Central Europe still remains tied to Russia's gas pipeline network

Russia’s sabre rattling over Ukraine and Nato’s eastern flank is once again raising questions over the wisdom of Europe depending on the Kremlin for 35% of its gas supply.

This dependence is already being reflected via gas prices. For some months Moscow has limited gas exports to Europe to only its contractual obligations, with minimal flows through the Yamal-Europe pipeline via Belarus this year. Gas export monopoly Gazprom’s daily exports westwards in January were the lowest in the first month of the year since 2015.

Russia has also been slow to refill European storage capacities, which has helped push up gas prices sharply at a time when Europe is looking to scale down its use of coal.

Gas storage levels in Europe have fallen below 40% of capacity, the lowest level since 2011. An interruption in gas flows now could make it impossible to refill storage capacities before next winter, given the bottlenecks in LNG export terminals.

Gas prices have soared and could go higher still. “Any [supply] curtailment is going to send the market into turmoil,” said Mike Fulwood of the Oxford Institute for Energy Studies on the institute’s podcast earlier this month.

Should the crisis escalate and Russia invade Ukraine again, Western countries would impose tougher sanctions, which could include blocking the new Nord Stream 2 pipeline under the Baltic Sea, which is ready to start operations.

Germany has so far been reluctant to voice this threat and it may continue to drag its feet unless Moscow launches a full-scale invasion. More deniable dirty tricks by the Kremlin could lead to a split in the Western alliance, allowing Nordstream 2 to gain certification.

“It is possible that while refusing to join the US sanctions in respect of Nord Stream 2, Germany – under pressure from the EU as well as from the Greens coalition partner within the government – may try to keep the certification process suspended for some time, thus preventing the pipeline from becoming operational,” the Oxford Institute for Energy Studies said in a recent report.

“However, it would be impossible for BNetzA [the German energy regulator] to do so for more than a few months without it becoming obvious that certification is suspended on grounds other than legal and regulatory, thus making itself liable to legal action.”

Sanctions could also lead Moscow to retaliate by cutting off gas supplies.  Russia has form in using gas as a weapon and it shut off supplies through the Brotherhood pipeline in 2009 because of a dispute with Ukraine over gas contracts.

Belarusian dictator Alexander Lukashenko has already threatened to shut the Yamal-Europe pipeline to Poland in retaliation for Western sanctions on his country, though whether he is in any position to make that threat is a moot point.

Russia may also decide not to export any gas at least during any conflict, given that it could be siphoned off by Ukraine.

Analysts question, however, whether it would be in Russia’s interest to damage its reputation as a secure supplier, given that it is trying to encourage buyers to lock themselves into long-term contracts with state-owned Gazprom, as Hungary has done recently. Moscow would also incur serious financial costs from turning off the tap, with the tax on gas production and export representing 6.3% of budget revenues, while for Gazprom, exports to non former Soviet Union countries represent 70% of revenues, according to the Oxford Institute of Energy Studies.

Fulwood believes that neither the West nor Russia are likely to impose gas sanctions, though he warns that any conflict in Ukraine could lead to damage to the Brotherhood pipeline to Slovakia, which runs just outside the rebel-held areas. “The real risk is damage to infrastructure,” said Fulwood on the Oxford Institute podcast earlier this month. “That becomes a real potential risk.”

Ukraine used to be one of the countries most dependent on Russian gas but in 2018 it decided to stop importing it for domestic consumption. Kyiv used to import 30 bcm in the early 2010s but this is now virtually zero, while imports from the West have soared from 2 bcm to 13 bcm, mainly via Slovakia. Ukrainian gas demand has fallen sharply anyway since Russian-backed separatists took over the heavily industrial Donetsk and Luhansk regions in 2014.

Ukraine’s importance as a gas transit country has also shrunk so that it now transports only around a quarter of Europe’s gas imported via pipelines. In 2014 Europe got 80 bcm of its Russian gas via Ukraine. By last year this fell to 37.5 bcm of the total of 142 bcm imported via pipelines, and the trend has continued this year: January 2022’s figure was down 57% on the previous year.

