The apparent capture of the Sudzha natural gas transit station by the Ukrainian army has drawn the attention of European gas markets to the physical risks of war with Russia and pushed benchmark prices to their highest levels this year. The situation around Sudzha remains unclear, satellite images appear to show damage to the facility. But gas is flowing appear stablesuggesting that neither side wants a disruption in supplies. However, the fighting over Sudzha represents the first physical threat to Europe’s gas supplies since the 2022 explosions that destroyed the Nord Stream pipelines. While Nord Stream supplies had stopped at the time of the sabotage, the pipeline connecting Sudzha to Europe continues to transport around 40 million cubic meters of gas per day. The volumes form more than 7% of European supplies, with countries such as Austria and Slovakia particularly dependent on Russian gas. Analysts say alternative imports via LNG terminals in Germany and Croatia, as well as the wider EU gas network and large amounts of gas in storage, could offset the loss of Sudzha volumes at least until year-end. Front-month prices for Europe’s Dutch TTF hub hit their yearly high of €40.60 ($44.33) per megawatt-hour late last week. The former CEO of the Ukrainian gas transit company warned in a social media post that the “risk of transit disruption due to military action is significant.” But analysts at ratings agency Fitch argued that “even a complete halt in supplies would have limited impact on European offtakers.” Austria’s dependence on Russian gas rose above 90% earlier this year, but executives at Vienna-based OMV say they have secured the volumes and transit rights to meet demand with non-Russian volumes if needed.
While the immediate risks to Europe’s gas supply until the end of this year appear manageable, Ukraine’s activities near the Sudzha station are complicating the already tense negotiations on the Renewal of the Russian contract to route gas to Europe through Ukraine. Sudzha is the only direct transit point between Russia and the EU, and while Moscow has signaled its willingness to continue the arrangement, Ukraine and the more belligerent EU states have publicly been less receptive to an extension. Alternative routes and arrangements could help Russian gas continue to reach EU markets even without an extension of Ukraine transit, but such arrangements appear less likely and would not fully replace existing volumes. European gas buyers could look for alternative contract structures that would allow them to transport Russian gas without having to deal directly with state-owned giant Gazprom. Azerbaijan has floated options to replace any shortfalls in Russian supply with its own volumes. But Azerbaijan lacks the upstream production and sufficient pipeline capacity to bring those volumes to market, and ideas for swapping volumes between Azerbaijan and Russia seem far-fetched.
Should the flow of gas through Sudzha be stopped, either due to physical damage to the infrastructure or the non-renewal of the transit contract, this would be a warning sign for one of the most dramatic changes in modern energy markets. Russian pipeline exports to Europe would fall from 150 billion cubic meters in 2021, which accounted for more than 40% of Europe’s total gas and LNG imports that year, to less than 1%, with Turkey remaining the only pipeline route connecting Europe and Russia. While supply and demand dynamics in Europe have changed dramatically since 2021, gaps in the system remain that could affect energy security in certain countries and push up prices. European gas demand has fallen by almost a quarter since 2021, according to Eurostat figures, as high prices have depressed industrial demand and the EU’s efforts to boost renewable energy generation bear fruit. Germany has been the most aggressive country in expanding LNG import capacity, adding 37 billion cubic metres in recent years. It plans to double that capacity by 2028, according to S&P Global. Pipeline links between EU member states are also nearing completion to allow more gas to flow across the continent. But Austria’s gas network management warned in May that the country’s supply situation beyond the coming winter was “not quite so reassuring”, saying that without Russian supplies, gas prices could rise not only in Austria but across Europe.
