Europe's Russian gas era comes to an end as Ukraine transit stops

Russia's once-dominant gas supply to Europe via Ukraine, which flowed for decades, is set to end on New Year's Day with the collapse of a contract between the two warring countries that paid out billions to Moscow in gas revenue and to Kyiv in transit fees.

The shutdown of Russia's oldest gas route to Europe ends a decade of fraught relations sparked by Russia's seizure of Crimea in 2014.

The European Union redoubled its efforts to reduce its dependence on Russian energy after the outbreak of the war in Ukraine in 2022 by seeking alternative sources.

Liquefied natural gas (LNG) from Qatar and United States has helped the EU find alternative supply. Piped supply has come from Norway.

The change was clear last year as Russian state-controlled gas exporter Gazprom recorded a $7 billion loss, its first since 1999, despite its efforts to boost exports to new buyer China.

The remaining buyers of Russian gas via Ukraine such as Slovakia and Austria have also arranged alternative supply.

A spokesperson for Austria's energy ministry said on Tuesday that due to purchases made via Italy and Germany and the filling of storage, supply for consumers was guaranteed.

Slovakia will also not risk a shortage, though now faces an extra 177 million euros ($184 million) in fees for alternative routes, its Economy Ministry said.

A European Commission spokeswoman said EU preparations had included energy efficiency measures, renewable energy development and a flexible gas system.

"The European gas infrastructure is flexible enough to provide gas of non-Russian origin to Central and Eastern Europe via alternative routes. It has been reinforced with significant new LNG import capacities since 2022," said Anna-Kaisa Itkonen.

MARKET IMPACT

Analysts foresee minimal market impact from the stoppage which was confirmed on Tuesday as data from Ukraine's gas transit operator showed Russia had not requested any gas flows for Jan. 1 through the Ukrainian pipeline to Europe as of 1700 GMT.

They say the end of the transit deal is unlikely to cause a repeat of the 2022 EU gas price rally as the remaining volumes are relatively small.

The gas market showed little reaction on Tuesday, with European benchmark gas prices ending at 48.50 euros per megawatt hour, up only marginally on the day.

UKRAINE WAR

Despite the EU's progress in replacing Russian supply via Ukraine, Europe has felt the impact, with higher energy costs hitting its industrial competitiveness versus the United States and China, for example.

That has contributed to a major economic slowdown, a spike in inflation and has worsened a cost-of-living crisis.

Ukraine now faces the loss of some $800 million a year in transit fees from Russia, while Gazprom will lose close to $5 billion in gas sales.

Moldova, once part of the Soviet Union, is among the countries worst affected. It says it will now need to introduce measures to reduce its gas use by a third.

OTHER ROUTES

Russia and the former Soviet Union spent half a century building up a major share of the European gas market, which at its peak stood at around 35%, but the war in Ukraine has all but destroyed that business for Gazprom.

The Yamal-Europe pipeline via Belarus has also shut and the Nord Stream route across the Baltic Sea to Germany was blown up in 2022.

Combined, the various routes delivered a record high 201 billion cubic metres (bcm) of gas to Europe in 2018.

Russia shipped about 15 bcm of gas via Ukraine in 2023, down from 65 bcm when the last five-year contract began in 2020.

The only Russian gas route still operating is TurkStream which crosses the Black Sea to Turkey.

TurkStream has two lines - one for the Turkish domestic market and the other supplying central European recipients including Hungary and Serbia.