Russian gas and oil still flowing under Ukrainian soil two years after invasion

It is a cruel paradox of realpolitik. Ukraine continues to transfer Russian gas and oil to the European Union via the Ukrainian transit gas pipeline and the Druzhba oil pipeline. While Russia bombs its cities daily and occupies a fifth of its territory, gas and crude oil from Siberia, the Caspian Sea and the Urals continue to circulate through an invaded country on its way to the EU.

At the end of the year, the contract signed in 2019 by the Russian and Ukrainian state companies—Gazprom and Naftogaz, respectively—for the transportation of gas expires. They were different times: the relationship between Moscow and kyiv was strained – it has never stopped being so since Russia's illegal annexation of Crimea in 2014 – but there were still channels of communication. Today, with the large-scale invasion unleashed in 2022, the Ukrainian Government has no intention of renewing the agreement. But it does open the door for other European operators to agree directly with Russia on the use of their infrastructure.

The anomaly could last beyond December 31, although Brussels is already sending more or less veiled signals that its first intention is to stop receiving gas through that route, even if that means adding one more point of spice to the puzzle of several States. member when it comes to gas supplies: Hungary, the Czech Republic, Slovakia, Austria and even Italy – the third euro economy – continue to depend on Russian gas and oil that arrives through Ukraine.

Unlike Russian crude oil that travels by sea, that which enters by pipeline is not affected by the sanctions with which the EU tries to reduce the Kremlin's income. In the case of gas, supply shortages – despite the miracle of liquefied natural gas (LNG), which arrives by ship from half the world – have led the EU to avoid the route of sanctions. For now.

Also for Türkiye

The paradox has meant that the Ukraine Transit is today – along with the Turkstream, which crosses Turkey and enters community soil through Bulgaria and Romania – the only gas pipeline through which Russian fuel flows to the EU after the blowing up of the iconic Nord Stream and the end of flows through the Yamal—which crosses Belarus before reaching Poland. Ukraine is, in fact, the main entry route today: just over 300 million cubic meters a week, half what it was before the war, but double what it was last year.

If the current supply rate is maintained, the Russian gas passing through Ukraine would add up to just over 16 billion cubic meters (bcm) throughout 2024. An important figure – and, above all, loaded with symbolism – but small on the total demand that, according to the International Energy Agency (IEA), will be around 500 bcm this year. The largest source of supply will be, once again, LNG: the tool that has allowed the Twenty-Seven to overcome the most complex match point in their entire energy history.

A million-dollar agreement that Russia does not comply with

In exchange for being able to use Ukraine Transit, Gazprom stipulates a payment of 7 billion dollars (6.46 billion euros) to Naftogaz over five years. In the case of oil, the transfer of Russian crude oil through the Druzhba pipeline involves a payment of 150 million dollars annually (138 million euros) by the Russian company Transneft. A contract that, unlike the previous one, is in force until 2030.

Roman Nitsovich, director of studies at the Ukrainian consulting firm Dixi, recalls that the Russian gas company Gazprom is not fully complying with the agreed payments, arguing that gas circulation is less. In September 2022, half a year after the start of the invasion, Naftogaz opened an arbitration process before the International Chamber of Commerce to claim the pending money.

The governments of Hungary and Slovakia – dependent on Russian energy and where the Druzhba crude oil arrives – are also the closest to Vladimir Putin. Disrupting shipments of Russian oil would be possible, although at the risk of paying a higher price for the product and provoking a diplomatic conflict. This happened in August 2022, when Ukrtansnafta, which manages the Druzhba as it passes through Ukraine, turned off the tap due to differences with payments from the Russian side. The situation was resolved within a few days, but Hungary raised its tone to the point that its Prime Minister, Viktor Orbán, urgently convened the Hungarian Defense Council.

“Europe could cover its demand without Russian gas, whether that which arrives through Ukraine, the Turkstream or that which arrives by sea,” says Georg Zachmann, from the Bruegel think tank. “For Slovakia, Austria, Hungary and Ukraine itself, however, the end of the flow through Ukraine Transit would force a readjustment and ensure that liquefied gas [GNL, el que viaja por barco] processed in distant maritime terminals reaches them. Technically it is possible, but it would probably lead to higher gas costs in those countries and force greater demand destruction.”

Henning Gloystein, from the risk consultancy Eurasia, agrees with this, and believes that if the EU has not yet given up on Russian gas that arrives by tube and by ship, it is because it wants to close the current winter season earlier. “Brussels is playing with time,” he says by email. Like many other analysts, Gloystein was convinced that the movement of gas through Ukraine would end in the first weeks of the war. “Obviously, we were wrong. In retrospect, Russia wants both to maintain its income and avoid harming Orbán, who is its only support in the EU. And Ukraine seems interested in continuing to receive Russian payments for transit, which it has surprisingly continued to carry out even in the midst of the invasion.”

Ukrainian commitment to the EU

Ukraine does not want to renege on its commitments to partners in the EU. This was highlighted last October by the president of Naftogaz, Oleksii Chernisov, when he confirmed that his company would not renew the agreement with Gazprom for the supply of gas to Europe in 2024. Chernisov then recognized the moral dilemma of the situation: “Exports of natural gas and oil are one of Russia's main weapons in its war against Ukraine.”

Ukraine is also legally obliged to maintain these contracts due to various legal ties. The first and most important, the Association Agreement that the Rada (the Ukrainian Parliament) approved in 2017. Also for the European legislation on gas consumption, to which Ukraine is subscribed, as Nitsovich explains.

In May 2023, it came to light that Ukrainian President Volodymyr Zelensky had proposed sabotage of the Druzhba in a meeting with his military leadership, according to sources from the US intelligence services. Washington Post. The Nordstream gas pipeline, which connects Russia with Germany, was the main access route for Russian gas to Europe until an attack ended its activity in September 2022. German, Danish and Swedish justice – in addition to the US intelligence services – They suggest that a team of Ukrainian special forces was responsible for t
he attack.

The president of Naftogaz also conceded that stopping the EU's dependence on Russian gas “will take time”: “We all recognize the capacity and supply limitations, especially of LNG.” At the end of January, the Ukrainian Council of Ministers reported that, although the agreement will not be renewed, the door to negotiate with EU member states “the use of gas transportation infrastructure” was left open. Nitsovich details that the protocols of the Ukrainian gas pipeline operator, GTSOU, allow a European company to contract the network and for this company to negotiate with the Russian side.

100% national production

For the Twenty-Seven, the importance of Ukraine in the energy field—and, particularly, in the gas field—goes beyond Ukraine Transit. Its vast underground warehouses turn this country into a kind of Swiss army knife in times of anxiety: although now – for obvious reasons: it no longer receives Russian gas for internal consumption and storage – they are at a fifth of their capacity, it can house three underground times more fuel than Spain or Poland, for example. A powerful weapon against future Kremlin blackmail.

All of this comes at a historic moment for Ukraine, in the words of its Prime Minister, Denis Shmihal, because for the first time, this January, the country's gas consumption has become entirely domestically produced. Naftogaz assures that Ukraine, with the third largest gas reserves in Europe, has the objective of becoming an exporter to help break European dependence on the Kremlin.

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