Gas Arithmetic: Can the European Market Do Without Russian Supplies

Econs published a column by Marcel Salikhov, president of the Institute for Energy and Finance, "Gas Arithmetic: Can the European Market Do Without Russian Supplies".

For all the drastic decline in volumes, Russia remains a supplier of gas to the EU. Our calculations show that Russia supplied 44 billion cubic meters of gas in 2023, of which LNG accounted for 40% and pipeline gas made up the remainder. The shipping route is either transit through Ukraine (to Slovakia, Austria, Slovenia and Italy) or the Turkish Stream gas pipeline (to Romania and Greece). Hungary is using both options.

Although the overall European dependency on gas supplies from Russia has declined, Slovakia, Austria, Hungary and Italy are countries most interested in continued Russian exports. Alternative supply options for them are not impossible but would come at immense costs.

The issue of Ukrainian transit

Economic logic suggests that the parties involved (several EU countries, Russia, and Ukraine) have an interest in the continuation of supply beyond 2024, since Slovakia, Austria and Italy are recipients of the Russian gas travelling via this route and have no readily available alternatives, Russia is unable to redirect these volumes to other markets, and Ukraine receives transit payments.

The parties could potentially agree on several options to continue the transit. The easiest option would be to commit to short-term reservations of Gazprom’s volumes for Ukraine’s transportation system. A more complex option involves changing the contracts in place and moving delivery points to the eastern border of Ukraine. In this case, transit and support costs would fall on European importers. Gazprom, which was previously against such proposals, may well find this option acceptable given the circumstances. From the economic point of view, both Russia and the EU stand to benefit from continued transit, but further developments will be driven by politics.