Ukraine gas transit expiry set to inflate Slovakia's energy costs

The agreement for the transit of Russian natural gas through Ukrainian territory officially expires at the end of December. However, the dynamically changing situation on the front, intensified attacks on Ukrainian infrastructure, and Moscow's assumption of initiative mean that transmission could be stopped at any moment.

This is a serious problem for European countries that continue to use Russian resources, such as Slovakia and Austria, and to a lesser extent, the Czech Republic, Hungary, Croatia, Slovenia, and Italy. Slovaks felt the first wave of restrictions when Ukraine cut off oil supplies carried out by the Russian giant Lukoil.

Now Bratislava must prepare for the cut-off of cheap Russian gas. Kyiv does not intend to extend the transit agreement with Russia, remaining deaf to the arguments of Prime Minister Robert Fico.

Slovakia is almost entirely dependent on the import of natural gas. Domestic production covers only 1 percent of demand, which averages 176 billion cubic feet of gas annually.

The main supplier here is Russia, with which Slovakia is linked by an agreement signed with Gazprom that covers supplies until 2028. The government in Bratislava succumbed to Putin's demands and agreed to pay Moscow for the gas in rubles starting in 2022. Prime Minister Fico argued to Brussels that these supplies are necessary to maintain the country's energy security. However, the European Commission replied that countries dependent on importing gas from Russia had enough time to secure other sources.

What does cutting off the Russian supplier mean for Slovakia? Is there a threat of a gas crisis? Not really. Despite the government's narrative, Slovakia has expanded its cross-border connections, gaining access to the European network and potential supplies from other directions.

"The expansion of transport capacities primarily took place after 2009, following the first gas crisis in relations between Russia and Ukraine, which led to the suspension of gas supplies to many EU countries. Since then, Slovakia created reverse connections in all directions - with the Czech Republic at the Lanžhot point (2010), Austria at the Baumgarten point (2011), Hungary at the Veľké Zlievce point (2015), and Ukraine at the Budince point (2016). Moreover, interconnectors were built with Hungary (2015) and Poland (2022)," according to a Polish analysis by the Institute of Central Europe (ICE).

The largest, state-owned company SPP (Slovensky Plynarensky Priemysel) signed agreements not only with Gazprom but also with companies like BP, ExxonMobil, Shell, ENI, and RWE. As the national operator declares, with these supplies they can cover up to 150 percent of the needs of their customers, both among households and industrial users, including heating plants.

According to the analyses by ICE, even without Russian supplies, this one company should have a 50 percent reserve.

Despite the previous reliance on imports of Russian gas through Ukraine, there is no indication that the expiration of the contract would threaten supply security. According to data from November 26, 2024, Slovak gas storages are 90 percent full, which corresponds to about 70 percent of Slovakia's annual gas needs based on 2023 consumption," emphasizes Marianna Sobkiewicz, a senior analyst at the Polish Institute of Economy in a conversation with money.pl.

Importantly, Slovaks also have reserved capacities in pipelines other than the one from Ukraine. An important supply route could be the pipeline from Germany through the Czech Republic and the network of the so-called Southern Corridor, which is a pipeline connection through Austria to LNG terminals in Croatia on the island of Krk, Greece, or Italy. A connection with Poland is also available.

As Sobkiewicz points out, the Slovak company ZSE Energia has already signed an agreement with the Orlen Group, which provides for the supply of natural gas from January to the end of 2025. The LNG, originating among others from the USA, will be delivered in liquefied form to the LNG terminal, where the ORLEN Group has a long-term capacity reservation. After regasification, the gas will be delivered by the Poland-Lithuania pipeline, and then to Slovakia through the Vyrava interconnector.

It is likely that Poland will benefit from the expiry of the Russian gas transit contract through Ukraine. The Poland-Slovakia gas interconnector will certainly constitute an important transit route," emphasizes the PIE expert.

This is not the only connection. There is also a pipeline connecting Slovakia with the Strachocina hub, which enables gas transmission at a level of 166 billion cubic feet annually towards Slovakia and 201 billion cubic feet towards Poland.

Options are there, but they mean higher costs. As Sobkiewicz explains, LNG terminals in Poland, Germany, or Lithuania can replace the lost volume or a significant part of it, but this increases the cost of importing liquefied natural gas. The price difference could be significant for Slovakia, considering that in 2022, LNG supplies from the USA to the EU were on average 50 percent more expensive than pipeline imports," emphasizes the PIE expert.

Cutting off Russian supplies through Ukraine to Slovakia does not mean the country will be without gas. However, it directly hits the gas interests of Slovaks, who earned from the transit of Russian resources to the Czech Republic and further into Europe.

As calculated by the Institute of Central Europe, even before the Russian invasion of Ukraine, about 92 percent of the natural gas pumped through Slovak territory (data for 2019) was transited and generated significant revenues. Throughout last year, however, transit was about 601 billion cubic feet, which is two-thirds less than in 2022.

This is the result of the EU's policy of moving away from supplies from Russia. Nonetheless, due to exemptions for some countries that were most dependent on Russian resources, this gas continued to flow.

"Stopping transit could mean significant financial losses for the Slovak side: resources from other, alternative sources will certainly be more expensive, and at the same time, the partly state-owned company Eustream will lose transit fees for Russian gas heading west," writes Łukasz Lewkowicz, an analyst at the Institute of Central Europe, in a comment.

As the PIE analyst reminds, this route also satisfied 65 percent of the demand of Slovakia, Austria, and Hungary for natural gas in 2023. In the years 2021-2023, the volume of Russian gas imports to Slovakia through Ukraine decreased by 55 percent. - However, it should be noted that in the period January-October of this year, the import volume remained at a similar level to the analogous period in 2023, and even increased by 8 percent," emphasizes Sobkiewicz.

A potential solution, more favorable for Slovakia, would be an arrangement with Azerbaijan. Prime Minister Fico held talks in Baku in May 2024 regarding potential gas supplies.

There are also two options here. The first involves using existing infrastructure through Bulgaria; the second concerns an agreement with Russia and Ukraine.

A cheaper alternative for Slovakia would be to replace the transit of Russian gas with 'Azeri' resources. Russia would still supply gas (labeled as 'Azeri gas') to Ukraine, while Azerbaijan would receive gas from Russia (labeled as 'Russian gas')," explains Sobkiewicz.

As the expert emphasizes, this would not eliminate Russian gas. - There would be no actual change in gas flows: traders from the EU would buy gas from Azerbaijan, which would buy gas from Russia. This solution is not preferred, considering the EU's goal of complete independence from Russian fossil fuels. Moreover, an agreement with Azerbaijan could create a precedent for similar agreements in the EU," comments the PIE analyst.