Ukraine’s transit contract with Gazprom may lapse altogether when it runs out in 2024, once Nord Stream 2 under the Baltic Sea is allowed to operate. By switching the gas route, Gazprom can avoid Ukrainian transit fees and the Kremlin can show Kyiv the price for its disobedience.

Central and Eastern Europe also contains some of the European countries with the highest dependence on Russia gas, because of their geographical position and their historical ties to the former Soviet Union and its pipeline network. In the previous Russian gas crisis of 2009, some of the biggest effects were felt in the CEE region.

Since then Europe and the CEE countries have made big efforts to reduce their dependence on Russian gas, by accessing other producers via new pipelines and LNG terminals. Most countries now avoid long-term contracts with Gazprom and instead private or semi-private operators make deals at spot prices with traders. Some of these operators are in fact re-selling Russian gas to Ukraine in the current crisis, by reversing the flow of the Brotherhood pipeline.

According to Statista, in 2020 the highest gas dependence on Russia in Central Europe was in the Baltic states, with Latvia on 93% and Estonia on 79%, though Lithuania had cut its dependence to 41% through the opening of the Klapeida LNG terminal. Among the larger states, Slovakia is the most dependent at 70%, with Czechia on 66%. Poland has cut its dependence to 40%, partly through the Swinoujscie LNG terminal. Hungary's dependence is only at 40% as it has benefited from its geographical position at the crossroads of east-west and north-south pipelines. 

Reducing dependency on gas imports from Russia is one of the key pillars of the EU’s long-term energy strategies, which collectively fall under the Green Deal label.

EU High Representative for Foreign Affairs Josep Borrell said earlier in February during talks with US Secretary of State Antony Blinken that while securing gas supplies was a short-term issue, it had to be balanced with the longer-term aim of achieving climate neutrality and reducing consumption of gas.

“Our joint work is needed to accelerate a green energy transition, to become neutral from the point of view of the climate in the future. In the medium term there is the climate neutrality, in the short term it is security of supplies of gas. Both things go together,” Borrell said in a joint press conference following his meeting with Blinken. 

EU efforts to reduce greenhouse gas emissions by 55% by 2030 – dubbed Fit for 55 – and are all part of its strategy of reaching net zero by 2050.

Reducing gas consumption plays a key role here. The EU in December published legislative proposals to increase to role of hydrogen and biomethane in Europe’s gas networks, shifting gas consumption from natural gas towards renewable and low-carbon gases. The EU also aims to phase out fossil fuels in heating and cooling by 2040.

Below bne IntelliNews correspondents in Central Europe assess how important the Russian gas flows still are to the region and how it would now cope in the event Russia turns off the tap.

POLAND

Poland is on the brink of telling Gazprom it doesn’t need its gas any longer, as the Baltic Pipe from the Norwegian sector of the North Sea is expected to go online this year and its Gazprom contract is up this year as well.

Poland uses ca. 20 bcm metres of gas annually, out of which less than half is imported. Imports were covered 62% by flows from Russia.

Gas consumption in Poland is expected to boom 50% to around 30 bcm annually in 2030 on the back of retiring old and climate-unfriendly coal-fired power plants.

But gas flows from Russia to Poland have been in a long-term downward trend after covering nearly 100% of demand in the mid-1990s. In 2021, Poland imported around 16 bcm of gas, including 9.9 bcm from Russia. The rest is LNG and domestic production.

Poland is keen to wean itself off Russian imports completely by expanding the capacity of the LNG terminal in the northwestern port of Swinoujscie, building a floating terminal in the Gdansk Bay, as well as by finishing the construction of the Baltic Pipe, down which will flow 10 bcm of gas from Norway via Denmark to Poland. Poland also wants to increase flows to and from Lithuania and Slovakia.

"Having the technical ability to import from Western Europe, we would [also] be able to buy gas on the spot markets when needed," Piotr Naimski, the Polish government's commissioner for strategic energy infrastructure, said recently.

Poland has said repeatedly that its contract with Gazprom – based on which the Russian company pumps gas via the Yamal pipeline – will not be renewed after expiring at the end of this year. For its part, Gazprom has not booked any flows via the Yamal pipeline for the second and third quarters this year and has signalled that it would only operate the pipeline based on spot auctions.

In effect, gas flows via Yamal have been eastbound, rather than westbound, since late December, contributing to price growth.

