Key Takeaways:
· The Ukrainian transit pipeline system, which transports Russian gas to Central and Eastern Europe (CEE) via Ukraine, will cease operations on December 31st 2024 as Ukraine has decided not to renew its five-year gas transit agreement with Russia.
· The European pipeline gas market will undergo significant restructuring to accommodate new sources of supply and to prevent potential supply deficits. The Trans-Balkan pipeline and the "Vertical Gas Corridor" are poised to become crucial channels for transporting new sources of gas and mitigating supply shortages.
·Europe will have to increase liquefied natural gas (LNG) imports, including for the Trans-Balkan pipeline and the Vertical Gas Corridor, raising questions about Russia's capacity to expand its market share in the European LNG market through LNG from the arctic Yamal peninsula.
Ukraine has confirmed that it will not renew the five-year gas transit agreement with Russia, which is set to expire on December 31st 2024. In 2023, 13.7 billion cubic metres (bcm) of Russian gas entered Central and Eastern Europe (CEE )via the transit. Ukraine’s decision will necessitate a restructuring of the CEE pipeline gas market. Additionally, Europe will require LNG imports to cover the supply deficit. Moldova, Slovakia, Hungary, and Austria,which have relied extensively on Russian gas imports, are the most affected by the non-renewal of the transit agreement.
Potential Solutions
In June, the EU asked Baku whether it could supply Azerbaijani gas through Russia into the Ukrainian transit, a move which would keep the Ukrainian transit operational. Baku is now discussing with Moscow the possibility of a “virtual swap”, whereby the gas passing through Ukraine would still be Russian but labelled as Azeri.
A key step toward strengthening CEE energy security when the Ukrainian transit ends, provided no deal has been reached between Baku and Moscow, are reverse gas flows through the Trans-Balkan pipeline. Historically, this North-South pipeline transported Russian gas from Ukraine to Türkiye via Romania, Moldova, and Bulgaria. However, with the launch of the TurkStream pipeline in 2020, its role diminished. The Trans-Balkan pipeline can operate in reverse flow (South-North), allowing it to transport regasified LNG from Greece and Türkiye, as well as gas from Azerbaijan, to Ukraine, which can then distribute it to CEE, a conversion Ukraine proposed last year.
Another critical initiative is the "Vertical Gas Corridor," a cooperative effort between Greece, Bulgaria, Romania, Hungary, Slovakia, Moldova, and Ukraine to transport regasified LNG imported at Turkish and Greek terminals, along with Azerbaijani gas supplied through the Trans-Adriatic pipeline, to the CEE region.
The vulnerability of each country in the event of a complete shutdown of the Ukrainian gas transit at the end of this year varies. Moldova extended the current transit agreement with Ukraine for Russian gas until 2025. After this period, Moldova will likely need to reroute the 2 bcm of gas it currently receives via the Ukrainian transit through reverse flow of gas from Romania through the Trans-Balkan pipeline. In January, Ukraine, Romania, and Moldova began consultations aimed at enhancing the reverse-flow capacity of the Trans-Balkan pipeline.
Austria will need to cover an import gap of approximately 5.7 bcm, which it will likely do through pipeline imports from Germany and Italy, both of which have LNG terminals. Hungary is likely to find itself in the most precarious position. Hungary’s access to Austrian gas inflows will depend on Austria's ability to secure sufficient LNG from Germany and Italy. Additionally, Hungary's access to Romanian gas supplies will be contingent on Moldova's use of the Trans-Balkan Pipeline. If these alternatives prove insufficient, Hungary may be forced to rely almost exclusively on increased flows of Russian gas via the TurkStream pipeline, leaving it particularly vulnerable to supply disruptions and pressure from Moscow. Slovakia could be in similar difficulties, having to resource about 3.2 bcm from Czechian pipeline gas or Austrian reverse flows. Slovakia will likely want to access Polish LNG, but additional regasification capacity in Poland won’t be available until 2025.
Increased LNG imports are poised to play a critical role in enhancing CEE energy security following the cessation of the Ukrainian gas transit. Rystad Energy estimates that in case of a complete cessation of the Ukrainian transit, the EU would need to import about 7.2 bcm on the LNG market. Both the Trans-Balkan pipeline as well as the Vertical Gas Corridor will likely rely in large part on LNG inputs further up the supply stream, mainly from Türkiye and Greece. LNG imports via Türkiye, Greece, Croatia, and Poland will likely fill an important part of Europe’s anticipated 7.2 bcm supply gap.
Looking Forward
The cessation of the Ukrainian transit helps Ankara’s ambitions to transform Türkiye into a regional energy hub. TurkStream, which transports Russian gas through Türkiye to Bulgaria, Serbia, and Hungary, will remain the last operational Russia-Europe gas pipeline once the Ukraine transit ceases. Türkiye is also positioning itself as an important entry point for LNG that can be fed into the Trans Balkan pipeline and the Vertical Gas Corridor. This will allow Türkiye to produce “Turkish Blends”, mixtures of gas from other countries including Russia and Azerbaijan that will allow Russia to launder gas into the European market. This development poses a threat to the profitability of LNG imports in Greece, Croatia, and Poland, as well as to new production projects in the Black Sea.
KSG assesses that once the Ukrainian transit closes, Russia will try to increase gas sales to Europe via TurkStream and LNG to retain market share. KSG anticipates that Russia will offer discounted gas to Bulgaria, Serbia, and Hungary via TurkStream. This risks undermining the profitability of LNG from places such as the US and Qatar and maintains Russia’s leverage over Bulgaria, Serbia, and Hungary. KSG assesses that Russia is well placed to increase LNG sales to Europe as well. The Russian LNG industry is expanding, with Moscow aiming for a capacity of 100 million tonnes by 2030, driven primarily by Novatek’s development of three new Arctic LNG projects on the Yamal Peninsula. Since Russia's invasion of Ukraine in 2022, the U.S. has imposed a series of sanctions on Russian LNG projects, targeting ships, shipping companies, and the supply of equipment to Novatek’s Arctic LNG assets. However, Russia’s success in circumventing oil sanctions suggests it has developed considerable expertise that could be applied to LNG. Recent movements of LNG carriers in the Arctic Sea indicate that Russia is assembling a shadow fleet, employing tactics such as “AIS spoofing” (disabling a ship’s legally mandatory automated identification system to avoid geolocation) and ship-to-ship (STS) transfers to obscure the origins of Yamal LNG. KSG anticipates that Russia will increasingly rely on ageing or end-of-life LNG carriers, as sanctions hinder the procurement of new vessels. This reliance could heighten the risk of serious accidents, particularly as older or non-icebreaker-grade LNG carriers operate in the Arctic during summer months, increasing the likelihood of collisions with ice floes.
The end of the Ukrainian transit and the switch to LNG will likely increase gas prices throughout CEE. Pipeline gas has a price advantage over LNG, which requires energy intensive liquefaction, maritime transport, and regasification. While gas prices are likely to rise throughout CEE countries heavily reliant on Russian supplies, KSG assesses that TurkStream and LNG will likely enable Russia to sustain its revenues and thereby shield its war effort from the termination of the Ukrainian transit. Ukraine’s decision to terminate the transit agreement to deprive the Kremlin of revenue is therefore unlikely to have a major impact on the Russia-Ukraine war.