After the War in Ukraine…  Four Scenarios of Russian Gas Export to Europe

Gas production industry near Novy Urengoi, Russia.

By Thierry Bros

As we enter the third year of the EU energy crisis and the second year of the war in Ukraine, there are four possible hypothetical scenarios for pipeline exports of Russian gas to Europe:

  1. Until the end of the war in Ukraine, the Kremlin will be able to carry on playing the uncertainty card. Russian pipeline flows can be expected to stay within a bracket of 0.9 bcm/month (TurkStream only, as Russia has little incentive to cut Europe off completely) to 4.5 bcm/month (TurkStream and Ukrainian contracted transit). The uncertainty Europe faces from Russia alone therefore amounts to 3.6 bcm/month, or 43 bcm/annum. This is more than 10% of EU demand or 17% of EU storage capacity.
  2. In a frozen conflict (cease-fire) with no peace treaty and no internationally recognized borders, as in Korea, there would probably be no agreement with Russia on gas. Only a few selected EU countries would continue post-2025 to receive Russian gas via TurkStream.
  3. If peace talks ever take place and succeed, the war could end with a geographic agreement delimiting borders. In this case, extra Russian pipeline gas via Ukraine (on top of TurkStream) would be unwelcome in Europe until all arbitrations have been finalized.
  4. In the event of “peace”, Europe could ask Russia to contribute financially to the reconstruction of Ukraine. Russian commodities and in particular pipeline gas that can’t be easily re-routed, could be used as a financial asset in an extended peace agreement. History presents examples of oil flowing under embargoes or sanctions. The Iraqi oil-for-food program could be used to draft a Russian-pipeline-gas-for-Ukraine-reconstruction; a peace agreement could set the amount of Russian gas Europe could buy by means of a formula determining costs and income for Russia and “gas rent” for Ukraine. And to prevent Russia from interfering with the market, an ad-hoc formula would be set for this gas.

Focusing on the hypothetical latter case – to be initiated by Ukraine alone – the extended peace agreement would freeze all pending gas arbitrations and would set both volumes and prices for this long-term Russian gas contract.

In terms of volume, the EU should not take more than 80 bcm/annum, as this figure is half of former Russian pipeline volumes to the EU and represents less than 25% of EU gas demand. These volumes could be split between the only two lines still operating: Ukraine and TurkStream. With 15 bcm/annum at most flowing via TurkStream this would leave 65 bcm/annum at most via Ukraine, in line with the volumes contracted for 2020.

This additional gas could be purchased in order to first displace the remaining coal and petroleum products in the EU’s power-generation mix. In 2022, 450 TWh was produced using fuels that generate more pollution than gas. This alone would require around 90 bcm of gas. Germany alone contributed 163 TWh (36% of the EU total, whereas Germany accounts for only 19% of the EU population). As Germany is the richest country in the EU, with one of the worst climate records in terms of electricity generation, and has a major responsibility vis-à-vis Ukraine, it could be obliged to accept at least 30 bcm of Russian gas to enable it to close down all of its polluting power-generation assets.

All EU countries would be free to use, or not to use, Russian gas. After all countries have submitted their requests to the EU Joint Purchasing Mechanism, if aggregate demand was higher than 80 bcm/annum, the split between EU countries would be performed on a pro-rata basis. It would be a baseload contract with no flexibility. Member-States would have to buy the agreed volumes, and Russia would have to supply them. Upon Russia’s first failure to deliver, all frozen arbitrations could be re-opened by European utilities. This extra gas would boost European security of supply with total volumes too low to inflict damage on Europe if Russia decides to “weaponize” its gas.

Prices would need to be set using an index that Russia can’t alter. As reliance on oil indexation is declining, the best index available is probably the US Henry Hub (HH). The fairest way would be to price Russian gas at the cost of US LNG delivered to Europe, with a cap. The formula could be 115% of HH + $7/MMBtu (to take liquefaction, shipping, and regasification into account) with a HH cap at $10/MMBtu translating into a cap of $18.50/MMBtu for Russian pipeline gas delivered to Europe.

This money would then have to be split between various players:

  1. Gazprom would get a minimum cost-plus production sum and, once HH is above $3/MMBtu, an additional small incentive.
  2. For 65 bcm/annum, Ukraine’s increased transit fee would be paid directly by the EU utilities5 that take delivery of the gas at the Russian-Ukrainian border. For the 15 bcm/annum transmitted via TurkStream, the same transit fees would go to the pipeline’s owner, Gazprom, as the EU utilities would take delivery in their respective countries. Gazprom would need to ensure that transit via Turkey is guaranteed. If Turkey were to refuse to cooperate, Russian exports to Europe would then be limited to 65 bcm/annum.
  3. The remaining gas rent would be paid directly into an escrow account for Ukraine’s reconstruction.
  4. This formula should not dictate TTF prices. If TTF prices are higher than the formula described above, EU Member-States would enjoy both security of supply and reduced costs. If TTF prices are lower, this could be viewed as an indirect EU contribution to the reconstruction of Ukraine. The average difference between the lowest and highest Russian prices is $12.80/MMBtu (this is what the EU Commission anticipates in its RePowerEU forecast). And having Russian gas prices capped at $108 (per barrel of oil equivalent) could also be viewed as riskmitigation to avoid further de-industrialization in Europe.
  5. The term of the contract could be twenty years at most, allowing full reconstruction of Ukraine without impacting the EU Green Deal narrative.

In a realistic scenario with HH at $3/MMBtu, Russian pipeline deliveries would cost $10.50/MMBtu, with Ukraine receiving $15 billion per annum for its reconstruction6.

With Ukrainian 2021 GDP of $200 billion7, these reconstruction amounts are substantial and can’t be expected to continue for more than twenty years. The extended peace agreement could even terminate the contract once $200 billion has been paid into the Ukrainian reconstruction escrow account8. Russian gas could help to end coal-fired power generation in Germany and avoid any further de-industrialization in Europe.

Thierry Bros is a lecturer and expert in the field of energy. The article was published in the World Energy Weekly, a publication of Petrostrategies, a French think-tank specializing in energy issues.