ICIS EXPLAINS: Ukraine gas transit agreement: What do we know so far?

LONDON (ICIS)–Discussions related to a new gas transit deal via Ukraine have been drawing significant interest from energy traders. Recent news articles related to the discussions have triggered steep price movements and ongoing market volatility

To help the market get a better understanding of discussions to date, ICIS has produced this Q&A. The insight has been collected over recent weeks and verified with multiple sources involved in talks. For background on technical details, the expiry of the current transit agreement and implications for the region, please check our earlier Q&A.

What we know so far

Discussions started in earnest in spring, when companies from Austria, the Czech Republic, Hungary, Italy, Slovakia and Ukraine met to discuss the possibility  of setting up a regional trading hub, possibly selling Azeri-labelled gas transiting Ukraine from 2025.

Since then, talks have focused on:

• Possible swaps between Russia and Azerbaijan. These may not involve just swaps of physical gas but also swaps of customers or other assets
• Price discounts offered to possible new customers
• The actual transit via Ukraine and the company or consortium of companies that could ship the gas from the Russian-Ukrainian border to EU markets
• The volume of transit
• The entry point(s) from Russia into Ukraine
• Possible arrangements to divert some of the gas to Ukrainian storage
• Transit tariffs

1. What are the options to bring gas to the Ukrainian border?

Option A: Physical swaps

Depending on how much gas would be agreed for the Ukrainian transit, one option is to swap gas, with Russia supplying the Azerbaijani market and possibly replacing some of the Azeri volumes contracted by Turkey.

Although Azerbaijan has imported Russian gas for internal consumption recently, it is questionable it would agree to allow Gazprom to increase supplies. Azerbaijani end consumers benefit from heavily subsidised prices. Although the Russian producer can offer price flexibility because of low production costs, supplies to Azerbaijan could be comparatively more expensive because of added transmission costs than locally produced gas.

Turkey may be keen to retain its Azerbaijani imports. The incumbent BOTAS has a 6bcm/year supply contract until 2033 and another short-term contract for 3.7bcm/year which was recently renewed until 2030. Historically, the Azeri sale price to Turkey was around 12% cheaper than the long-term Russian contract price to BOTAS. Currently, the purchase price also includes the transit tariff estimated at $75/1000m3 (€6.50/MWh).

Option B: Delivery on Russia-Ukraine border

This option might involve a straightforward delivery of Russian gas on the Ukrainian border to a company or consortium of companies looking to transit it. This would be no different from what happens in Ukraine right now, where the incumbent Naftogaz takes receipt of the gas and organises transit from the Russian border in the east to the Slovak border in the west.

Option C: Swaps with other producers

Another option that has been discussed recently is Turkmenistan. The country’s 5.5bcm/year gas supply contract to Russia expired on 30 June 2024 and it may be invited to consider selling gas for transit via Ukraine.

The Central Asia country is keen to diversify its markets in addition to supplying China and has recently been in talks with Turkey for exports.

In the early 2010s, it supplied gas to Europe via a scheme involving Ukrainian and Russian companies. The joint venture was dismantled.

Furthermore, the actual physical transit of Turkmen, Azeri or any other gas via Russia to Ukraine is blocked by Russia itself.

The former Soviet countries had tried to sign an agreement for the free transport of gas via the Russian system as far back as 2013 but Russia blocked it, seeking to retain its regional monopoly over supplies to Europe.

Option D: Swaps of clients or assets

This option has also been discussed although details remain sparse. Individuals close to negotiations say talks between Gazprom and Azerbaijan’s SOCAR had cooled off in recent weeks, reporting mutual distrust, with Gazprom still aware that Azerbaijan supported and was involved in the construction of the Southern Gas Corridor designed to help Europe diversify away from Russian gas.

Option E: Russian flows

Although the Ukrainian government had repeatedly denied it would negotiate directly with Gazprom, Donald Trump’s victory in the US election could force Kyiv into bringing the war to a close and resuming negotiations with Russia.

This option would be the most straightforward and possibly least costly from Russia’s point of view as any profits raised from the sale of transit gas would no longer have to be shared with intermediaries.

However, it would be a very hard sell to the Ukrainian population which has endured significant hardship since Russia invaded.

2. Who would organise the transit via Ukraine?

The options that had been discussed involved either one company, possibly SOCAR or a consortium of companies involving Slovakia’s SPP, Hungary’s MVM, Ukrainian companies, as well as other firms active in the region.

Replying to questions from ICIS, MVM Zrt denied involvement in talks, noting the ‘group does not conduct the mentioned negotiations about the Ukrainian transit.’

It said that, regardless of what happens to the Ukrainian transit, it can guarantee security of supply for its portfolio. It said termination of the Ukrainian transit would have no impact on its portfolio.

Also responding to questions from ICIS, the Ukrainian ministry of energy insisted the country’s official position on transit remained unchanged. It said transmission and storage operators have implemented all necessary measures and training to ensure stable operations in a zero-transit mode for Russian gas.

It added it was actively working to expand sanctions for all Russian gas via pipeline and LNG.

Gazprom, SOCAR and SPP did not respond to questions.

3. What about the transit risk?

A first risk facing any company interested in facilitating the transit relates to the delivery point of gas and the measurement of volumes at exit points from Russia.

