The geopolitics of energy is in full play in Europe. For years, Russia has been the biggest gas supplier in Europe. This even continued after the Russian invasion of Ukraine in the year 2022.
But now, Ukraine has stopped the transport of Russian gas to Europe through its territory after its oil giant Naftogaz refused to renew the five-year transit deal with Russia’s Gazprom.
It is pertinent to note that the transit deal signed in the year 2019 benefited every player in Europe. Ukraine earned around $800 million to $1 billion in transit fees per year from this. Russia got access to a huge European market for its energy sales and Europe has stable supplies for its energy requirements.
Now, with the transit deal gone, Europe is witnessing a foreseeable energy crisis. Though the impact would be way lesser than that in the year 2022, it will severely impact poorer and smaller countries of Eastern Europe, particularly Slovakia and Moldova. The rich Western European countries are least likely to face any consequences as they have diverted their supplies to other parts like the US and Qatar.
The panic in Eastern European countries is visible. Slovakia’s Prime Minister Robert Fico, who is perceived to be a friend of Putin recently made a surprise visit to Moscow where he discussed gas supplies.
During his New Year’s address, he categorically cleared that it would be the European Union and not Russia that would suffer after Ukraine turned off the tap on Russian gas supplies.
He has even threatened to take reciprocal measures against Ukraine if it does not extend the gas transport arrangement. These measures include stopping electricity exports to Ukraine as it faces harsh winter.
Moldova, the former Soviet state declared a 60-day state of emergency over fears of an immediate threat to the security of its citizens after the halt in Russian gas flows.
This also underlines the difficulty of Europe in coming to a common position when dealing with Russia. Hungary and Slovakia don’t want the closure of this pipeline while Western Europe wants to end Russia’s energy leverage over Europe and to prevent Putin from funding the war in Ukraine through energy sales.
However, the question remains why did Ukraine halt this agreement which was getting it a revenue of around $1 billion annually at a time when its economy is dwindling and it is battling harsh winter? Who are the stakeholders who will benefit from this?
The halting of this agreement marks a pivotal shift in Europe’s energy landscape, potentially influencing U.S. LNG demand and global natural gas prices.
Ukraine’s energy ministry said it ended the deal “in the interests of national security.” Ukrainian President Volodymyr Zelensky called this move one of Moscow’s greatest defeats and accused Putin of turning energy into a weapon. He also expressed hope that the United States would increase its supply of gas to Europe.
Russia which enjoyed dominance on Europe’s gas supply for years is likely to suffer around $5 billion.
The one country which is using the situation to its advantage is the US. The US remains the largest exporter of LNG so far in 2024, shipping a record 56.9 million metric tons of LNG during the first eight months of 2024.
As per a report by Reuters, Europe’s sudden jump in demand for LNG since Russia’s invasion of Ukraine has been the main catalyst behind the ascendancy of the U.S. LNG export industry.
From the year 2018 to 2021, U.S. LNG exports to Europe averaged around 15 million tons a year but jumped to around 55 million tons annually in 2022 and 2023
The US has already been accused of blowing up the Nord Stream pipeline in the year 2022 that supplied Russian gas to Germany. The US has long been asking Europe to reduce their energy dependence on Russia. The entire focus of the US geopolitical strategy has been to prevent Europe from accessing Russian oil and gas.
Reports have pointed out that the US was buying Russian gas from India and was selling it to Europe at an inflated price. This has led to a mounting energy crisis in Europe and now has finally succumbed to US pressure. Europe has started to significantly boost its LNG import capacity since Russia’s invasion and is strengthening its infrastructure to manage non-Russian supplies and to bring energy from Qatar and the US to Europe.
Since 2022, the EU has been successful in cutting down Russian Energy imports from 35% to just 8%. This has now created an opportunity for increased U.S. LNG exports to Europe. After the halting of the gas transit agreement, the demand for U.S. LNG is expected to increase further in 2025, tightening the global LNG market. This is going to increase the prices in the energy market.
India is also likely to be affected by this move. India imports 80% of its energy requirements and the tightening of the global LNG market will surely increase energy prices and India is likely to face more financial constraints.
India was successful in dealing with the oil crisis by importing unprecedented amounts of Russian oil. But gas cannot be transported in containers and needs pipelines.
Hence, the latest move by Ukraine will put considerable pressure on global energy markets. While the U.S. profits from this by exploiting market mechanisms, Europe seems constrained to accept policies aligned with the US interest even at the expense of its economic welfare.