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Ukraine Signals Potential Shutdown of Gas Transit Route, Raising Concerns for European Supply

In an interview, Ukrainian Energy Minister German Galushchenko expressed doubts about the renewal of Ukraine's gas transit contract with Gazprom, which is set to expire by the end of next year. The transit route through Ukraine currently accounts for almost 5% of Europe's total gas imports, and the potential shutdown could have significant implications for European gas supply.

Ukraine Signals Potential Shutdown of Gas Transit Route, Raising Concerns for European Supply

Galushchenko stated, "I really can't imagine how it could be bilaterally," when asked about the possibility of renegotiating the agreement with Moscow following the invasion of Ukraine last year. He further mentioned that Ukraine is preparing its system for a cut in gas supplies.

Last year, Moscow's decision to reduce gas supply to Europe caused an energy crisis, leading to increased inflation and living costs across the continent. While several routes were shut off, the Ukrainian pipeline and one other have continued to supply gas at reduced volumes. In May, Austria relied on Russian gas passing through Ukraine for about half of its gas imports, and for Slovakia, the pipeline accounted for 95% of its gas imports.

Galushchenko acknowledged that Europe has adapted to previous supply cuts by reducing demand and sourcing alternative imports like liquefied natural gas. However, this is the first acknowledgment from Ukraine that the contract underpinning the remaining gas flows from Russia through Ukraine will likely be allowed to expire.

Without the Ukrainian transit route, the only remaining pipeline from Russia supplying gas to Europe would be TurkStream, which caters to countries in the southeast and accounted for just under 3% of Europe's gas imports in May.

Although Galushchenko suggested that European politicians might desire to renegotiate the contract, analysts believe it is unlikely given the challenging optics of engaging in talks with Moscow. The European Commission declined to comment on whether it would attempt to initiate discussions with Russia regarding the contract renewal.

The potential loss of even a small percentage of gas supply has the potential to drive up prices across the continent due to the tightness of global gas markets. However, it is anticipated that LNG supplies will increase rapidly from 2025 with major projects launching in Qatar and the US.

Russian Deputy Foreign Minister Mikhail Galuzin recently stated that a decision not to extend the gas transit agreement would negatively impact the EU, while Ukraine would lose dividends from transit and harm itself in the process.

Gas prices in Europe soared to more than 10 times their normal level in 2022, equivalent to almost $600 per barrel in oil terms, but have since fallen significantly. The TTF contract, a benchmark for gas prices, has dropped to around €40 per megawatt hour, a decline of nearly 90% from its peak in August last year.

The current gas transit contract was signed in December 2019, just a day before the previous agreement expired. It secured Russian gas flows through Ukraine until 2024, with Gazprom committing to send minimum gas volumes each year and Ukraine expected to receive transit fees of $7 billion.

However, Russia is currently shipping only about 12 billion cubic meters per year, and Ukraine claims that Moscow has been underpaying it, despite contractual obligations to pay the full transit fee regardless of the supplied gas volumes.

OMV, one of Austria's major energy companies, expressed confidence in being able to supply its customers even without Russian gas, as it has made preparations since the invasion of Ukraine last year.

If the contract lapses, Gazprom could technically still send gas through Ukraine by booking capacity through auctions held by its gas transmission system operator, as required by European rules.

Laurent Ruseckas, an analyst at S&P Global Commodity Insights, commented, "It's hard to see how you renew a contract that neither side believes the other has honored, let alone in the middle of a war between the two parties." However, he added that theoretically, gas should continue to flow if European buyers still desire it and Russia is willing to send it.



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