The agreement for transiting Russian gas through Ukraine is set to expire at the end of this year. However, it’s unlikely that Europe will halt its purchases of Russian gas. Furthermore, the EU's announced plan to completely phase out Russian gas by 2027 also remains a challenging political and economic task for Europe.
The key consumers of Russian pipeline gas in Central Europe – namely Austria, Slovakia, and Hungary, whose economies benefit from the supply of affordable Russian gas – are unlikely to switch to liquefied natural gas (LNG). Therefore, two other options are under consideration: extending the agreement under new terms or switching to pipeline gas from Azerbaijan.
These two options differ in form but not in substance. Azerbaijan lacks the capacity to significantly increase production; to boost exports to Europe, it would need to buy gas from Gazprom. Extending the existing agreement, despite its ethical ambiguities, could be a more strategically advantageous solution for Europe, experts say.
An agreement with Azerbaijan would set a precedent: in the future, Russian gas supplies under the guise of Azerbaijani gas could increase further. Additionally, sanctions can be imposed on Russian gas, unlike Azerbaijani gas.
The political and economic situation hinders the abandonment of Russian gas.In countries receiving Russian gas, the far-right and Eurosceptic positions are strong, and support for Ukraine in Europe appears far less consolidated than two years ago. Moreover, gas demand is rising, and major LNG projects are facing delays. This will keep prices relatively high on the market. Under such conditions, giving up Russian gas would face significant resistance from its beneficiaries.
On 31 December, the Gazprom and Naftogaz agreement on transiting Russian gas through Ukraine, signed back in 2019, will expire. Following the damage to the Nord Stream pipelines and the shutdown of the Yamal-Europe pipeline, this is now the only remaining route for Russian gas to reach European countries. In 2022, after Russia invaded Ukraine, the EU set a goal to fully phase out Russian gas, but only by 2027.
Despite the ongoing war, Ukraine's gas transportation system has operated without major interruptions for the past two and a half years. Austria and Slovakia remain the primary consumers of Russian pipeline gas: over 80% of Austria’s gas imports are sourced from Russia, and Slovakia's dependency level is nearly the same. Italy, the Czech Republic, and Hungary also purchase significant volumes. Supplies continued even after Ukraine assumed control of the only functioning Russian gas metering station in Sudzha, located in the Kursk region.
Absurd as it may seem, Russian pipeline gas supplies to Europe even increased in 2024. According to the Oxford Institute for Energy Studies (OIES), they reached 8.1 billion cubic metres in the third quarter of 2024, up 0.9 billion cubic metres, or 13%, compared to the third quarter of 2023. For the fourth quarter, the institute forecasts a similar volume, equating to roughly 18% of Europe’s total pipeline gas imports. Overall, when considering both pipeline and liquefied natural gas, Russia’s share of European imports from January to September 2024 was 20%, compared to just under 15% in 2023, as reported by the EU Agency for Cooperation of Energy Regulators (ACER). Before the war, Russia’s share in European supplies was nearly 45%, meaning it has been cut by just over half. Completely abandoning Russian gas remains a complex political and economic challenge for Europe, with no clear indication of resolution.
This is evidenced, in particular, by the situation surrounding the end of the transit agreement. Three options are currently being considered: replacing Russian pipeline gas with liquefied natural gas (primarily from the United States), switching to Azerbaijani pipeline gas, or extending the agreement under new terms.
For Gazprom, halting supplies to Europe would mean a loss of $6.5 billion per year, according to estimates by Bloomberg. This amount roughly corresponds to the loss that Gazprom recorded in its 2023 IFRS financial statements. Ukraine will also suffer: in 2023, its transit revenues were estimated at $1 billion, which represents about 0.5% of Ukraine's GDP.
According to a report by the Bruegel research centre, Europe could abandon Russian gas without posing serious risks to its energy security, at least during the newly started heating season. LNG terminals in Poland, Germany, Lithuania, Italy, Croatia, and Greece, along with new floating regasification units in Germany and Italy, are capable of offsetting the shortfall, experts note. Moreover, the capacity of the TurkStream pipeline could be expanded. Infrastructure necessary to supply Austria, Hungary, and Slovakia with LNG is already in place, and storage facilities in these countries are currently more than 90% full. Austria could even manage the winter season without additional gas purchases.
