By Thomas Fazi
The European power market is getting ready to one other shock. Regardless of the battle in Ukraine, over the previous three years, Russian fuel has continued to movement to Europe — primarily to Slovakia, Hungary, Austria and Italy — by means of a pipeline through Ukraine. Though the share of Ukrainian transit in EU fuel imports has considerably declined in comparison with pre-war ranges, it nonetheless made up 5 per cent of EU fuel imports in 2024 — out of roughly 20 per cent of fuel nonetheless imported from Russia (together with each pipeline imports and liquified pure fuel (LNG) imports).
Alongside TurkStream — which carries fuel throughout the Black Sea to Turkey and on to Bulgaria, Serbia and Hungary — Ukraine stays the one energetic pipeline by means of which Russian fuel continues to reach within the EU. Most different Russian fuel routes to Europe have been shut down, together with Yamal-Europe through Belarus and Poland, and Nord Stream below the Baltic.
Nonetheless, the contract governing the transit of Russian fuel by means of Ukraine is about to run out at the moment (December 31) — and Ukraine doesn’t intend to resume it. Which means that, as of tomorrow, Europe will not be receiving fuel by means of Ukraine. The implications might be pricey. The nations most affected will clearly be the direct recipients of the Ukrainian transit route fuel, particularly Slovakia, Hungary, Austria and Italy.
The stopping of Ukrainian transit is not going to pose a right away provide safety threat to those nations: although the capability of other pipeline routes —TurkStream, Bulgaria, Serbia or Hungary — to interchange the Ukrainian transit is restricted, storage ranges within the EU stay excessive, and different provide sources exist, primarily within the type of shipped LNG.
Nonetheless, the latter is considerably dearer than pipeline fuel: whereby long-term contracts govern pipeline imports, LNG costs are tied to world spot markets, which are usually considerably larger, to not point out far more risky, as they’re topic to world competitors in addition to monetary hypothesis, which might drive costs larger throughout disruptions (e.g., geopolitical conflicts, provide reductions, and many others.).
Previous to the outbreak of the battle in Ukraine, the EU imported most of its fuel through pipelines — principally from Russia. Since then, in its try and decouple from Russian fuel, the bloc has massively boosted its LNG imports, which have risen from 20 p.c to 50 p.c of whole fuel imports. Nearly half of the EU’s LNG imports in 2024 got here from the US, although absurdly the EU final yr additionally boosted its imports of Russian LNG — all whereas decreasing its imports of cheaper pipeline fuel from the nation.
The considerably larger value of LNG — particularly that imported from the US — in comparison with Russian pipeline fuel has severely impacted each European households and companies. Certainly, the current Draghi report highlighted excessive power prices as one of many major causes for the EU’s lack of competitiveness. The report emphasises that European firms face considerably larger power prices in comparison with their US counterparts: power costs stay “2-3 instances larger” for electrical energy and “4-5 instances larger” for pure fuel. These excessive prices have pushed giant components of Western Europe — at first Germany — into recession and even outright deindustrialisation, and proceed to hinder industrial progress and funding significantly.
On this context, the shutdown of the Ukrainian transit route is more likely to make a nasty scenario worse. Though the European Fee claims that the top of fuel flows by means of Ukraine may have a “negligible” impression on European fuel costs, the fact is that European spot costs, as decided within the TTF digital buying and selling hub, have proven a excessive sensitivity to the Ukraine transit route.
Certainly, European fuel costs have already risen 48% this yr, partly on account of markets anticipating the top of the transit deal. The precise shutdown of the pipeline is probably going so as to add further stress on costs — particularly if coupled with a colder-than-usual winter and better demand for LNG elsewhere on this planet. As Javier Blas put it in Bloomberg earlier this yr, that is “a stark reminder that Europe hasn’t but emerged from its power disaster”:
Admittedly, costs have fallen, however they continue to be a lot larger than earlier than Russia invaded Ukraine. Aside from delicate winters, the opposite cause why costs have dropped in Europe is as a result of demand has been a lot decrease than earlier than the pandemic, largely as energy-intensive firms in Germany decreased manufacturing. For Europe, the 2024-25 winter is more likely to be the final troublesome one.
Extra importantly, it’s a reminder of the completely suicidal insurance policies that the EU has applied in its try and wage a self-defeating financial battle in opposition to Russia, alongside its equally unsuccessful army proxy efforts — each of which run counter to the EU’s core financial and safety pursuits. The EU’s refusal to problem Ukraine on the shutdown of the pipeline — all whereas sending tens of billions to the nation — is solely the most recent instance of how EU coverage undermines the basic pursuits of its member states.
Certainly, the one actual beneficiary of Ukraine’s determination to close down the pipeline might be, as soon as extra, the US, which might be introduced with one more alternative to deepen the bloc’s reliance by itself LNG exports.
The one main pushback thus far has come from Slovakia’s chief Roberto Fico, who two days revealed an open letter to EU leaders calling for them to urgently re-evaluate Ukraine’s transfer. Fico described Ukraine’s determination to finish Russian fuel transit as “a unilateral measure” with no EU guidelines or sanctions at present stopping contracts for the provision or transport of Russian fuel. Ukraine was provided the opportunity of delivery non-Russian fuel sooner or later, however this was additionally refused by Zelenskyy, Fico mentioned.
The Slovakian chief famous that though Russian fuel transit by means of Ukraine signify a small proportion of total EU fuel imports, in a tense market scenario this may lead — and certainly has already led — to additional value will increase. In a video posted on Fb, Fico estimated that the top of transit of Russian fuel would price the EU an extra €120 billion euros in power prices over the subsequent two years.
Sadly, Fico’s warning is more likely to fall on deaf ears. The value might be paid, fairly actually, by all Europeans.