Gazprom does not have full control of the Yamal pipeline, which is controlled by Poland’s PGNiG. Gazprom indirectly controls just under a 49% stake in Yamal.

SLOVAKIA

Flows of Russian gas from Ukraine via Slovakia have decreased significantly since the beginning of the year. At the border pipeline station in Velke Kapusany, traffic has dropped from 70 mcm to 90 mcm per day in December to an average of 34 mcm in January.

Nevertheless, according to the Slovak Gas Industry (SPP), the largest supplier of natural gas in Slovakia, there is sufficient natural gas in underground storage facilities. Miroslav Mital, director of SPP's trading division, told the vEnergetike.sk portal in an interview in mid-January that the current state of underground storage capacity in Slovakia is at 43%.

"We see that the restriction of supplies via the UA-SK transit route towards Baumgarten in Austria is replaced by supplies via the Nord Stream 1 pipeline as well as by transit via Germany, Czech Republic to Slovakia and the mentioned Baumgarten. It can be seen that they are literally trying to bypass Ukraine at all costs," energy analyst Karel Hirman told the Slovak News Agency.

As reported by iDnes.cz, Russia’s Transneft pipeline operator plans to increase flows in the Druzba (Brotherhood) pipeline this year in Slovakia by 13.5% to 5.9mn tonnes.

Instead of being used for imports, the flow of the Slovak pipeline has often been reversed, to supply Ukraine with gas, usually from Russia. While imports to Slovakia from Russia have been flat, exports from Slovakia to Ukraine rose from zero to 9 bcm from 2013 to 2019.

Minister of Foreign Affairs of Slovakia Ivan Korcok has said that the Slovak gas transit system could provide double the gas flow to Ukraine. "I also informed our colleague Dmytro [Kuleba] that the Slovak gas transit system provides double the capacity for Slovakia's gas flow to Ukraine. We are ready to analyse the possibility of the commercial viability of such a project," Korcok said.

Last week, Ukrainian President Volodymyr Zelensky held  a phone call with Slovak President Zuzana Caputova during which both politicians agreed that the countries will discuss a permanent increase in the guaranteed capacity for natural gas transport from Slovakia to Ukraine.

“We discussed specific forms of assistance, particularly in the energy sector. I assured [President Zelensky] that Slovakia is ready to support Ukraine not only at the political and diplomatic level, but also in the form of practical cooperation in response to further developments in the crisis,” Caputova said on her Facebook profile.

CZECH REPUBLIC

Czech-Russian political relations have been at a standstill since the former government of Andrej Babis revealed Russia's alleged involvement in the Vrbetice arms depot explosions back in 2014. The explosion at the Vrbetice depot, in the Zlin Region, in October 2014, killed two people and resulted in the evacuation of nearby areas.

The depot reportedly contained weapons that were to be sold to a Bulgarian arms dealer and supplied to Ukraine, to help it in its conflict with Russian-backed seperatist forces.

Moreover, in November 2021, in its 2020 report, the Czech Security Information Service (BIS) described activities of foreign intelligence services from Russia (besides other countries), such as cyber-attacks and efforts to obtain internal information related to the construction of Dukovany nuclear power plant as a significant threat to Czechia.

Czechs still remember the January 2009 crisis when Russia froze gas supplies to Ukraine (because of disputes over price) and thus its flow to Europe. The 2009 crisis was quickly resolved, with the support of Czech EU presidency, leading to construction of the Nord Stream pipeline.

On one hand, this means that Czechia is now less dependent on Ukraine; on the other, concerns about gas supplies are not eased. The current gas threat due to the escalating conflict between Ukraine and Russia is being addressed by the Czech National Security Council on a regular basis. 

Czech domestic traders do not buy Russian gas directly from Moscow but they operate on the exchange market. Thus, Russia's threats do not directly affect Czechia but it can result in price growth on the markets – which now, when Czechia is struggling with soaring inflation and high energy prices for households, can be a great challenge for the new coalition government.

According to analyses by the Czech Ministry of Industry and Trade, as reported by SeznamZpravy, the likelihood of a full stop of gas flows from Russia to Europe is minimal. Czechia still has an option to balance low supplies from Russia with supplies from Norway or Algeria, or even with LNG supplies from overseas via terminals in northern and southern Europe. However, this would still be accompanied with significant price growth.

