Why is Russian gas still flowing through Ukraine? - Grid

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Almost from the moment Russia invaded last year, Ukraine has been insistently urging European countries to end their reliance on Russian gas, arguing that these purchases are effectively funding Russia’s war effort. “Please do not sponsor the weapons of war of this country, of Russia,” Ukrainian President Volodymyr Zelenskyy told the European Parliament last March. “No euros for the occupiers. Close all of your ports to them. Don’t export them your goods. Deny energy resources. Push for Russia to leave Ukraine.”

Europe has responded, though not as forcefully as some would like, cutting its use of Russian oil and gas, investing in other energy sources and vowing to completely phase out Russian imports by 2027. U.S. and European intelligence agencies reportedly now suspect that a pro-Ukrainian group was behind the explosion that damaged the Nord Stream gas pipelines linking Russia and Germany. If true, it would be the most profound indication of the lengths at least some Ukrainians will go to halt these exports. (The government in Kyiv denied any involvement.)

Less discussed is the fact that the vast majority of these energy resources now run through Ukraine itself. Ukraine’s own pipeline system now carries nearly all of Central and Western Europe’s remaining exports of Russian gas. This means that every day, 44 million cubic meters of gas, worth well over $100 million, pass through pipelines owned and maintained by the same country they are shelling and bombing on a daily basis.

“At the start of the war in Ukraine, a lot of commentators thought that Russian gas flows through Ukraine would be the first to go,” Natasha Fielding, head of European gas pricing at Argus Media, an energy analytics firm, told Grid. “And actually, they’re almost the last ones standing.”

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It’s a strange and surprising story of what happens when war breaks out in a world of evermore interdependent economies.

A vital link

Ukraine’s gas infrastructure is a crisscrossing network of about 45,000 miles of pipelines. The system dates to Soviet times and at one point supplied 80 percent of Europe’s natural gas. Long before this war, Europe had concern about the reliability of this supply in an era of Russia-Ukraine tensions.

During the winter of 2009, a pricing dispute between Russia and Ukraine’s pro-European government led to supplies being cut for nearly two weeks, resulting in almost a dozen deaths from the cold in Europe. Over time, Europe began to diversify its supplies of Russian gas away from Ukraine, in part via the construction of new pipelines like Nord Stream (under the Baltic Sea) and Turk Stream (via the Black Sea and Turkey.) Still, about 40 percent of Russian gas exports to Europe continued to flow through Ukraine.

Ukraine stopped buying Russian gas for its own energy needs in 2015, but the country has continued to collect revenue for shipping that gas west. In 2019, soon after Zelenskyy took office, Ukraine and Russia reached an agreement under which the Russian state-owned company Gazprom agreed to ship 65 billion cubic meters of gas through Ukraine in 2020 and then 40 billion cubic meters per year from 2021 to 2024. The deal was supposed to net Ukraine around $7 billion in transfer fees over five years.

As far as Ukraine is concerned, that contract is still in effect.

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“We continue implementing our obligations in terms of transit, which are also our obligations to Europe,” Ukrainian Deputy Prime Minister Olha Stefanishyna told Grid. “Ensuring the transit, according to the international agreements that we have, shows our resilience and credibility. Despite the full-scale war, we still delivered on our obligations.”

Given the extraordinary circumstances, it might seem logical that Ukraine would at least use its leverage over these gas supplies to pressure European countries to cut their imports. But Andrian Prokip, a Kyiv-based energy analyst for the Wilson Center, told Grid, “There’s a fear that this would be seen as blackmailing.”

Ukraine not only relies on European support for its military resistance against Russia, it has important aspirations of one day becoming an EU member state. That means Zelenskyy can’t exactly afford to just turn off the tap.

The energy war within the war

None of this is to say that the system has continued running smoothly.

In May, Ukraine halted gas flows through the pipeline’s Sokhranivka transit point on the Russian-Ukraine border, which previously handled about a third of the Russian gas flowing through the system. Part of the Sokhranivka route passed through territory occupied by Russian troops and the Ukrainian company that operates the pipeline system declared “force majeure,” accusing occupying forces of diverting gas to the Russian-backed separatist regions in the Donbas. The Ukrainians say they won’t reopen the closed route until Ukraine has full control of its pipeline system.

In September, Ukraine’s state-owned energy firm Naftogaz initiated an arbitration proceeding against Gazprom, accusing the Russian company of failure to pay its transit fees. The Russian government meanwhile has threatened to sanction Naftogaz over the closure of the pipeline, which could result in a complete halt of gas supplies through Ukraine.

For now, though, the gas keeps flowing. Exports slumped in January, as a mild winter and European efforts to build up energy stockpiles resulted in customers taking less gas under existing contracts, but volume started to tick up again in February.

Meanwhile, as Russia has stepped up its attacks on Ukraine’s energy infrastructure, another bizarre coda was added to the pipeline story: Ukrainian repair crews were going out in combat zones to repair and maintain the pipelines bringing gas to Europe and rubles to Moscow.

Ukraine’s energy future

Ironically, the importance of Ukraine for Russian gas exports has only grown since the war began.

Even before the undersea explosion in September, Russia had cut off exports to Germany via the Nord Steam pipeline, and there appear to be no plans to repair or restart what was once considered a marquee infrastructure project for both countries. There’s also the Yamal-Europe pipeline, which normally brings gas from the Russian Arctic all the way to Germany via Belarus and Poland. But the long-term gas transit contract between Russia and Poland expired back in 2020, and for the last few months, Gazprom has not booked any short-term contracts to supply gas via this route. Instead, the pipeline has been running in reverse, bringing gas from Germany to Poland. TurkStream and Blue Stream are smaller pipelines via the Black Sea that supply Turkey and countries in southeastern Europe.

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For the countries of Central and Western Europe that are still buying Russian gas, this leaves the Ukraine route as the only game in town. Those countries include Italy, Austria and Hungary. Most analysts expect these imports to continue for at least a while longer, depending on price fluctuations and weather conditions, as Europe works to cut its gas reliance on Russia entirely.

While Ukraine might welcome a permanent cutoff as a political matter, the prospect poses economic challenges as well. That’s another irony of the arrangement; Ukraine would rather not have Europe doing any business with Russia — but shutting down this particular link would upend one of Ukraine’s key industries at a time of acute economic distress. Prokip, the Kyiv-based energy analyst, noted that Ukraine may play a future role in energy exports moving between Northern Europe, Southern Europe and Turkey, but without Russian supplies, there probably just isn’t enough gas to provide the volumes that Ukraine’s pipeline system was designed for.

Ukraine has natural gas reserves of its own, and officials have expressed interest in producing hydrogen fuel or biogas from agriculture. “Under a good energy and economic policy, it’s possible Ukraine may become a net exporter of natural gas,” Prokip said. But making his future possible would require a substantial overhaul of the country’s existing energy infrastructure.

If that happens, it might finally sever one of the most lasting and strangest links between Ukraine and Russia.

Thanks to Lillian Barkley for copy editing this article.

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Why is Russian gas still flowing through Ukraine? - Grid
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