By Olga Samofalova
The final point in the rupture of gas relations between Russia and the EU that have enduredsince the 1960s will be symbolically take place in a year and a half, when the transit contract ends. Ukraine does not intend to negotiate with Russia to extend the gas transit contract. Until recently, such a scenario would have painted a frightening picture. However, after the shock phase of the energy crisis in 2022, the EU really has nothing to fear. Moreover, there is a way to keep deliveries even without a contract.
Ukraine does not intend to negotiate with Russia to extend the contract for gas transit to Europe, which ends at the end of 2024. This was stated by Minister of Energy of Ukraine German Galushchenko. According to him, the coming year will show what "the ability of Europe to function without any Russian gas at all."
This statement, of course, did not come as a surprise. The end of this contract will mark an almost complete gas break between Europe and Russia after many years of cooperation. The first Soviet gas through the 'friendship' gas pipeline began to flow in 1967 to Czechoslovakia. A year later, in 1968, a contract was signed for the supply of gas to Austria. Deliveries to Germany began in 1973. And then every year new sales markets for Russian gas were opened in Europe.
The turning point was 2022, which was to be the beginning of the end of this incredibly long friendship of neighbors.
Surprisingly, the consequences for both Ukraine and the EU from the termination of the contract in 2024 now do not seem to be as catastrophic as they were a year and a half ago. But only because the Europeans have already drunk the whole shock scenario last year.
“Ukraine has been doing without physical supplies of Russian gas for its own needs for a long time. The only loss for Ukraine is the loss of money from the transit of Russian gas,” says Aleksey Gromov, director for energy at the Institute of Energy and Finance.
Ukraine produces 18-19 billion cubic meters on its territory, and if earlier, with a consumption of 60 billion cubic meters, it was sorely lacking, now it is quite enough. Back in 2020, consumption fell to less than 25 billion cubic meters, and in 2022 it sank by at least 50%.
Ukraine's monetary losses due to the end of transit will not be as high as they could be before. Although, of course, now every penny should be on the account. Because the transit itself has already decreased.
“Compared to 2021, when up to 40 billion cubic meters of gas per year was guaranteed to be pumped through Ukraine, now the situation is different. Nowadays at most its 15-18 billion cubic meters per year through the northern transit line. Therefore, Ukraine's revenues from Russian gas transit have already been significantly reduced,”
Gromov says. Pumping was reduced due to Ukraine's refusal last year to receive gas at one of the two gas compressor stations.
At the same time, Ukraine expects to compensate for the shortfall in revenues for its budget due to transit through the use of Ukrainian gas storage facilities for the needs of the EU, which is already happening this year, the analyst adds. Ukrainian gas storage facilities are conveniently located along the western border, and in Europe itself, storage facilities are already nearly 90% full unusually early. Therefore, the Europeans have the opportunity to pump more gas than they want to use. First, prices are likely to rise in winter. Secondly, after the warm winter of 2022-2023, the upcoming winter may turn out to be cold. Therefore, it is better to stock up for future use.
As for Europe, it probably already passed the shock phase of the energy crisis in 2022. Therefore, all the turbulence that will await it in the coming years is unlikely to surpass the past peak.
“Russia used to supply Europe with 140 billion cubic meters of pipeline gas alone, but last year it supplied only 76 billion cubic meters, that is, half of what iy once did. Plus Europe coped, albeit with heavy losses. This year, Russia will supply no more than 25 billion cubic meters of gas, taking into account the loading of the Turkish Stream and Ukrainian transit. And even in such conditions, Europe will cope, no one will freeze in winter, ”says the director for the energy direction of the Institute of Energy and Finance.
The price of such "success" of the European Union, of course, is high. How will the EU cope even with such a low amount of Russian gas?
Firstly, because the gas storages are filled with gas to the eyeballs. Remained pretty good stocks after a warm winter. Plus, they pumped in new gas, because the prices were comfortable.
