Rising LNG imports and strained reserves: The fallout from Ukraine’s decision to cut Russian gas flows to Europe

It’s been an open secret for a couple of weeks, ever since Ukrainian Prime Minister Denys Shmyhal ruled out any new agreement with Gazprom to keep Russian gas flowing to the European Union. His position was confirmed on Wednesday, January 1, when the contract expired and the gas pipeline running through Ukraine from east to west was completely shut down — possibly for good. This pipeline, the oldest of its kind with a history of five decades, holds significant symbolic value.

While the flow of Russian gas through an Ukraine under siege — one of the great paradoxes of the past three years, with Moscow earning “additional billions on our blood,” as Volodymyr Zelenskiy put it — had been very low for months, the end of the supply leaves behind both some certainties and a number of unresolved questions.

Moldova, the hardest hit

A nation that does not yet belong to the EU, Moldova is ironically the first to feel the effects of the gas cutoff. Although Moldovan authorities had been bracing for this outcome, the search for alternatives has been notably absent. This is especially true in the separatist region of Transnistria, which has a pro-Russian majority. On Wednesday, the first day without gas flowing through Ukraine, locals were forced to endure the harsh winter without two essential supplies: “There is no heating or hot water,” an employee for the local energy company, Tirasteploenergo, told Reuters.

Russian gas company Gazprom has offered to supply gas to Chisinau through other routes outside Ukraine, but it is demanding payment of a large overdue debt, which Moldova does not recognize. In response to this new crisis, Fatih Birol, the director general of the International Energy Agency (IEA), urged European partners on Wednesday to support Moldova — a country increasingly divided between pro-European and pro-Russian factions — so it can maintain essential supplies to its people during the winter.

Slovakia and Hungary forced to look for alternatives

The situation has sparked concern in two EU countries with the closest ties to Vladimir Putin — Slovakia and Hungary — which also received the largest share of gas through the Ukrainian pipeline. While their situation is less urgent than Moldova’s, as they have more routes to source fuel from neighboring countries, the end of the contract has cast some uncertainty over their energy future.

Being landlocked and unable to directly import liquefied natural gas (LNG) — which is transported by ship and far more expensive than pipeline gas — Slovakia’s authorities have confirmed that they will face an additional cost of nearly €180 million ($185 million) in 2025 alone to secure gas through alternative routes, particularly the pipeline connecting Slovakia to Germany via the Czech Republic. “Currently there is no threat of a shortage of gas,” said Economy Minister Denisa Sakova, who criticized Kyiv’s “unilateral” decision and acknowledged that it would harm Slovakia’s interests.

Hungary, meanwhile, plans to double its imports of Russian gas via Turkey, with the TurkStream pipeline, which runs beneath the Black Sea, now the sole land route for Russian gas into the EU. Austria, the third major recipient of Russian gas through Ukraine, cut ties with Gazprom a month ago following a dispute with its energy company, OMV. Like Hungary, Austria is now relying more on imports from Turkey and Germany. “It’s a big adjustment in the gas flows, from east to west,” said Markus Krug, deputy head of the Austrian gas regulator, who has hinted that consumers might face a temporary increase in rates.

In Central Europe, this situation can be summed up in one sentence: supply security will be tighter, but nowhere near the levels of panic that gripped the region during the worst months of the energy crisis. The Ukrainian gas pipeline accounted for less than 5% of Europe’s gas needs — a trend that had already been declining. In 2024, only 13% of Europe’s gas imports will come from Russia, and as Henning Gloystein, chief energy analyst at Eurasia Group, points out, European gas demand has dropped by a fifth compared to pre-invasion levels.

Possible retaliation against the Ukrainian electricity system

Kyiv’s refusal to renegotiate the contract with the Kremlin that has been in place since the end of 2019 has particularly upset Bratislava and Budapest, the two EU capitals with the closest ties to Moscow. Hungary has even threatened Ukraine with cuts to its electricity exports — crucial for a country whose power generation and distribution infrastructure has been severely damaged by Russian attacks, the latest of which occurred just days ago, around Christmas time.

The challenge posed by Robert Fico’s government, which recently visited its Russian counterpart, has been partially countered by Poland. The Polish government has announced it will increase electricity deliveries to Ukraine if the country requests it. This episode highlights the growing divide within the EU between governments that are firmly pro-European and pro-Ukrainian, such as that of Donald Tusk, and those that align more closely with Moscow’s interests, including Hungary and Slovakia.

More LNG, also from Russia

The end of gas supplies through Ukraine doesn’t necessarily mean that the EU will import less gas from Russia. With imports of Russian LNG —especially from the Yamal Peninsula in Siberia — at an all-time high, it’s likely that this route will expand even further as a replacement. Maritime imports from the world’s three largest LNG exporters — the United States, Qatar, and Australia — will also increase, along with supplies from Norway, the major economic beneficiaries of Putin’s invasion in March 2022.

Rising prices

“While there is no imminent gas supply security risk for the EU, its LNG import needs may rise and may lead to tightening of global gas markets in 2025,” the International Energy Agency acknowledged hours after the closure of the so-called Ukraine Transit pipeline.

“The cessation of these supplies will likely drive up prices in Europe, which ended 2024 at annual highs,” Henning Gloystein, head of Energy, Climate & Resources at Eurasia Group, wrote in a special report for clients. “However, a price increase as severe as that seen on previous occasions [in reference to 2022] is very unlikely: EU markets and importers have long prepared for this cut,”

The shift from pipelines to LNG tankers has, in fact, been pushing prices higher for some time. While many factors influence the gas market, the closure of the Ukrainian pipeline has played a significant role in the recent rise in natural gas prices in the EU. The Dutch TTF index, a key benchmark for the region, has surged by 70% over the course of 2024, with a sharp acceleration since the summer. Beyond industry and heating — two of the largest demand sectors — this price increase has directly impacted the electricity market, where gas-fired power plants still play a dominant role, despite their reduced use in recent years.

More strategic use of underground reserves

Largely unknown to the general public until the energy crisis hit, Europe boasts an extensive network of underground gas storage facilities that help it manage winter demand peaks. This infrastructure has become especially important in times like these, with overall demand nearing its annual maximum and with the closure of the second-to-last land route for Russian gas.

After reaching peak levels at the end of summer and early autumn, European gas storage is currently at 72% of its capacity, with Spain exceeding the average by 10 points. However, France and much of Central Europe are slightly below the average. In most cases, these levels are healthy, but European authorities are keeping a close watch after consumption during November and much of December was higher than in previous years. While there’s little doubt that the current reserves are sufficient to comfortably carry Europe through the rest of the cold season, the declining state of storage and the recent closure of the Ukrainian pipeline will likely require additional effort to refill supplies next spring.

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