A site of gas giant Gazprom in Sofia (Bulgaria), April 27, 2022. NIKOLAY DOYCHINOV / AFP
Gas and its uses are at the heart of the war in Ukraine. Ukrainian President Volodymyr Zelenskyy has repeatedly urged Europeans to extend their economic sanctions to gas and oil and to stop buying from Moscow.
The European Union (EU) refuses for the time being. Several countries, notably Germany, have claimed that they are unable to go without Russian gas in the short term. What about Ukraine, which ensures the transit of part of Russian gas to the EU? Does it also depend on its neighbor for supplies or could it survive without gas transit from Russia to the West?
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How dependent is the Ukrainian economy on gas?
Ukraine is one of the most energy-intensive countries in Europe. Gas accounts for almost a third of this consumption, followed by coal (30%) and nuclear (21%), of which it is the seventh largest producer in the world. Despite producing some of the gas it consumes, Ukraine has historically been dependent on the outside world for its supply: in 2013 it imported almost 60% of the gas it consumed.
However, this import dependency has tended to decrease. Ukraine’s energy needs have fallen significantly over the past twenty years, after falling sharply in the decade following independence. Measures against energy waste were taken after 1991. The successive economic crises that hit the country, notably that of 2009, as well as the conflict in Donbass from 2014, also reduced economic activity and industrial production. After all, the loss of Crimea, part of the Luhansk and Donetsk regions in the east of the country and the damage caused by the war automatically reduced consumption as well.
In 2019, their gas requirements had halved compared to 2006 and their national production covered 70% of their needs. For the remaining 30%, Kyiv continues to import.
Does Ukraine buy gas from Russia?
A legacy of the Soviet era and the days when Ukraine benefited from lower gas prices, the country has historically been very dependent on Moscow for its supplies. In 2013, Kyiv bought 92% of its imported gas from Russian giant Gazprom. In 2016, that percentage dropped to zero. After the annexation of Crimea and the gas crisis that both countries faced in 2014, Ukraine actually stopped purchasing from Moscow and has not supplied itself directly from Russia since 2016.
It now buys its gas from European countries including Slovakia, Poland and Hungary. These deliveries are the result of so-called “reverse flows”, ie from west to east, while gas historically flows from east to west.
These “returns” from the EU have long been much more expensive to Ukraine than the gas sold by Russia. However, in 2014 Russia ended the price reduction granted to the Ukrainian government of Viktor Yanukovych and made buying from Europeans more economically attractive for Kyiv.
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These flows can be physical (the gas is actually transported in a gas pipeline from a European country to Ukraine), but also “virtual”. The amount of gas bought by Ukraine then does not actually go the other way, it is taken by Kyiv from the gas stream flowing on its soil between Russia and the EU. The result is the same in each case: the gas imported by Ukraine may be sourced from European countries, but it is still mostly Russian gas – although it is difficult to know in what proportion.
Does Ukraine still ensure the transit of Russian gas to the European Union?
With 38,600 kilometers of Soviet-era gas pipelines, Ukraine has the largest transit infrastructure in the world and remains crucial for transporting Russian gas to Europe, Moscow’s first customer. For the time being, Russian gas will continue to be transported to the EU via the Brotherhood’s network gas pipelines, which cross Ukraine.
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In 2019, Kyiv and Moscow signed a new transit agreement that stipulates that Gazprom will ship 40 billion cubic meters of gas annually to Europe via Ukraine until 2024. The resulting rent for Ukraine – Gazprom has to pay her “transit costs” – is just over $7 billion (€6.7 billion) over this period.
However, these gas volumes are minimal given the initial importance of the Ukrainian gas artery. In 2006, for example, more than 128 billion cubic meters of Russian gas flowed through Ukrainian gas pipelines. At that time, Gazprom was still dependent on Kiev’s infrastructure for more than 65% of its exports to Europe.
However, economic scrambles over gas and transit prices, as well as geopolitical tensions between Kyiv and Moscow, have prompted Moscow to seek ways to bypass Ukraine and sell off its “blue gold.” In the past twenty years, the construction and commissioning of the Yamal gas pipelines, which pass through Belarus and Poland, Nord Stream, which reaches Germany via the Baltic Sea, and more recently, Turkish Stream, which crosses the Black Sea and Turkey, have Bulgaria significantly reduced the weight of the Ukrainian network.
In 2021, the latter provided just over a quarter of the EU’s gas supply, where the Nord Stream gas pipeline’s share reached 40%. Brotherhood remains, however, in the absence of Nord Stream 2, the network whose capacity is – by far – the largest of any gas pipeline connecting Russia to the EU.
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Could Ukraine cut off supplies of Russian gas to its territory in retaliation for the war?
Ukraine did not mention this threat, the use of which would have several implications. The contract signed with Gazprom, which provides for the payment of transit fees to Ukraine, would effectively be terminated. The EU, Kiev’s partner in this war, would also lose part of its gas supply. “As long as Europeans buy Russian gas, Ukrainians’ interest in terms of commercial credibility, economic profits and security of supply is to maintain transit continuity,” summarizes Sami Ramdani, a PhD student at the French Institute of Geopolitics.
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However, the intensification of fighting in Donbass could threaten gas supplies, according to Yuri Vitrenko, CEO of Ukrainian gas company Naftogaz. “We estimate that a third of the gas exported from Russia to the European Union via Ukraine will be lost if the armed forces [russes] of the occupation continue to disrupt the operation of the stations in the recently occupied areas” of Doneskt and Luhansk, he warned on Twitter.
Could Ukraine have the means to get out of its dependency?
The country is rich in natural resources. Besides Russia, it has the second-known natural gas deposits in Europe after Norway. However, their potential remains partially unexplored and largely underexploited. For example, the rate of exploitation of Ukrainian natural gas reserves is 2% per year.
“Determined exploitation of already known and accessible Ukrainian resources could significantly increase Ukraine’s gas production” and “would not only allow the country to fully meet its domestic gas needs, but also make Ukraine largely self-sufficient from an energy perspective,” he noted to Harvard International Review in 2020. Harnessing this energy potential would entail significant costs, which the Ukrainian institute put at $19.5 billion (€18.4 billion) in the future in 2016.
However, the loss of Crimea and its offshore gas fields in 2014 forces us to revise estimates of Ukrainian reserves downwards. The war also threatens the areas where the country’s main hydrocarbon resources are located: the Dnieper-Donetsk region in the east accounts for 90% of Ukraine’s natural gas production and 80% of its proven reserves. About 6% of the reserves are also located in the Black Sea and Sea of Azov region, which Russia intends to fully control.
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In the short term, in order to no longer depend on the flow of gas from Russia, from which it sources part of the volumes it buys from the Europeans, Ukraine is securing and increasing physical gas flows from the West, over which Russia has no control.
Physical flows allow diversification of supplier countries (for example, they allow LNG arriving from the United States or Qatar to be transported to European countries with terminals). Together with Ukraine’s very large storage capacities (the third largest in the world), they strengthen the country’s energy security. But these purchases from the EU will only be a real guarantee of independence if Europe as a whole reduces Russia’s weight in its imports.