The Central and Eastern European natural gas market 2013-19: trends and implications

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However, other mostly market-driven changes have also played a role in transforming the energy landscape in Europe, especially in intra-European (and Ukrainian) gas trade and  markets. This includes the reversal of significant volumes of Soviet-era “east-to-west” gas flows, as well as increases in Europe’s capacity to import Liquefied Natural Gas (LNG). The major changes in gas flows and their geopolitical implications presented below illustrate some of the most significant developments that occurred between 2013 and 2019.[1]

Ukraine

One of the most significant changes to the European gas landscape during this time period was the reversal of Ukraine’s direct dependence on Russian gas imports, which were replaced with imports from the West. Ukraine has essentially stopped buying gas from Russia (it still allows the transit of Russian gas to Europe under a contract  through 2024) and instead buys gas from the West. Admittedly, some of this gas is of Russian origin sold onwards to Ukraine through traders and transmission system operators in other places in Europe. Despite this, much if not most of the gas is  no longer controlled by Moscow when it is imported into Ukraine. The country imported roughly 30 billion cubic metres per year (bcm/y) from Russia for domestic consumption in the early 2010s. Today, however, it does not import any Russian gas for the domestic market. During that time, the nation experienced a rapid increase in imports from the West, from about two to over 13 bcm/y. This gas was principally imported from Slovakia. The rest of Ukraine’s natural gas consumption – down by some 50 per cent over the decade – is made up of gas produced within the country.

One caveat to this analysis is that we do not know how much, or whether, Russian gas is still used in the heavy industries of the eastern and southern parts of Ukraine that Russia occupies. Those industries in years past typically represented about 40 per cent of Ukraine’s GDP and upwards of half of the country’s exports. The metal and chemical industries in eastern Ukraine used to consume roughly half of the state’s imported gas from Russia. A lack of transparency (even by historical standards) regarding the current gas usage and sources of assets in these regions make it difficult to understand how the system is working there now. Nonetheless, basic math suggests that, excluding the unknowns regarding eastern Ukrainian and Crimean gas usage, Ukraine uses no Russian gas and now only transits Russian gas to Europe.

These developments suggest that Ukraine has become increasingly integrated into the European market trading system in a relatively short time. A major factor at play here is the fact that imports into Ukraine was enabled during the 2010s by effective and efficient EU gas-trading hubs. Regulations in Europe that permitted traders to, in many cases, undercut Russia’s offering price encouraged Ukraine to buy from the West rather than exclusively from Moscow. It could be argued that subsequent political changes only strengthened the incentive to pursue this market-driven trend. In any event, this previous half decade or so witnessed dramatic change in Ukraine’s reliance on direct economic support via gas from Russia, and a switch to integration with the European open market trading system. Clearly, this has been a small but meaningful win for those hoping to further Ukraine’s integration with the West.

Slovakia and Hungary

Slovakia also offers an important story regarding changing the realities in the gas market. The country’s gas imports remained essentially the same between 2013 and 2019, but its exports to Ukraine rose from zero to nine bcm/y. Some of this change is the result of Ukraine’s transit contract with Russia to send gas west, as some is then returned to Ukraine after passing through Eustream (Slovakia’s gas transmission system operator) and presumably gas traders. Slovakia also sends slightly more gas to Austria, presumably for storage at Baumgarten, a giant gas storage site, or sold onward to other continental Europe countries. Slovakia also tripled its exports to the Czech Republic during the 2013-19 period and raised its exports to Hungary from zero to 1.3 bcm/y. As a result, Slovakia’s growing importance in the CEE gas trading system is increasingly clear.

Hungary is another emerging player in the construction of a more flexible regional gas sector. During the period we examined, Hungarian gas imports rose from about 10.2 to 16.5 bcm/y, with the bulk of this increase coming from Ukraine. Imports from Ukraine rose from 6.3 to 11.3 bcm/y, accounting for about 80 per cent of the total increase of Hungarian imports.  These increased volumes were likely Russian gas transited through Ukraine. While imports from Slovakia grew from 0 to 1.3 bcm/y, and imports from Austria and Romania remained relatively flat, Hungary has become somewhat of an export centre. Hungary increased exports to Croatia sevenfold and to Romania by a factor of six. Exports to Serbia also increased marginally and those to Ukraine more than doubled. While outside the scope of this survey, Hungary is reportedly now receiving gas via LNG from the long-awaited Krk facility in Croatia and is even in talks regarding promising gas developments in the Black Sea. If Romania ever develops its offshore gas deposits, pipelines may bring more gas to Hungary that it can dispense into the European market. Finally, Hungary created in 2013 one of the fastest-growing gas trading hubs in CEE, CEEGEX, which accommodates both intra-Hungary and international trade.  Clearly, Hungary is a country worth following regarding natural gas dynamics in Central and Eastern Europe, with both import and export options and technical and market experience.

