A New Era of Gas Wars between Ukraine and Russia?

BY ANDRIAN PROKIP

Since the 1960s, Ukraine has been a major corridor for the transit of Soviet—and, later, Russian—gas to Europe. After the dissolution of the Soviet Union, Russia became deeply dependent on the quasi-monopoly of Ukraine’s gas transit capacities, and thus tried to get control of this gas transportation system. When repeated attempts proved unsuccessful, the Russian government tried another gambit: it started looking for a way to bypass Ukraine’s monopoly by constructing new pipelines traversing either to the south or to the north of Ukraine. These efforts were marked by numerous gas disputes—amounting to gas wars—in which the Kremlin tried to portray Kyiv publicly as an unreliable gas transit partner for Europe. Among these wars, the most remarkable were 2005–2006 and 2008–2009 gas crises.

Some of the pipelines were successfully put into operation: Yamal-Europe, Blue Stream, Nord Stream. However, not all projects Russia undertook to bypass Ukraine were viable. For example, after Russia annexed Crimea and launched military aggression in the Ukrainian Donbas, the South Stream (with an annual capacity of 63 billion cubic meters, or bcm) was canceled, for multiple reasons, and US sanctions meant the suspension of work on Nord Stream 2 (55 bcm), intended to carry gas primarily to Germany. If these two lines are ever put into operation, Ukraine’s role transiting gas to Europe will be vastly diminished and the country would stand to lose an important tool in its multidimensional conflict with Russia.

In addition to attempts to dilute Ukraine’s role in gas transit, the Russian government began building new pipelines to further its energy expansion. In 2009 Gazprom expected natural gas demand in Europe to rise to the level of 700 bcm within ten years. But these forecasts went unrealized because of Europe’s energy policy. As a result of a push to develop renewable sources of energy and to enhance energy efficiency overall, the EU’s natural gas consumption fell more than 10 percent in the period of 2010–2018. In 2019, energy consumption in the EU amounted to 482 bcm—considerably less than Russia had anticipated. And in addition to diminished EU energy demand, larger volumes of liquefied natural gas (LNG) have been reaching the European market, a development that has restricted Russia’s energy expansion to Europe even more.

In 2019 the global gas market experienced serious price drops. In 2020 the COVID-19 pandemic further crimped energy demand, which severely hit the Russian energy business. In the first half of 2020 Gazprom lost a big share of the EU market, supplying 18.4 bcm less than in the previous year, whereas US LNG shipments increased by almost 10 bcm in a year-over-year comparison. In addition, because Nord Stream 2 was not on-line, in late 2019 Gazprom was forced to sign a new transit contract with Ukraine, booking its anticipated capacity needs to the end of 2024 (65 bcm in 2020 and 40 bcm annually during 2021–2024 under a ship-or-pay rule), and paid Ukraine $2.9 billion compensation in the wake of a decision by the Arbitration Institute of the Stockholm Chamber of Commerce settling suits between Russia and Ukraine.

It looked as though the gas conflicts were settled, at least for a while. But European energy and climate policy was in the meantime becoming more ambitious: at the end of 2019 the EU adopted the Green Deal, a package of policy initiatives expected to make the EU carbon neutral by 2050. It is also expected to boost Europe’s economic recovery in the postpandemic period because of the huge investments planned. Among other measures, this package stipulates increasing the use of renewable energy sources, decarbonizing the gas sector, and radically increasing the role of hydrogen.

The details of this plan are laid out in the EU’s recently adopted Hydrogen Strategy for a Climate-Neutral Europe. Hydrogen, it is planned, will become a key priority in Europe’s energy transition, replacing nonrenewable energy sources and contributing to decarbonization by 2050. The strategy pays special attention to hydrogen obtained from renewable sources.

However, this policy is not just about the EU’s economy and ecology. It has a serious international dimension as well. The European Commission supports an energy transition regime not only in the EU member states but also in the neighboring countries, which could become hydrogen suppliers to the EU. The strategy calls for the installation of 40 GW of electrolyzers by 2030 to produce hydrogen in the EU and 40 GW in its neighbors, with subsequent potential for export to the EU.

The Hydrogen Strategy stipulates that “the Eastern Neighborhood, in particular Ukraine, and the Southern Neighborhood countries should be priority partners.” Thus Ukraine could become a key partner of the EU in the production and export of hydrogen. In light of Ukraine’s current diminished role in natural gas transit, which has the follow-on effect of a decreasing interdependency with the EU, hydrogen export may become the basis for a revitalized, long-term cooperation and part of the real economic integration of Ukraine and the EU.

The commitment to developing renewables and increasing hydrogen usage means that between 2030 and 2040, Europe may see a radical drop in demand for natural gas. That would likely mark the end of Russia’s energy expansionism.

The Russian government, however, is preparing to enter the European hydrogen market, and may even try to become a key player, though it is not mentioned in the EU’s Hydrogen Strategy. Recently Gazprom and Rosatom (the Russian state-owned nuclear corporation) signed a deal that envisages the launch of hydrogen production in 2024. The Russian Energy Ministry issued an action plan for hydrogen energy development by 2024. Russia may try to build new pipelines to supply hydrogen instead of gas. For example, the unused Nord Stream 2 pipeline could be repurposed to this end, according to the German energy giant Uniper. Uniper expects that Nord Stream 2 could carry a blend of 80 percent hydrogen and 20 percent natural gas.

Thus, for Ukraine, there is a risk that Russia, well experienced in the energy and misinformation wars, will try to compete with Ukraine in supplying hydrogen to Europe. For Ukraine to win this future battle, it is not enough just to be mentioned in the EU’s Hydrogen Strategy as a priority partner. The Ukrainian government and the country’s major energy companies should urgently prepare themselves to be such a partner to the EU. The gas distribution companies, in cooperation with some technical universities and academic institutions, have already started investigating the possibility of transmitting hydrogen through the existing distribution grids. However, significant investments in new hydrogen production and transit infrastructure will be needed in the near future. Kyiv should lose no time in making the relevant decisions, starting a search for investors, and reviewing the existing energy regulations—which, as I wrote recently, have created a lot of problems for Ukraine’s energy sector.

The future of Ukraine’s role in the European energy market is being designed today. And there should be no delay in getting all the pieces in place to win the emerging competition in a new era of energy conflicts.

The opinions expressed in this article are those solely of the author and do not reflect the views of the Kennan Institute.