Nevertheless, the likelihood of a definitive break with Gazprom in 2025 is very low, the report's authors suggest. Central European countries will resist alternative scenarios, as relatively inexpensive Russian gas enhances their economic competitiveness. According to Bloomberg, European countries and Turkey paid an average of $320.3 per 1000 cubic metres of Russian pipeline gas in 2024. This is higher than China’s cost ($257) but lower than the cost of LNG. In the second and third quarters, ACER's data, based on the Dutch TTF hub, showed an average LNG price of €33.5 per megawatt-hour, approximately $381.5 per 1000 cubic metres (a difference of nearly 20%). In the fourth quarter and the first quarter of next year, prices are expected to be even higher. Meanwhile, right-wing and Eurosceptic positions are particularly strong in most Russian gas-importing countries, and support for Ukraine is notably lower than in northern European countries. Therefore, Brussels is unlikely to force these nations to relinquish this advantage.
The two other options – signing a new agreement with Gazprom or switching to Azerbaijani gas – differ in form but not in substance. At least initially, Europe would continue to receive Russian gas under either scenario. As Bruegel experts point out, Azerbaijan is unable to significantly ramp up production, so to export additional gas volumes to Europe, it would need to purchase them from Gazprom. Later on, by signing new long-term contracts with European consumers, Azerbaijan could invest in expanding production.
Ukraine is advocating for the ‘Azerbaijani’ option. This would allow it to retain transit revenues while formally severing business ties with Russia. Although this option may seem economically and ethically viable, Bruegel experts caution European authorities against adopting it. Dependency on Russia would not effectively decrease, and it would create a dangerous precedent: in the future, Russian gas supplies under the guise of Azerbaijani gas could increase even further.
Extending the current agreement, despite its ethical ambiguity, could be a strategically advantageous solution for Europe. Unlike Azerbaijani gas, sanctions similar to those on Russian oil can be applied to Russian gas, Bruegel experts point out. Supply volumes could be limited to the needs of specific consumers, and an additional import duty could be imposed to restrict Russia’s revenues. Bruegel experts suggest setting this duty at 20% of Europe’s base price for natural gas.
Russia may agree to these terms, as it currently lacks alternative markets for all the gas volumes Europe continues to purchase. In the first nine months of 2024, Europe purchased 22.5 billion cubic metres of gas, according to Bloomberg. Over the same period, China purchased 23.7 billion cubic metres, almost 40% more than the previous year. The Power of Siberia pipeline, which supplies China, has a capacity of 38 billion cubic metres. Initially, it was expected to reach full capacity in early 2025, but Gazprom recently announced that this goal will now be met by December this year. To further increase supplies, the Far Eastern route, with an estimated additional capacity of 10 billion cubic metres, would need to be completed. According to recent statements by Gazprom, it may not be operational until 2027 – the same year the EU aims to completely end gas purchases from Russia (plans for the Power of Siberia 2 project, with a capacity of 50 billion cubic metres per year, now seem almost entirely shelved).
The full phase-out of Russian gas by 2027 now appears less achievable than it did two years ago for several reasons. First, European support for Ukraine has generally waned, and the public is less willing to bear the costs associated with opposing Russia. Second, the gas market situation has turned out to be less favourable than previously forecasted.
Overall, the global gas market is balanced at present, according to the OIES report. However, LNG demand in Asia is growing faster than anticipated, and the launch of several major infrastructure projects has been delayed. Specifically, the American LNG terminals Golden Pass (invested in by ExxonMobil and Qatar Energy) and Energia Costa Azul (Sempra) will not be launched this year. Gregory Joffroy, Senior Vice-President of TotalEnergies, commented to Reuters that further delays to a number of other projects in the US would be possible. Previously, the agency explained that these delays arise primarily due to a shortage of skilled workers. As demand rises and project delays continue, upward price pressures will make the abandonment of Russian gas even less viable for Central Europe. Thus, political and economic factors together make plans to phase out Russian gas increasingly unrealistic.