Fate of Sudzha: What will happen to gas in Europe if the route is closed?
By Asif Aydinli
For the first time since the crisis began around the Sudzha gas metering station (GMS), located on the border between Russia and Ukraine, Gazprom's official representative Sergey Kupriyanov provided a comment , published on August 9, 2024, on the company's Telegram channel. This situation has sparked widespread discussions among analysts and market participants, as it significantly impacts gas pricing on the European market.The events surrounding Sudzha have led to a sharp increase in prices for both natural gas and liquefied natural gas (LNG). According to Sergey Kupriyanov, August 9 marked the highest gas prices of the year, despite it still being summer. A natural question arises: who benefits from this? Analysts suggest that the situation may be driven not only by the actions of the Ukrainian side but also by planned maintenance work on Norwegian gas facilities. Last year, similar work led to delays, which triggered another price hike.
The Sudzha GMS is a critically important facility for the transit of Russian gas to Europe via Ukraine. It is currently the only remaining route through which Russian gas is delivered to Slovakia, Austria, Italy, and Transnistria. The alternative route through the Sokhranovka GMS was blocked by the Ukrainian side on May 11, 2022. Gazprom called this decision unjustified but refused to shift transit to Sudzha due to technological constraints.
The situation is further complicated by the fact that the transit contract between Russia and Ukraine expires at the end of 2024. Ukraine has already stated that it does not plan to extend it but is interested in maintaining transit to ensure the interests of its European partners. At the same time, Ukraine is seeking to switch to an auction-based system for booking capacities on its gas transmission system (GTS), which would allow it to significantly increase transit fees, which would be paid by European buyers.
After Ukrainian armed forces entered the Kursk region on August 6, 2024, the transit of Russian gas through the Sudzha GMS began to decline significantly. On August 7, transit volumes dropped by 7.08% , and on August 8, they fell by another 5.33%. On August 9, there was a slight recovery in transit, but it did not reach previous levels.
Gazprom officially commented on the situation for the first time, indirectly confirming problems at the facility. However, the increase in transit on August 9 is unlikely to be seen as a sign of normalization.
Meanwhile, as the situation around Sudzha and the potential capture of the facility by Ukrainian forces unfolds, gas prices in Europe surged above $460 per 1,000 cubic meters. At the TTF hub in the Netherlands, September gas futures reached 40.36 euros per megawatt-hour, equivalent to $462.8 per 1,000 cubic meters. This represents a 0.66% increase compared to the previous day's settlement price.
The developments around Sudzha could have a long-term impact on gas supplies to Europe. As the only remaining route for Russian gas transit through Ukraine, Sudzha plays a key role in the energy security of several European countries, including Slovakia, Austria, and Italy. If transit through this route is further limited or completely halted, it will result in a significant reduction in gas supplies to these countries.
There is particular concern about the potential prolongation of the crisis, especially in light of the planned maintenance work on Norwegian facilities. If Norwegian supplies are also restricted, Europe could face a gas shortage, especially in the run-up to winter when energy demand traditionally increases. This could lead to further increases in gas and LNG prices, negatively impacting the economies of countries dependent on energy imports.
Moreover, the current events may encourage Europe to accelerate the diversification of its gas supply sources. Amid uncertainty surrounding Russian transit, EU countries may intensify efforts to secure new contracts with alternative suppliers such as the United States, Qatar, or Australia, leading to increased LNG imports. However, the construction of the necessary infrastructure for receiving and processing LNG requires time and significant investment, which in the short term will not fully compensate for the potential loss of Russian gas.
Political consequences for Europe should also be considered. The escalation of the situation on the Russia-Ukraine border could increase political pressure on European governments, forcing them to reassess their energy strategy and possibly even impose additional sanctions on Russia. This, in turn, could provoke retaliatory measures from Moscow, further exacerbating an already challenging situation in the gas market.
Thus, the current situation around Sudzha significantly impacts not only the immediate gas supply but also the strategic prospects of the European energy market. The developments will be closely monitored by analysts and market participants, and each new decision or change could have far-reaching consequences for the entire European energy system.
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