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The transit of Russian gas through Ukraine should end in six months – but Europe does not want this. What are the chances that supplies will continue into the fourth year of the war?

Транзит российского газа через Украину должен закончиться через полгода — но этого не хочет Европа. Каковы шансы, что поставки продолжатся и на четвертый год войны?

Europe is discussing with Ukraine the continuation of gas transit from Russia in 2025, despite the fact that the agreement with Gazprom expires at the end of 2024, Bloomberg reported on June 10. The idea is to reduce interaction between Moscow and Kyiv to a minimum – to involve an intermediary (for example, Azerbaijan) or to come up with a consortium of Europeans to buy gas on the Russian-Ukrainian border. Meduza explains why the chances of success of the new deal are not high – and legal proceedings between buyers and Gazprom could even lead to the suspension of supplies ahead of schedule. One of the working options for continuing transit through Ukraine, according to Bloomberg sources, could be a purchase by European companies of Azerbaijani gas, which should then go through Russia and Ukraine to Europe. The structure of such a scheme is not completely clear, but most likely it involves an exchange (swap) of Russian gas for Azerbaijani: the state oil and gas company of Azerbaijan SOCAR takes over supplies to Gazprom's buyers, and Gazprom provides gas for some of SOCAR's buyers. European companies from six countries – Austria, the Czech Republic, Hungary, Italy, Slovakia and Ukraine – are ready to discuss this plan, the ICIS agency wrote, citing a document signed by company representatives. Such an exchange can be either real, that is, with a change in physical gas flows, or virtual, reflected only on paper. Both options involve actions that are almost impossible to implement in practice: in the first case, Gazprom will have to give SOCAR access to its gas transportation system, in the second, we will talk about changing the existing long-term export contracts of both Gazprom and the Azerbaijani companies. Currently, Azerbaijan supplies gas to Europe through the Southern Gas Corridor – a network of gas pipelines passing through Turkey. In 2023, the country exported 12 billion cubic meters to Europe (a volume comparable to Gazprom’s current supplies through Ukraine) and plans to double this figure by 2027. However, right now it will not be possible to increase both production and exports – Azerbaijan is hampered by infrastructure restrictions and growing domestic demand for gas. “We need more funds for investment in fields and pipelines,” Reuters quoted Advisor to the President of Azerbaijan Hikmat Hajiyev as saying. Even before full-scale hostilities, Ukraine offered to give Gazprom access to its infrastructure for gas supplies from Central Asia, for example, Turkmenistan, and even threatened to sue if it refused. Gazprom, as the monopolist of gas export infrastructure in Russia, did not comment on these proposals then, and does not respond to them now – and it is difficult to imagine that the situation will change. Ukrainian officials have repeatedly said that negotiations with Russia on extending the gas transit contract are excluded. The Ukrainian gas transportation system (GTS) is capable of pumping about 140 billion cubic meters of gas per year to Europe, but over the past two years deliveries have been significantly lower – only about 15 billion cubic meters annually. A complete stop of export flows from Ukraine to Europe threatens Kyiv with two consequences: Since the end of March 2024, Russia began to attack the gas infrastructure in western Ukraine, including underground gas storage facilities (UGS), the capacity of which is leased by European companies. “I am doing everything possible to find a solution to keep the Ukrainian gas transportation system running, because it is a big asset and someone has to be a buyer. Otherwise, it will generate losses,” Bloomberg quoted the head of Naftogaz, Alexei Chernyshov, as saying last week. To maintain the operation of at least part of the gas transportation system after the Russian transit stops, Ukraine is considering the “Vertical Gas Corridor” project, which will connect its system with Moldova, Bulgaria, and then the Trans-Adriatic Gas Pipeline, through which supplies go, among other things, from Azerbaijan to Europe. The vertical corridor also opens access to Ukraine for liquefied natural gas (LNG), which arrives at terminals in Greece and Turkey and can then be pumped into Ukrainian underground gas storage facilities for storage by European companies. In theory, Ukraine can send this gas to Slovakia, that is, along part of the route along which Russian gas now travels, but this requires significant investment in infrastructure. Another option for continuing transit from Russia through Ukraine could be direct agreements between European companies on gas supplies with both Gazprom and the Ukrainian side. In this case, a consortium of European companies will pick up gas at the Russian-Ukrainian border and independently negotiate with Kiev about pumping it further to the west. But this means that the consortium will have to take on all the risks associated with delivering gas through the territory of a warring country, and not everyone thinks this is a good idea. The head of the Austrian OMV, Alfred Stern, said last week that the company insists on maintaining the terms of the existing contract with Gazprom – the gas supply point to the Baumgarten point on the Slovak-Austrian border. Therefore, the base scenario for most analytical companies working in the gas market remains a complete cessation of Russian gas transit through Ukraine from January 1, 2025. Energy Aspects experts note that in addition to the transit contract between Gazprom and Naftogaz, the inter-operator agreement between the Russian company and the Ukrainian GTS operator Ukrtransgaz, which defines the technical parameters of interaction between the two companies, also expires at the end of December. And if such an agreement is not renewed for a new term, there can be no talk of any continuation of supplies. The transit of Russian gas through Ukraine may decrease earlier, without “waiting” for the expiration dates of contracts. Austria's OMV warned at the end of May that gas supplies from Russia could stop due to a foreign court decision. The lawsuit against Gazprom was filed by a large European energy company, which OMV does not name, but clarifies that the court's decision in this case could lead to the fact that the Austrians will have to transfer payments for gas not to Gazprom Export, but to the company that won the case . This scenario is possible if the court decision comes into force in Austria. As a result, this will lead to Gazprom Export stopping any supplies to OMV. Three weeks later, on June 12, the German Uniper spoke about the decision of the Stockholm arbitration, according to which the company has the right to terminate the contract with Gazprom early and recover from it more than 13 billion euros in compensation for undelivered gas from mid-2022. “It is unclear whether it will be possible to recover a significant portion of this amount,” said Uniper CEO Michael Lewis, specifying that any funds received would be transferred to the German government. This is probably what the Austrian OMV hinted at in its May announcement, although several European companies, including the German RWE, are currently pursuing similar arbitration proceedings with Gazprom. The court's decision to collect payments for gas can theoretically be applied in any territory where Gazprom gas comes, and this will affect not only the flow through Ukraine, but also buyers receiving volumes, for example, through the Turkish Stream. Hungary tried to insure itself against such a situation, where the government at the end of May issued a decree prohibiting third parties from collecting payments intended for Gazprom Export. This could potentially lead to a conflict between national legislation and European legislation, but this is not the first case for Hungary. The reason for stopping supplies to Europeans may appear as early as this week – the companies will make their next monthly payments to Gazprom around June 20. If all payments go through and no attempts are made by Uniper to collect them, deliveries will continue as normal. If payment for gas, for example, from the Austrian OMV, is collected, we may see a slight decrease in transit volumes now. At the same time, Uniper is unlikely to be able to receive anything more than the monthly payment for gas – about one billion euros, Energy Aspects analysts estimated. The cessation of supplies under Gazprom’s long-term contracts does not mean a complete stop in transit – there are many trading companies operating on the European market that will be happy to use the capacity freed up from large buyers and buy Russian pipeline gas that has not become sanctioned. Read RusDelfi wherever it is convenient for you. Follow us on Facebook, Telegram, Instagram and even TikTok.

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