Energy and Our World

This article originally ran on Forbes.com on December 6, 2024. All rights reserved.

Daniel B. Markind is a Forbes.com energy column contributor. The views expressed in this article are not to be associated with the views of Flaster Greenberg PC.

Despite being at war for almost three years, Russia has continued to ship natural gas via pipelines through Ukraine to other countries in Europe. That has kept money flowing to both countries, which helps as they try to kill each other. However, that may end on December 31 when the current five-year pipeline agreement ends. Kyiv is saying that it will not enter into negotiations with Russia over an extension. (Source). It appears then that the Zelensky Administration in Kyiv has determined that the economic costs to itself by cutting off transshipments, including the loss of fees that this arrangement generates for Ukraine, are less than the potential costs to Moscow would be in terms of lost markets and revenue if the pipeline agreement is not renewed.

In numerical terms, the estimates are that Russia could lose up to $6.5B annually should the agreement not be renewed. (Souce). For Ukraine, losses could equal only $800M annually – substantially less than Russia. In addition, Russia faces the long-term effects of the loss of market share and the perception of its future reliability. In the long term, the consequences of the non-renewal of the pipeline agreement could shift the entire geopolitical energy equation. The effects of that might be the most important impact of all.

Since 2022, when European countries pledged to disconnect from Russian energy supplies in the wake of Vladimir Putin’s invasion of Ukraine, Russia's share of natural gas imports to Europe has decreased significantly from the 40% share that it once owned.  Meanwhile, Ukraine's share of those exports has dropped from 11% to 5%. (Source).

However, not all European countries have been successful in ending their energy dependency on Russia. As we approach 2025, Austria still receives most of its gas via Ukraine from Russia. Hungary also receives two-thirds of its gas from Russia, and Czechia has begun, again, accepting gas imports from Russia. (Source). 

Perhaps nothing shows the complicated nature of pipeline politics and economics than the Urengoy-Pomary-Uzhgorod pipeline itself. This Soviet era relic brings gas from Siberia via the town of Sudzha - now under the control of Ukrainian military forces - in Russia's Kursk region. It then flows through Ukraine to Slovakia. In Slovakia the pipeline splits, with one stem flowing into Austria and another into neighboring Hungary. Should Ukraine follow through on its threat to cease allowing transshipments of Russian gas and oil through its territory, those countries will find their economic situation precarious, to say nothing of their need to supply heat to their people during the winter. In addition, while Ukraine’s natural gas infrastructure largely has not been targeted by Russia, so far, should that infrastructure no longer be valuable to Russia, it could become a prime target of Russia itself as the war continues.

On this side of the Atlantic, the end of the Ukraine pipeline agreement makes American energy export capability all the more important. Due to the shale revolution in the Northeastern United States, America is able to replace Russia as Europe's key natural gas supplier. Further, as Russian supplies are drilled from the Arctic with few environmental safeguards, that arrangement has not only worked well for American producers and overall national security, but it actually is also better for the world environment as a whole. If Ukraine now moves to isolate Russia even further, continued American oil and natural gas production will no doubt have positive impacts in many areas, and possibly might even help bring the fighting to an earlier end than might otherwise be possible.