/ world today news/ The last point in the rupture of gas relations between Russia and the EU since the 1960s will symbolically be set in a year and a half, when the transit agreement expires. Ukraine does not intend to negotiate with Russia to extend gas transit. Until recently, such a scenario painted a frightening picture. After the shock phase of the energy crisis in 2022, however, the EU really has nothing to fear. It also has a way to keep supplies even without a contract.
Ukraine does not intend to negotiate with Russia to extend the gas transit contract for Europe, which expires at the end of 2024, Ukraine’s Energy Minister Herman Galushchenko said. According to him, next year will show what “Europe’s ability to function at all without Russian gas” is.
This statement was, of course, no surprise. The end of this contract will mark an almost complete gas cut between Europe and Russia after many years of cooperation. The first Soviet gas through the “Druzhba” 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. After that, new markets for the sale of Russian gas were opened in Europe every year.
The turning point is 2022, which will be the beginning of the end of this incredibly long friendship between neighbors.
Surprisingly, the consequences for both Ukraine and the EU of terminating the treaty in 2024 do not now look as catastrophic as they did a year and a half ago. But only because the Europeans already endured 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 Alexey Gromov, director of 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, this was not enough, now it is quite enough. Already in 2020, consumption fell to below 25 billion cubic meters, and in 2022 it sank by at least another 50%.
Ukraine’s monetary losses due to the end of transit will not be as high as they could have been before. Although, of course, now every penny must be counted. Because the transit itself has already decreased.
“Compared to 2021, when it was guaranteed to pump up to 40 billion cubic meters of gas per year through Ukraine, now the situation is different. We pump at most 15-18 billion cubic meters per year. Therefore, Ukraine’s income from the transit of Russian gas has already been significantly reduced,” says Gromov. 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 lack of revenue for its budget due to transit by using Ukrainian gas storages for EU needs, which is already happening this year, the expert adds. Ukrainian gas storage facilities are conveniently located along the western border, and in Europe itself, storage facilities are already almost 90% full at an unusually early time. Europeans therefore have the opportunity to pump more gas than they want to use. First, prices are likely to go up in the winter. Second, after the warm winter of 2022-2023, the upcoming one may turn out to be cold. That is why it is better to store them for future use.
As for Europe, it has probably already passed the shock phase of the energy crisis in 2022. Therefore, any turbulence that awaits it in the coming years is unlikely to surpass the previous peak.
“Russia supplied Europe with only 140 billion cubic meters of pipeline gas, but last year it delivered only 76 billion cubic meters, that is, twice less. And Europe coped, albeit with heavy losses. This year, Russia will deliver no more than 25 billion cubic meters of gas, taking into account the load of “Turkish Stream” and Ukrainian transit. And even under such conditions, Europe will manage, no one will freeze in winter,” says the director of the energy division of the Institute of Energy and Finance.
The price of such “success” of the European Union is, of course, high. Why will the EU cope with even so little Russian gas?
First, because the gas reservoirs are filled to the brim with gas. There are quite a few stocks left after the warm winter. In addition, they poured new gas because the prices were convenient.
Second, the structure of the European economy changed dramatically and quite rapidly. “Over the past year and a half, Europe has been deindustrializing. Industrial production in Europe fell by 20% last year and by 10% in the first half of the corresponding period last year. Although supposedly the gas prices this year are much more comfortable (not 1000-3000 dollars per thousand cubic meters, but already 400-500 dollars). This means that European industry has reduced its production 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 others. A number of productions were moved from Europe to the US, not to China, and will not return because there is a better investment climate and conditions for further work. European entrepreneurs fear that if they resume their work in the EU, the high volatility of gas prices will return again,” notes Gromov.
Third, the EU authorities and population are taking measures to save money: some Europeans have switched to heating their homes with wood, and European authorities are also replacing coal-fired power generation with gas, especially in Germany and Poland.
“Thus, if last year Europe lived without 70 billion cubic meters of Russian gas, it will certainly be able to live in the coming years without 15-18 billion cubic meters of Russian gas, which now pass through Ukraine,” sums up Gromov.
The fourth important factor that will help the EU is the slowdown in economic growth in China, which leads to weaker demand, including for LNG. This means that the PRC will not buy all the free LNG on the world market and will not actively fight for it with the European Union, and Europe will have enough.
If China has entered a long stage of slowing down its economy, then Europe can easily make it through without shock winters until 2026-2027, the expert believes. During 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 by 2027. But now the situation looks different.
“Back then, no expert 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 happened in 2022 showed that it was possible. All forecast models showed that Europe will be able to reduce the maximum demand for gas by only 9-10%, and we saw a decrease in demand by 17%”, concludes Gromov.
“So the catastrophic scenario where people are freezing in their homes, there will be power outages, will not happen. But, of course, you can see how the European economy suffered a lot,” says Gromov.
The price is high of course. They are a one-third drop in industry, billions of euros spent to keep household gas prices under control, record inflation that the ECB is tackling with interest rate hikes, a slowdown in the European economy and the looming threat of a eurozone recession next year year. In Germany, the economy has already slipped into the negative plane. Germany alone spent 18 billion euros at the end of July on measures to limit electricity and gas prices. In December, 22.7 billion euros were allocated for consumer aid for energy supplies. The entire package of support measures is estimated at 200 billion euros.
Interestingly, in theory, the transit of Russian gas through Ukraine could continue even after the end of the transit agreement. And for this, in fact, it is not necessary to sign a new contract at all. According to European rules, gas transmission capacities can be reserved in auctions. Thus, for example, the transit of Russian gas through the Polish section of the Yamal-Europe gas pipeline was carried out even after the transit contract expired in 2020. Ukraine switched to the European system for negotiating transit capacity. Accordingly, the country is obliged to conduct regular tenders for the use of the capacities of its gas system. Thus, Gazprom can buy daily lots for daily pumping of gas, as sanctions have not yet been imposed on it,” emphasizes Igor Yushkov, an expert from the Financial University of the Government of the Russian Federation and the National Energy Security Fund.
The disadvantage is that Ukraine can determine the price of transit at its discretion, and it may turn out to be insufficient. In addition, the demand for transit capacity 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 disadvantageous for Ukraine itself, as the country does not receive an exact guarantee of purchasing transit for a long time. In fact, Zelensky’s cabinet is facing the threat that Gazprom will not buy capacity at all in the summer. In this case, the infrastructure will not work,” says the expert. The main beneficiary of the termination of the transit of Russian gas through Ukraine will, of course, be the USA. They are attracting European factories to their territory, they will get a weaker and therefore more accommodating eurozone to push their own exports, and a huge market for their LNG, which is set to grow in three years.
Translation: V. Sergeev
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