Gazprom turns off the gas tap again. It can cut off the last big customer in Europe

There have been so many threats from Russia about turning off the gas tap to Europe that hardly anyone paid attention to the latest one. This time, Moscow is threatening the Ukrainian state-owned company Naftogaz with a suspension of gas transit through Ukraine. However, this would mean that the Russian state-owned company Gazprom would cut off the most important of the other two transport routes to the EU, through which it serves its last major European customer: Austria. Meanwhile, Austria’s most important gas importer, OMV, is sending signals that it is prepared for a crisis situation.

The last two delivery routes to the EU

To understand this particular situation, you must first be aware of it: Despite the war in Ukraine, the transport of Russian gas through Ukraine to the EU continues uninterruptedly. This can be explained by Kiev’s desire not to cut off its European neighbors from Russian energy supplies, which are still largely crucial for them. In addition, violation of the five-year Russian-Ukrainian transit contract, which is valid until the end of 2024, may result in lawsuits before international arbitration courts and, as a result, severe penalties.

Brussels did not impose sanctions on Russian natural gas. It was Moscow, in an apparent bid to put pressure on Ukraine’s European supporters, that first imposed sanctions on the Yamal-Europe gas pipeline via Poland to Germany in spring 2022 as part of a dispute with its Polish partner, and then completely suspended already severely limited supplies to Germany on August 31 and Western Europe via the Nord Stream 1 gas pipeline (this gas pipeline was destroyed by an unexplained explosive attack only almost a month later, on September 26).

This would leave Gazprom with only two intact supply routes to the EU. This is the second branch of TurkStream, which runs through Turkey to Bulgaria, and then under the name of Balkan Stream through Serbia to Hungary. The capacity of this pipeline is less than 16 billion cubic meters per year. There is also a much larger transport route through Ukraine that was built during the Soviet era and which Russia now threatens to block.

Gazprom boss calls arbitration courts ‘illegal’

The five-year transit contract, signed in December 2019, stipulates that Gazprom will pump 40 billion cubic meters per year through this transport route through Ukraine and Slovakia to the Austrian Baumgarten transmission point between 2021 and 2024. At this hub, Russian supplies have been taken over by European gas importers from Austria, Germany, Italy, the Czech Republic, Slovenia and other countries for decades. In the meantime, the semi-state-owned Austrian oil and gas company OMV has remained virtually the only major customer.

The oldest operating Western European buyer of Russian or Soviet natural gas could therefore suffer if Gazprom carried out its latest threat to Ukraine. On July 6, the head of Gazprom, Alexei Miller, declared that Russia may impose sanctions on Naftogaz if Naftogaz continues its legal actions in European arbitration courts. In this case, any further cooperation, including transit, would be impossible, Miller threatened.

In light of Western sanctions and the “wave of Russophobia in Europe”, he continued, Gazprom can no longer count on a fair trial. Arbitration courts, for example in Switzerland or Sweden, are therefore “unlawful” and participation in them is “pointless”.

The dispute over Sudja and Sochranovka

Naftogaz wants arbitration courts to clarify whether Ukraine is entitled to billions in penalties from Gazprom. In the transit contract, it was agreed that the Russian supplier must pay 40 billion cubic meters per year for transport, even if it delivers less. And from 2022, it delivers much less: instead of the daily 109.5 million cubic meters, mainly around 42 million cubic meters.

The Russian company, however, refuses to pay because the Ukrainian side does not accept any Russian deliveries through the Sochranovka measuring station as of May 2022. Since then, transit has only been through Suja measuring station. The argument of the Ukrainian side: the supply route through Sochranovka runs through the Ukrainian region of Lugansk, which is occupied by Russia and where fighting is taking place, so its use is not possible due to the war.

Therefore, Kiev proposed to increase the transit through Sochranovka accordingly, but the Russian side claims that it is technically impossible. In the past, as much as a third of the EU’s gas was pumped through this point. Gazprom reduced transit by almost two-thirds.

It is unlikely that this dispute will be settled in an arbitration court with the participation of both sides, as Moscow seems to take seriously its threat to stop supplies, even at the price of a further sharp reduction in its gas exports.

However, such a development would not surprise OMV. Already last year, deliveries to Austria fluctuated significantly, sometimes as little as 30 percent or even less of the agreed volume, the company’s chief financial officer, Reinhard Florey, announced during the presentation of the 2022 balance sheet in early February.

OMV secures ‘non-Russian gas sources’

In late May, former OMV CEO Gerhard Roiss caused a stir in Austria by warning that Ukraine would not renew a transit contract with Russia that expires at the end of 2024. The next day, Austrian Energy Minister Leonore Gewesser demanded that Austria quickly free itself from its still high dependence on Russian gas, because “inaction is a threat to our country.”

Three weeks later, OMV announced its decision to develop the large Neptune Deep gas field, which had already been discovered in 2012 in the Romanian part of the Black Sea. Thanks to this project, according to OMV CEO Alfred Stern, “Romania will become the largest producer of natural gas in the EU”. From 2027, gas supplies from this source to Austria will also be possible.

After two consecutive weeks, OMV announced that it had leased additional European gas pipeline capacity to transport gas to Austria. These are gas pipelines in Germany and Italy, through which larger volumes of purchased Norwegian gas can be imported from October 2023 to September 2028, as well as gas coming to Dutch and Italian LNG terminals.

Austria prepared for lack of supplies from Russia

“All of this has given us access to non-Russian gas and we will have more than enough to meet our commitments to customers,” Alfred Stern emphasized in an interview with the Financial Times (July 9, 2023).

He also stated: “As long as Gazprom continues to supply, we will continue to buy these quantities from Gazprom.” This was a clear rejection of the unilateral termination of the contract with Gazprom, which is valid until 2040 and whose deliveries are not covered by EU sanctions. But the actual message of the head of OMV in this conversation was different: If Russia stops the flow of gas on its own initiative, Austria will deal with it.