bit more complicated. But the pipeline gas market, it’s very easy. So there is the pipeline, if there is no gas possible, there is no export. So LNG, literally it will be different market. But anyway, I think that the all governments in Europe, they should wake up and to understand that the war is very close, believe me. So when I was in December 2000 in Kyiv, so I never would expect to hear the bombs, you know, in my city, but it’s really happened. So nobody in Ukraine expected that. So that’s why I really urge European Europeans to think about this, this threat and do something about it.
Aura Sabadus
Thank you. Dr. Kennedy?
Craig Kennedy
My colleagues will have a better read on the month by month political modalities in Europe about what’s acceptable and what’s not and when. But, but I think for me, there are two big lessons that come out of analysis of what’s happened over the last two years. And number one is that Russia actually is much more vulnerable to western energy sanctions and Western policies around Russian energy than many people realize, I think everybody was surprised at how resilient and resourceful Europe was, when Russia decided to turn off the gas. Moscow was certainly shocked. But I think many people in Europe and abroad, were surprised as well. So Russia is much more vulnerable than we often realize. And my second point would be Europe is indeed much more resourceful and resilient than I think it often realizes. Europe has been a major center for innovation around energy, and in the green transition. They should embrace this as an opportunity, one not of their own choosing, but nonetheless a golden opportunity to continue to invest and push in new sources of energy that will prevent them from the sort of dependency they’ve had in the past. And just be confident that the resourcefulness and the resilience and the moral backbone of many Europeans will will take them to a better place.
Aura Sabadus
Thank you, Dr. Schmitt?
Benjamin Schmitt
So I would be remiss if I didnt give kudos to Dr. Kennedy on what I think is a great tagline: Russian gas less reliable than the sun. I think that is, that’s something that might might be a nice vital phrase to remind folks. Look, I think that we’re not out of the woods yet. I think that it’s going to be a high political threshold to get permanent blocking sanctions on Russian pipeline gas. We certainly have seen, at the same time, Russian LNG coming into the European market at record levels. So whereas we’ve had this, this tendency to be very, you know, jubilant right away that Russia, or that the European Union has reduced its pipeline inports and weathered the storm, a lot of what’s going on now is weathering the storm, by bringing Russian gas in by by other means. So I think that one of the things we need to think about right away is possibly sanctions on Russian LNG exports, such as the Nova tech market to LNG facility. And, you know, one of the knee jerk reactions from from some crowds, and I think there are some of which are operating in bad faith is that, well, if we do this, then, you know, then Europe will lose, you know, lose out on, quote, unquote, cheap Russian gas, and it’s going to allow Russia to export more of this gas to places like, like China or elsewhere. And isn’t that a bigger concern? And I would say no, ultimately, I think the the national security impact of European reliance on Russian gas specifically over the years, in the sense that it has limited the political and national security latitude of leaders across Europe, to respond to Russian hybrid and over compression, whether or not you know, Russia is getting revenues from finding another market elsewhere. At least, you know, at least Europe will be less reliant on an authoritarian and aggressive neighbor for that for that natural gas. And so I think that this is this is the goal. I think that Europe should do everything in its power to realize its phase out of Russian gas by 2027 to the greatest extent possible. Do I think that it’s going to happen? I hope so. Am I pessimistic given that there seem to be a lot of companies that would would jump back into business with Russia tomorrow, if they haven’t already left, many of which are still doing business with Russia in the technology sector?That gives me pause, and I think the you know, the reality is a lot of these companies will drive their political leaders to push for a return to business as usual, and I think that that’s why we need to seize on this moment of, you know, a redirection in the European market to make sure that never happens.
Aura Sabadus
Thank you very much. Of course, we do not know what will happen from next year related to the, related to the Ukrainian transit, and much less what will happen by 2027. But we have heard from the speakers that Europe is in a better situation, it has shown a lot of resilience, whereas Russia has- is in a vulnerable position, but much of what will happen in the next two years, and the longer term, of course, will depend on the leadership of political elite. And of course, that is something else to watch, especially with European elections coming up in June, and then US elections in November. So a lot of a lot of food for thought and of course at CEPA we will be keeping an eye on all these developments. So please visit cepa.org, and be sure to follow CEPAs social media accounts to stay up to date on the latest analysis and upcoming events. Thank you very much for this wonderful discussion.