The current interconnection agreement between the Ukrainian gas grid operator, GTSOU and the Russian counterpart Gazprom includes the Sokhranivka and the Sudzha border points. The former is under Russian occupation with the latter under Ukrainian occupation.

Gas flows enter the country via Sudzha, in the Kursk province of Russia. Exit measurements on the Russian side are reportedly carried out further north into Russia.

Whichever company took receipt of the Russian gas on the Ukrainian border would most likely require accurate readings to ensure they would not face legal disputes in the future.

The transit risk via Ukraine itself may be reduced because the transmission system is vast and could allow the operator to divert gas to other routes within the network in case any segments were physically damaged.

Gazprom reportedly asked for deliveries via Sokhranivka but if the border point and the associated Novopskov compressor station remain under Russian occupation it is unlikely any agreement would be reached to use this point.

4. Transmission tariffs

The regulator NERC published the proposed transmission tariffs  for the upcoming regulatory period covering 2025-2029 on November 7.

Under proposals going for public consultation on November 13, long-haul tariffs are set to more than double on current levels.

The levels were calculated on a no Russian transit scenario and there are no tariffs included for the Sudzha and Sokhranovka border points with Russia.

Nevertheless, a market source conceded  that overall tariffs could be adjusted in case a transit deal is reached at a later date.

5. Bringing gas to Europe

Here too, there are multiple discussions involving multiple options.

Slovakia: The main beneficiary of the transit would be Slovakia’s SPP which reportedly has a 3bcm/year supply contract with Gazprom until 2034.

Yet market sources say the company is still keen to persuade other buyers, for example, Hungary’s MVM or German companies such as Uniper or RWE to secure additional volumes.

On the other hand, there are reports that Ukraine has proposed Slovakia offtake higher volumes, some of which could be stored in Ukraine but the offer was declined by SPP because of additional costs the company does not envisage. The information was valid as of the end of October. There were no further details on whether discussions had advanced by the first half of November.

Hungary

Hungary no longer offtakes Russian gas directly via Ukraine as most of its supplies sold by Gazprom have been rerouted via Turkey and the Balkans.

In recent months, companies such as state-owned supplier MVM have been ramping up imports via Serbia and Romania, accumulating gas in Hungary and selling it further to premium markets. Gas sourced in Bulgaria at significant discounts has offered attractive opportunities for Hungarian buyers.

Austria

The country has ramped up Russian imports entering the country via Ukraine and Slovakia by a third in the first ten months of 2024 compared to the same period in 2023.

Market sources say that despite the availability of a compensation scheme  for companies looking to buy non-Russian gas, Austrian consumers continue to prefer Russian gas, possibly because of price discounts embedded in contracts.

Moldova

There were reports at the end of October that representatives of state company Moldovagaz had travelled to St Petersburg to discuss the possible resumption of Russian flows to the Right Bank of the River Nistru after exports to this region stopped at the end of 2022.

The government is keen to keep a lid on gas prices to consumers ahead of parliamentary elections next year and resuming comparatively cheaper Russian gas may help.

Representatives of the company, which is majority-owned by Gazprom, were expected to meet counterparts at the Ukrainian gas grid operator GTSOU, but the TSO refused to take part in the meeting, sources close to discussions told ICIS.

There is strong opposition from wholesale companies which could be squeezed out if comparatively cheaper gas volumes reach the market.

6. Volumes and duration

Sources say counterparties had been mulling anything between 4-15bcm/year. The bracket is wide and provides little indication as to what volumes would eventually be agreed, if at all.

The CEE region is already oversupplied and, although many companies are keen to lock in cheaply priced volumes, they also know that surplus volumes would crash the market, limiting premium opportunities.

They may also keep an eye on developments further out in 2026 when US and Qatari LNG production is set to double, adding further pressure to prices.

Ironically, Gazprom is also aware that possible transit via Ukraine would compete with its TurkStream transit via Turkey and will likely seek to play one against the other in terms of volumes and duration of contracts.

On the other hand, if Ukraine will agree to a deal, it may seek to negotiate higher volumes to ensure it covers transport costs.

Finally, all counterparties will monitor the incoming European Commission and its commitment to phase out Russian gas by 2027.

Depending on the signals they get, any transit arrangements would be short term.

7. Does a Trump US presidency change anything?

Yes. Donald Trump has pledged to bring the war to an end, likely forcing Ukraine to resume direct talks with Russia, including possibly over the transit of Russian gas.

If Ukraine agrees to the transit it may provide a signal to other buyers that it would be acceptable to restart Russian imports, including via Nord Stream.

Unless the EU proceeds with sanctions of its own against Russian gas, it is possible that Gazprom would seek to rebuild its lost European market share.

But this would coincide with a surge in US and Qatari LNG production from 2025 and 2026, which would help depress global gas prices and provide real competition including for European buyers.

8. All things considered, will the transit continue after 2024?

Possibly, but much will depend on several factors, including the possibility that negotiations would drag on into the new year:

• Who will supply the gas?
• How will the transit be organised?
• What volumes will be involved?
• What does Ukraine get in exchange?
• How long will the new deal be signed for?

9. If there was to be an agreement, when should we expect an announcement?

Hard to tell, although the upcoming COP29 forum in Baku in the second half of November may be a good opportunity to release further updates.