As pointed out by Michal Kocurek, a gas analyst at Brno consultancy group EGU, an open Russian-Ukrainian war could destroy the gas pipelines to the Western Europe but this would mostly threaten supplies to Slovakia and further to Austria which are already at their historic lows. "We assess the probability of a direct halt of supplies to the selected countries as very low," he was quoted by SeznamZpravy as saying.

HUNGARY

Hungary has embraced its dependence on Russian gas as part of Prime Minister Viktor Orban’s pivot east and away from Brussels.

Under Hungary's renewed long-term gas contract, signed last September, Hungary is getting 4.5 bcm per year from Gazprom, including 3.5 bcm delivered from the south, through Hungary's interconnector with Serbia, and 1 bcm via the pipeline running from Austria.

Hungary has switched to use mainly the Turkstream pipeline from the South rather than the Brotherhood pipeline via Ukraine and Slovakia. Since October it has receivee no imports via Ukraine. Hungary is also exporting to Ukraine, via Slovakia.

At a meeting with Russian President Vladimir Putin in Moscow earlier this month, Orban said that Hungary meets 55% of its oil and 80% of its gas needs from Russia and despite the "difficult" situation caused by the coronavirus epidemic, bilateral trade had increased by 30% to $5.5bn in the first 11 months of last year.

Orban said "meaningful talks" could start on raising the volume of gas Hungary gets from Russia by 1bcm a year to 5.5 bcm. Putin noted that Russia needs to see how its gas delivery situation develops, but added that an additional 1 bcm will "not be a big problem for us".

Nevertheless, Hungary has also been able to diversify its gas purchases through its geographical position at the nexus of pipelines coming both from the east and the south. In 2020 it sourced only 40% of its gas from Russia.

BALTIC STATES

Lithuania’s  Energy Ministry has drawn up a special plan to ensure energy security amid rising tensions between Russia and the West.

Naglis Navakas, an energy expert and journalist of business portal verslozinios.lt, told bne Intellinews two elements must be a must in it: maximising LNG volumes in the 2.9mn tonne per year Klaipeda LNG terminal and in the Incukalns gas storage in Latvia.

“Otherwise, Lithuania has got very good gas infrastructure, one many others European countries can envy,” he said.

He says such a plan should have been drawn up long time ago, especially that all the Lithuanian governments had underlined the importance of energy security.

Navakas said he was “surprised” that the government and the energy ministry chose not to make the special plan public. “It ought to be accessible to all to raise the public’s awareness,” he said.

Arvydas Sekmokas, a former Lithuanian energy minister and now an independent energy analyst, agrees that maximising LNG quantities in the country’s LNG terminal and in the Latvian gas storage facility are key.

The analysts say that Lithuania, and the entire Baltics, are in a better situation (in terms of energy supply) than some other EU member states – due to the availability of the Klaipeda LNG terminal, the gas storage facility in Latvia’s Incukalns and the access to GIPL, an international gas pipeline connecting Lithuania and Poland since January 2020. Besides, the first gas pipeline between Finland and Estonia, the Balticconnector, entered into commercial use at the start of 2020.

Yet, last year, Gazprom’s pipeline from Russia still accounted for around 40% of Lithuania’s supply mix last year, which is still too high to sail smoothly through an emergency like a full halt of Gazprom gas imports. Latvia and Estonia remain even more dependent, at 93% and 79% of gas consumption respectively.

Reporting by Robert Anderson in Prague, Richard Lockhart in Edinburgh, Wojciech Kosc in Warsaw, Linas Jegelevicius in Vilnius and other bne IntelliNews correspondents.

There are three main pipeline routes to export Russian gas to Northern Europe: the Nord Stream 1 pipeline under the Baltic Sea to Germany, Yamal-Europe via Belarus to Poland, and the Brotherhood pipeline via Ukraine to Slovakia. In 2021, Nord Stream carried 58.1 bcm; Yamal-Europe 26.5 bcm, and 37.5 bcm came via Ukraine. To the South, 12.1 bcm was carried via the TurkStream pipeline via Turkey to Bulgaria.