The fate of what was once Russia’s most important gas supply route to Europe came back into focus last week when Ukrainian troops militarily entered Russian territory for the first time since World War II. Gas supplies remained steady, suggesting that neither side wants an escalation or has an immediate plan B in case supplies are cut off. Europe’s reaction was also measured, although an immediate price spike showed that Russian gas supplies are still important.

The threat that Russian gas exports through Ukraine could abruptly cease emerged on August 7, when Ukraine claimed it had seized the Sudzha gas transit station in Russia’s Kursk region. The Sudzha station has been the only access point for Russian gas through Ukraine to Europe since May 2022, when Kyiv closed another existing access point, Sokhranovka, citing Russian military interference. Since then, daily deliveries through Sudzha have remained steady at around 40 million cubic meters. And despite the recent counter-invasion by Ukraine, deliveries through Sudzha remained stable over the past week, with the volume nominated for August 14 remaining at 42.4 million cubic meters, according to Russian state-owned gas giant Gazprom.

Contract expiration

Both sides appear to be interested in maintaining flows for different reasons, at least until the gas transit agreement between Moscow and Ukraine expires at the end of 2024.

Reputation matters because neither side wants to be blamed for supply cuts or increased pressure on European gas prices. The mere threat of a possible disruption to gas supplies pushed prices last week to their highest since December last year, although they began to cool on reports that supplies via Ukraine remained stable.

In addition to reputational risks, economic issues are also on the table for both sides. According to Alexander Frolov, deputy head of the Russian National Energy Institute, Ukraine receives almost $900 million a year for Russian gas transit. Gazprom, in turn, could have earned around $5.2 billion from exports to Europe in the first half of 2024, with almost half of that coming from Ukrainian transit, according to Energy Intelligence estimates. Both sides would suffer financially if supplies were stopped.

However, analysts point out that despite the stable supply situation over the past week, the risk of disruptions remains as fighting continues.

Plan B

Ukrainian transit supplies mainly Slovakia and Austria, meaning Gazprom needs to develop a plan B to maintain gas flows to these important markets. Gazprom delivered around 14 billion cubic metres to Europe via Ukraine in 2023, and current dynamics suggest that deliveries could be even higher this year. In the first seven months, Russian deliveries via Ukraine amounted to around 9 billion cubic metres, with deliveries increasing to 1.3 billion cubic metres in July alone.

Analysts believe that in the event of disruptions, Gazprom could divert some of its gas volumes to the Turk Stream pipeline. According to Frolov, Gazprom could divert about 30 percent of the gas it currently supplies via Sudzha to the Turk Stream pipeline. Gas supplies to Europe via the Turk Stream pipeline remained fairly high in July, but supplies via this pipeline were more volatile than those via Ukraine, depending on demand and price fluctuations.

Sergei Kapitonov, an analyst at Moscow-based Skoltech Project Center for Energy Transition and ESG, agrees that “there is definitely spare capacity within the Turk Stream and Blue Stream pipelines (leading from Russia to Turkey) with a total capacity of 32 billion cubic meters per year.” Kapitonov says that as part of Turkey’s aspirations to become a gas hub, Russia can sell more gas to Turkey. “However, further opportunities to monetize this gas are limited given the lack of export infrastructure on the Turkish-Bulgarian border and the vague prospects of selling this gas anywhere outside Europe,” he adds.

More options

Meanwhile, there is still a technical possibility of pumping gas to Europe via the Sokhranovka border crossing, but Ukraine is currently refusing to do so. Under a five-year “ship or pay” contract signed between Moscow and Kyiv in late 2019, Gazprom has booked a transit capacity of 109.6 million cubic meters per day – 77 million cubic meters per day in Sudzha and 32.6 million cubic meters per day in Sokhranovka. If the situation becomes critical, Europe can put more pressure on Kyiv to allow this transit.

Another option is the existing Yamal-Europe pipeline through Poland, through which Russia will no longer supply gas from 2022.

If none of these options work, Gazprom will have no choice but to cut production, analysts say. One mitigating factor that could support Gazprom’s production is continued strong domestic demand in Russia, which hit new records in June and July.