Gas transit contract lowers prices in Europe

Spot prices for natural gas at key European hubs affecting pricing on the Ukrainian market declined during December by 18.8–20.6%, to 12.25–12.66 €/MWh. This was a consequence of the fact that the European Commission, Naftogaz and Gazprom agreed on the transit of Russian gas through Ukraine for the next five years.

Compromise agreements on gas transit are beneficial to all three parties: the Russian exporter (Gazprom), the Ukrainian transit country (the Ukrainian GTS Operator and Naftogaz, as the largest gas company) and numerous European consumers.

If the Ukrainian and Russian parties failed to reach an agreement and a contract for gas transit through Ukraine had not been signed since January 1, 2020, this would lead to a sharp increase in the cost of natural gas on the European market, which would result in gas prices energy in Europe in the short term would be a record for the past few years.

The losses of European consumers from the sharp cost of gas would be difficult to accurately estimate, but only in 2020 would they amount to billions of euros, Ukraine would lose transit revenues and the ability to purchase additional volumes of gas from the European direction due to the inability to buy inexpensive volumes and would have to raise prices for all categories of consumers. However, record highs over the past 10 years and more than sufficient gas reserves in underground storage facilities enabled Ukraine to calmly survive the current heating season in any scenario.

For Gazprom, the continuation of gas transit through Ukraine in 2020-2024 allowed to save the face as a reliable supplier and made it possible to avoid fines from European gas buyers in the amount of about €400 million per month.

In general, the settlement of the issue of gas transit was very beneficial to all three parties to international gas relations. Immediately after the news came about reaching an agreement in principle on the transit of Russian gas through Ukraine’s gas transmission system on December 23-24, gas prices in Europe began to decline sharply, and this downward price movement with slight upward adjustments continued until the end of last year.

So, on December 31, the spot natural gas market on the Powernext exchange ended with the following key quotations:

  • at the Austrian Central European Gas Hub (CEGH) the price was 12.56 €/MWh compared to 15.31 €/MWh at the end of November;
  • at the Dutch hub Title Transfer Facility (TTF) the cost of gas fell to 12.25 €/MWh against 15.42 €/MWh a month earlier;
  • at the German hub Net Connect Germany (NCG), natural gas prices fell to 12.66 €/MWh against 15.59 €/MWh on November 30;
  • at the same time, at the German Gaspool Hub (GPL), the price of natural gas decreased to 12.60 €/MWh from 15.93 €/MWh at the end of November.

Peak prices for natural gas in Europe over the past six months were observed in November, when two factors led to their growth: the uncertainty at the time with the issue of gas transit through Ukraine and the seasonal increase in consumption.

At the end of the year, the price of gas was at the same level that was observed in mid-July and early November, and in the first days of January European gas quotations continued to decline.

Tags: Gazprom, gas, Naftogaz, contracts, The European Commission, UGSF, gas transit, price, gas supplies

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