European energy prices have hit record levels. Countries that do not have long-term contracts with Russian energy giant Gazprom are expected to pay more than $1000 per thousand cubic meters for Russian natural gas. What will that mean for Ukraine, a nation that still refuses to purchase gas directly from Russia?
On October 1, Gazprom began supplying gas to Hungary under a long-term contract, which was signed on September 27, through the Balkan Stream gas pipeline – an extension of TurkStream which runs under the Black Sea, thus bypassing Ukraine and angering Kyiv. Ukrainian authorities claim that the deal between Moscow and Budapest is political and “economically unfounded”. Indeed, Gazprom has already started bypassing Ukrainian territory in its gas supplies to Europe, even before the controversial Nord Stream 2 pipeline, linking Germany and Russia via the Baltic Sea, became fully operational. By any measure, Nord Stream 2 is expected to undermine Ukraine’s role as a regional gas hub, and could deprive the Eastern European country of around $3 billion a year in transit fees. That, however, will unlikely happen before 2024 when Gazprom’s gas transit contract with Ukraine’s state-owned energy company Naftogaz expires.
Meanwhile, the United States and the European Union are expected to pressure the Kremlin to renew the deal with Ukraine. According to the US – Germany energy agreement, signed in July, the two nations are united in their belief that it is in Ukraine’s and Europe’s interest for gas transit via Ukraine to continue beyond 2024. Although it is too early to say if Moscow will agree to keep using the former Soviet republic’s old gas infrastructure for gas supplies to Europe, there are indications suggesting the Kremlin could make another concession to the West. Recently, Russian President Vladimir Putin stressed that Gazprom must continue to fulfill its contractual obligations to supply gas through Ukraine to the EU.
“It is necessary to fully comply with the contractual obligations for the transit, delivering our gas through the territory of Ukraine, through the gas transportation system of Ukraine. We should not put anyone in a difficult position, including Ukraine, despite all the aspects related to the Russian-Ukrainian relations today”, Putin said.
Over the years, Kremlin propagandists have claimed that Ukraine will not survive without Russian gas. It is, however, rather questionable if Putin will let “brotherly Ukrainian people” freeze to death. According to the transit contract between Gazprom and Naftogaz signed in December 2019, Kyiv got very high transit tariffs. Originally, Moscow offered a short-term gas transit deal to Ukraine, small amount of gas that should go to Europe through Ukrainian territory, as well as low gas transmission tariffs. However, the Kremlin had to accept Ukrainian and European conditions, and yet again demonstrated clear weakness. Thus, it is entirely possible that Russia will agree to renew gas transit contract with Ukraine, although the volume of natural gas passing through Ukrainian pipelines and the transit fees could be the subject of dispute. Moreover, it remains to be seen at what price Kyiv will be purchasing Russian natural gas.
Ukraine does not plan direct talks with Russia on gas supplies, which means that Kyiv will continue to buy the de facto Russian gas from Slovakia. The country’s officials claim that Ukraine has sufficient gas stocks in its underground storage facilities to ensure a stable heating season. For the current winter and until springtime, Ukraine and its population have been secured against a possible gas restrictions, although gas prices in the country are expected to surge. The Eastern European nation has a rather poor choice – to continue purchasing gas at market prices, which are currently around $1900 per thousand cubic meters, or to make a long-term deal with Russia.
Meanwhile, Gazprom is expected to fully comply with its contractual obligations for the transit of gas through Ukraine to Europe, but it will unlikely race to book extra pipeline capacity for spot buyers. There are many potential reasons for such a decision, and one of them is Ukraine’s old infrastructure.
“This cannot be done using the gas transport system of Ukraine, which has not been repaired for decades and something there can burst at any moment, with unfavorable consequences for everyone: both for the transit side and for the consumer” Putin said.
In other words, Russia could be interested in the modernization of the Ukrainian energy infrastructure, but given that the two countries are de facto at war, it is not very probable that Kyiv will agree to allow Moscow to take part in such a significant project. There is speculation Russia does not plan to supply Europe with more gas because it faces its own shortage and wants to rebuild domestic stocks. It is also believed the Kremlin wants Nord Stream 2 without any compliance with European rules, which is why Gazprom refuses to send enough gas to Europe until its demands are fulfilled. Whatever the reason is, shortages of gas are evident in Europe, and other regions such as North America and Asia are faced with lack of coal, electricity, and oil to a certain degree. The energy crisis has just begun, and is unlikely to be resolved any time soon.
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