Secondly, the structure of the European economy changed dramatically and rather quickly. “Over the past year and a half, there has been a de-industrialization of Europe. Industrial production in Europe fell by 20% last year and by 10% in the first half of the relative period last year. Although, it would seem, gas prices this year are much more comfortable (not $1,000-3,000 per thousand cubic meters, but already $400-500 - approx. VIEW). This means that the European industry has reduced its output by almost a third. A number of industries in Europe were simply closed, mainly energy-intensive chemical plants for the production of mineral fertilizers and so on. A number of productions were moved from Europe to the USA, and not to China, and they are not going to return, because there is a better investment climate and conditions for further work.
Thirdly, the authorities and the population of the EU are taking austerity measures: some Europeans have switched to heating their homes with wood, and European authorities are also replacing gas generation at thermal power plants with coal, especially Germany and Poland.
“Thus, if Europe last year lived without 70 billion cubic meters of Russian gas, then it will definitely be able to live in subsequent years without 15-18 billion cubic meters of Russian gas, which are now going through Ukraine,”
The fourth important factor that will help the EU is the slowdown in economic growth in China, which leads to a weakening of demand, including for LNG. This means that the PRC will not buy up all free LNG on the world market and actively fight for it with the European Union, and Europe will have enough more.
If China has entered a long stage of slowing down its economy, then Europe can easily make it without shock winters until 2026-2027, the expert believes. In these years, new additional LNG will pour into the world market from the United States and Qatar, where new plants will start operating. That is why earlier there were expectations that without Russian gas, Europe would face an energy crisis until 2027. But now the situation looks different.
“No analyst then could have predicted that Europe would be able to change the structure of its economy so quickly and reduce gas consumption so much. But the shock therapy that occurred in 2022 showed that this is possible. All predictive models showed that Europe would be able to reduce gas demand as much as possible by only 9-10 percent, and we saw a reduction in demand by 17%,” Gromov concludes.
“Thus, the catastrophic scenario, when people freeze in their homes, there will be power outages, will not happen. But, of course, you can see how the European economy has suffered greatly,” says Gromov.
The price is high, of course. There are the one-third drop in industrial productiony, billions of euros spent to keep household gas prices under control, record inflation that the ECB is fighting with rate hikes, a slowdown in the European economy and the looming threat of a recession across the eurozone next year. In Germany, the economy has already slipped into a negative plane. Germany alone spent 18 billion euros at the end of July on measures to limit prices for electricity and gas. In December, 22.7 billion euros were allocated for consumer benefits for energy supply. The entire package of support measures is estimated at 200 billion euros.
Interestingly, in theory, the transit of Russian gas through Ukraine may continue after the end of the transit agreement. And for this, in fact, it is not at all necessary to sign a new contract. According to European rules, gas transmission capacities can be booked at auctions. In this way, for example, the transit of Russian gas through the Polish section of the Yamal-Europe gas pipeline was carried out even after the expiration of the transit contract in 2020. Ukraine switched to the European system of contracting transit capacities. Accordingly, the country is obliged to conduct regular auctions for the use of the capacities of its gas system. Gazprom, therefore, can buy daily lots for the daily pumping of gas, since sanctions have not yet been imposed against it,”
The downside is that Ukraine can set the cost of transit at its discretion, and it may turn out to be inadequate. In addition, the demand for transit capacities will no longer be determined by the contract, but by the buyers themselves - the Europeans. And this demand in winter can be very high, and in summer, for example, zero.
“Such a system is unprofitable for Ukraine itself, since the country does not receive an exact guarantee of the purchase of transit for a long time. In fact, Zelensky's office faces the threat that Gazprom will not purchase capacity at all in the summer. In this case, the infrastructure will be idle,” the expert says. The main beneficiary of the termination of the transit of Russian gas through Ukraine will, of course, be the United States. They have got European plants, a weaker, and therefore more accommodating, eurozone to push through their own exports, and a huge market for their LNG, which is scheduled to grow in three years.
this article originally appeared in Russian at vz.ru