Nord Stream

The statements of senior political and commercial officials about Nord Stream 2 (NS2) are likely well known to anyone reading this article. The second Nord Stream pipeline will obviously increase Russian direct gas supplies to Europe and be a challenge for European, Ukrainian and American policy-makers concerned about energy source diversification on the continent. It will also pose a market challenge to the US and other LNG exporters. That said, it also presents an opportunity to build upon the last decade of gas market integration within the Central and Eastern European area and Ukraine. The more Russian gas that enters Greifswald in Germany via Nord Stream 2, the more there is for non-Russian parties to trade and export within Europe and to Ukraine, even if some of NS2-sourced gas will be sold by Gazprom-controlled traders.

Accordingly, western (and Ukrainian) leaders should pursue changes similar to those made over the last three decades in the Caspian Sea basin. These include increased diversification of sources, and economic integration while remaining aware of the reality of Russia’s role. In the face of yet more Russian gas supplies and high prices that may or may not be partly attributable to Russian actions, now is the time to capture a future that achieves the energy goals of European nations and citizens, especially including further diversifying sources.

One of these opportunities for the CEE region and more broadly for Europe is LNG. LNG dynamics in Europe have and will continue to be a major developing story and are a positive development with regards to gas supply diversification. LNG imports to Europe (excluding Turkey) increased by 54 per cent between 2013 and 2019. Competition for the European market suggests that, in the long run, LNG should continue to be a competitive source of gas supply not only for the whole continent but also to the CEE region despite its land-locked position. New LNG receiving facilities in Poland, Lithuania, and Croatia (and in the future perhaps others such as in Greece) have recently opened several CEE countries to access the global gas market, especially when more cross-border interconnectors are built and properly regulated under EU rules.

Lessons for the future

The natural gas trade market in Central and Eastern Europe has changed dramatically throughout the last decade, with more bi-directional pipeline flows and the possibility of greater LNG imports. There are now increasing economic opportunities for the full market chain under EU rules. Hungary, Slovakia and Ukraine are worth watching as key players in the future.

Central and Eastern Europe’s changes in natural gas consumption, imports and exports should carry weight in international relationships. A CEE region working under EU rules and more integrated in a commercially viable way with Ukraine, will only encourage the expansion of commercial transparency, investment, and opportunity throughout the area. Whatever the outcome regarding Nord Stream 2, governments and market players should continue to encourage  gas pipeline cross-border integration as an important part of energy system resiliency and commercial flexibility. A key priority should be solidifying gas imports from non-Russian direct supply and finding further ways to tie Ukraine into transparent markets through energy trading and other sectors. CEE countries should be encouraged to continue building an interstate gas trading system based on commercial terms under EU regulations.

Applying the lessons learned from the three decade push to unlock Caspian oil and gas, western governments should further encourage the expansion of Europe’s LNG import capacity. As in the case of the Caspian experience, it is crucial that governments and the private sector act in a coordinated and transparent manner. Finally,  the West should actively move to secure gains and build diplomatic, financial, commercial and energy infrastructure that will withstand the challenges of the future.

Dwight Nystrom is a Senior Fellow at the Institute for American Studies at the National University of Public Service in Budapest, Hungary and a retired U.S. Foreign Service officer.

Geoffrey Lyon is an independent researcher, after retiring from over three decades in the U.S. government conducting international energy analysis and energy diplomacy

[1] We chose 2013 as a base year for data comparison because it was sufficiently after the energy supply/demand distortions resulting from the financial crash in 2008 and the subsequent recession, but prior to the energy disruptions in Central and Eastern Europe (CEE) caused, in part, by the Russian actions in Crimea and Eastern Ukraine in 2014. We chose 2019 as the final year for data comparison because 2020 was an anomalous year due to COVID-19 and the 2021 data are not yet fully available.

gas, Hungary, Nord Stream 2, pipelines, Russia, Slovakia, Ukraine