Crossroads of energy security: how will the impending Ukraine-Russia gas contract expiry affect CEE

At the end of December 2024, the 2019 Ukraine-Russia gas agreement will come to an end. Following the Russian invasion, in 2023 the transit volume fell to less than 13 billion cubic metres (bcm), from the 65 bcm in the first year and the 40 bcm in the following years. Now, there is a lot of speculation about what will happen after the contract expires, with some fearing a price crisis and others more optimistically expecting an extension of the contract, in the interest of all parties.

A supply crisis or a price crisis?

“If Russian gas stops transiting via Ukraine there will be missing gas in the region which will not have a devastating impact on the security of supply but an impact on the prices,” said David Viduna, Head of LNG and Origination at Czech company ČEZ. “Not only for countries that rely on Russian gas, like Slovakia and Austria, but also other countries that are interconnected, like also Czechia which shall perceive on its price the need for gas in Slovakia.”

Indeed, most of the Russian gas has been delivered to the Central and Eastern European region, namely Austria, Hungary and Slovakia, which in turn, delivered it to other consumers like Germany, Czechia and Poland.

“The question is whether the contract will end and why it should or should not,” continued Mr Viduna, while speaking at a panel discussion at Flame Conference, moderated by CEENERGYNEWS. “And it won’t be a discussion only between Ukraine and Russia but it will also involve those countries that are buying Russian gas.”

In their latest piece for the Atlantic Council, Sergiy Makogon, the former CEO of the Gas TSO of Ukraine and Daniel D. Stein, a former senior advisor with the Bureau of Energy Resources at the US Department of State, argued that Slovakia and Hungary will be the countries to be directly affected the most and thus they have expressed their interest in the continuation of Ukraine transit. Other consumers like Italy have already diversified their sources of supply and others like Austria are still sending mixed signals.

“There won’t be a security of supply issue but an impact on the prices,” also agreed Borbála Takácsné Toth, Senior Research Associate at the Regional Centre for Energy Policy Research (REKK). “There are currently 13 bcm of gas transiting through Ukraine and this will certainly be missed especially as the routes from the South are already congested and there are still some missing infrastructure that could help replace it. This will lead to a price difference between European countries and regions.”

However, according to Mr Makogon and Mr Stein, the argument that the end of transit would lead to much higher gas prices in Europe is actually questionable. “The EU gas market has currently stabilised and returned to its pre-war price range and Ukrainian transit accounts for only 4 per cent of total European demand,” they said.

Broadening the security perspective

“I am not 100 per cent sure that the transit will stop,” continued Ms Toth, who sat in the same panel discussion as Mr Viduna. “As an external observer, we can see that there has been a routine with previous negotiations and the last time an agreement was reached on the last day.”

So, what are the current opinions? On the one hand, we have the EU, whose officials said that there is no need to extend the current transit agreement, although, for a moment, there have been talks about booking capacity at the Sudzha border point, which has a daily capacity of 244 million cubic metres (mcm). However, in this case, the capacity can only be offered if an interconnection agreement is signed by the gas grid operators. On the other hand, Ukraine’s Energy Minister has ruled out the possibility of an extension of the contract while the Prime Minister said to be in favour if the right circumstances are verified.

“Another important aspect to not underestimate is that if gas is flowing via Ukraine, then Russia has something at stake and it is also good for Ukraine to have something that can’t be destroyed due to the interest of the gas transit,” pointed out Mr Viduna. “But, of course, it is a difficult decision for the Ukrainian government as on the other hand, it will mean an additional source of money for Russia to continue the war.”

“We have to broaden our security perspective, not only limiting it to the gas industry,” added Ms Toth. “We have seen Russia targeting civil infrastructure in Ukraine. If there is no Russian gas transiting through the country anymore, what will stop Russia from targeting also the pipeline infrastructure? These considerations must also be taken into account.”

Strengthening the current infrastructure: the best solution in the short-term

In Mr Makogon’s and Mr Stein’s view, it is a question of unity among EU Member States which has been disrupted by “the continued reliance on Russian pipeline gas. […] Ending transit via Ukraine after 2024 would enhance the region’s energy security and diminish Russia’s export income with minimal disruption in gas supplies.”

For Mr Viduna, it is not just about replacing Russian gas with different sources (whether it is US LNG or Azeri gas). But, it is an issue of strengthening the current infrastructure. And, according to him, there are three things we can do now.

“First, to utilise better the existing infrastructure as, especially in SEE, there are some interconnectors where the capacity is not utilised at maximum,” he underlined. “Secondly, there are still some emergency regulations in place which reduce the interest of players like traders to enter the market and to facilitate the flow of gas within the region. Finally, strengthening the infrastructure doesn’t necessarily mean building additional pipelines but also compressor stations, like for example between Austria and Hungary where the gas flow could become bidirectional, bringing the gas from the region and countries like Romania and Hungary to other places in Central Europe.”

Then, of course, many other options are on the table, including biogas, biomethane, hydrogen, geothermal energy and so on. Nevertheless, as Ms Toth and Mr Viduna highlighted in the panel discussion, they are part of a more long-term solution while now we should discuss what the gas sector should be prepared for in the short term when strengthening the current infrastructure should emerge as the top priority.