European gas market strained as Ukraine quits transit from Russia

The price of pipeline gas in Europe surged 5% on a weekly basis after Ukraine shut down the pipeline system carrying Russian gas to Slovakia. Now the only active route into the EU is the Balkan Stream.

Gas futures at TTF, Europe’s benchmark hub, are setting a foothold around EUR 50 per MWh. It is 5% up week over week and just off a 14-month high. Ukraine triggered the jump by not renewing a five-year deal to transit Russian fossil gas, through pipelines. The move was announced and not expected to change, but a colder winter and fear for stockpile stability contributed to demand.

Slovakia, one of the most affected countries, wants an alternative solution. Prime Minister Robert Fico even threatened to halt electricity supply to war-torn Ukraine. Another option is to cut aid to Ukrainian refugees. Supplying Ukraine has contributed to a surge in power prices in Southeastern Europe last year.

Slovakia has threatened to stop supplying Ukraine with electricity

Turning off the gas valve is costing Slovakia EUR 500 million per year, Fico estimated. Moreover, the European Union will suffer from a drop in competitiveness, he warned. The Ukrainian pipeline system accounted for some 5% of European natural gas imports last year.

The decision by Ukrainian President Volodymyr Zelenskyy will cost the EU around EUR 50 billion in gas alone in 2025 and 2026, Fico claimed. He added that expenses for the production of power from natural gas add EUR 70 billion.

Zelenskyy responded with an accusation that Russian President Vladimir Putin has ordered Fico to open “a second energy front” against Ukraine. “Fico’s shortsighted policy has already deprived the Slovak people of compensation for losing Russian gas transit. It now risks depriving the Slovaks of another USD 200 million per year, which Ukraine pays for the imported electricity,” he said.

Ukraine counts on LNG supply through Greece

Ukrainian company DTEK said it received a liquefied natural gas (LNG) shipment at the Revithoussa terminal in Greece.

Moldova is especially affected by the cutoff. The government, which has declared a state of emergency in energy supply, said it would cover most of its electricity demand in January from neighboring Romania. At the same time, the breakaway pro-Russian region of Transnistria ground its district heating system to a halt.

The EU reduced the share of Russian gas supply to 15% last year. In 2021, the level was 40%.

LNG is more expensive, affecting EU’s competitiveness

Southeastern Europe including Hungary keeps covering its needs for Russian gas through the Balkan Stream pipeline. Nevertheless, the cutoff in Ukraine is bound to prop up demand, adding upward pressure to gas and electricity prices. It exposes Europe more to LNG, which is much more expensive. Notably, Russia is still supplying LNG.

The Nord Stream, another route for Russian pipeline gas into Europe, suffered massive damage in 2022 in an apparent sabotage. It’s been offline since then. Investor Stephen Lynch from the United States said in November that he is interested in buying Nord Stream.

Analysts say Ukraine’s decision to halt the transit opens the possibility that Russia would now bomb the pipelines.

Putin said the part of the Yamal-Europe pipeline system through Belarus and Poland, which has been offline for almost three years, can be reopened.