Gazprom announced at the start of March that it was starting procedures to cancel both its supply contract and its transit contracts with Ukraine. Cancelling the transit contracts via Ukraine raises the question of whether Gazprom can reroute sufficient gas to the rest of Europe.
In 2017, around 80 bcm of gas transitted through Ukraine. Of that, around 50 bcm went into Slovakia, 15 bcm into Romania, 10 bcm into Hungary and 5 bcm into Poland. There are currently few existing options apart from transiting gas through Ukraine. Nord Stream 1 is running at 90% of its capacity. So the onus is on Gazprom to now deliver the pipeline projects it is developing.
The 55 bcm/y Nord Stream 2 (NS2) pipe is progressing despite opposition from some central European countries and the European Commission. The 55 bcm/y EUGAL pipe, running north-south in Germany, needs to be built for flows through NS2 to continue onwards through Europe. However, only half the capacity of EUGAL is to extend to the Czech border (Brandov), and no downstream pipeline reinforcement is currently planned from that point southward. Current OPAL-Brandov capacity, of 25 bcm/y, was fully utilised in 2017. Plentiful Russian gas into northern Germany without an exit route southward means that Poland-to-Germany volumes, of 30 bcm/y, are the transit gas flows most at risk of no longer being needed due to NS2.
The building of the 31.5 bcm/y TurkStream pipe, which runs from Russia to Turkey, is progressing. Sub-sea pipelaying was some 50% completed in early March. The first 15.75 bcm/y line is for the Turkish market and is expected to be in service in H2 19. Flows through this pipeline could replace some 13 bcm of Russian gas that currently transits Romania and Bulgaria into northwest Turkey.
European imports via the second 15.75 bcm/y string of TurkStream will flow onto the 12 bcm/y IGI pipe, which runs from the Turkish-Greek border to the west of Greece, where it links with the 20 bcm/y Poseidon pipeline to Italy. TurkStream would allow Gazprom to replace 12 bcm/y of the 30 bcm/y of Russian gas currently going into Italy’s northeastern border. The two TurkStream strings could replace up to 25 bcm of the 80 bcm of EU gas supply currently transiting Ukraine.
Even with these various projects Gazprom is still nowhere near being able to replace all of the 80 bcm/y or so of flows that currently go through Ukraine, so the threat to cancel the transit contracts should be seen as gaining leverage to renegotiate a more favourable transit deal.
In terms of market impacts of the new pipes, the new flows would help keep the TTF and German hubs at a discount to the other regional hubs, given that NS2 would be pushing so much gas into the market. We also expect to see a narrowing of the premium of the PSV to AVTP, while NE Greece has the making of a low-priced competitive southern gas hub.