Italy as the main supplier of natural gas to Austria

Italy’s role as a major supplier will come at the hands of the EU leadership, which in March 2022 set a course to completely eliminate hydrocarbon imports from Russia by 2027. However, unlike oil, the EU did not dare to impose an outright ban on Russian gas imports, as this would either have disastrous consequences for the European economy or would require too many delays to enforce such a ban. Therefore, the EU has chosen the strategy of chopping the dog’s tail bit by bit.

A vivid example of such a strategy is the rupture of European gas buyers’ long-term contracts with Russia due to the Russian side’s demand to make a critically necessary and essentially minimal addition to the contract. The issue at hand was replacing the direct payee in euros in invoices for payment of supplies. Instead of Gazprom’s national company’s accounts, payments in euros for the gas received would first have to go to a special account – something like an escrow – in a Russian bank. Only after the actual receipt of money on this account the payment for the delivery was considered to be fulfilled. The need for such indirect payment was due to the fact that payments directly to Gazprom could be frozen at any time in a Western correspondent bank, and the buyer would not be liable for the frozen money, since payment under the existing terms of the contract was deemed to have been completed. By withdrawing from long-term contracts, the EU has reduced its dependence on Russian gas by a third in the second and third quarters of 2022. And this is about 50 billion cubic meters (bcm) of the 150 billion cubic meters per year that the EU had previously purchased.

To prevent the process from getting out of control and individual European countries from trying to backtrack, the Americans were actively involved in the process. The blow-up of the Nord Stream 1 and Nord Stream 2 pipelines destroyed the very physical basis for an additional 55 billion cubic meters of gas from Russia in August 2022. The American trace in the sabotage of gas pipelines is indicated not only by the revelations of journalist S. Hersh, but also by the apparent unwillingness of Europeans to objectively investigate these acts of international terrorism. Ukraine, on which they are trying to pin the crime, has so far vehemently denied its involvement in the attack. But the USA and the EU have plenty of leverage to force Ukraine to take the blame.

Ukraine’s involvement in the fight against Russian natural gas seems at first glance to defy common sense. But that’s only at first glance. Under the 2019 transit contract, Russia has pledged to pump up to 110 million cubic meters per day (about 40 billion cubic meters per year) through Ukraine on a ship-or-pay basis. In other words, the contract contained a guarantee that the money for transit would be received in any case, regardless of how much gas was actually pumped through Ukraine. In May 2022, Ukraine, under false pretenses, refused to take gas from one of its two delivery hubs on the border with Russia. This concerns the hub called Sohranivka, which halved the volume of transit through Ukraine. Ukraine currently accepts gas from only one delivery point – Sudzha. Every day is “Groundhog Day” all over again. Gazprom puts a request for pumping through Sohranivki, and every day Naftogaz of Ukraine rejects it. Naturally, Ukraine has already lost half of its revenues and receives money only for the gas it sends to Europe. Western partners continue to convince Ukraine that “pump-or-pay” conditions will allow it to receive all the payment amounts, including for unfulfilled work. However, in order to do so, it must first obtain a ruling from the European Court of Arbitration in its favor. But will Gazprom agree to comply with this arbitration decision, since Russia has lost confidence in the possibility of fair and equitable relations with the collective West?

Having taken on the role of an outpost of Western civilization in the fight against energy resources from Russia back in 2022, and even sacrificing its own interests in doing so, Ukraine is not going to stop there. In the middle of the year, Ukraine said it would not, under any circumstances, prolong the transportation contract with Gazprom after it expires at the end of 2024. The cessation of transit through the only remaining Sudzha hub will reduce the volume of Russian gas coming to Europe by another 14 billion cubic meters.

Moreover, Russian gas flows through Ukraine may stop not in January 2025, but several months earlier. The reason being that the town of Sudzha became a battlefield in August after the Ukrainian armed forces attacked the Kursk region of the Russian Federation. Military actions at the largest hub of the gas transportation infrastructure serve as a reasonable basis for a complete halt of gas transit to Europe via Ukraine. But the Russian Federation continues to pump gas through Sudzha. This way, it once again proves that it is not the initiator of cutting off natural gas supplies to Europe, as high-ranking European politicians claim. The Russian Federation’s offer to Ukraine to prolong the transportation contract also remains in force.

Why has Ukraine not yet destroyed the gas distribution center in Sudzha and presented this destruction as a gift and evidence of loyalty to the USA and the EU? The destruction of the Sudzha station would become an onshore option of blowing-up the Nord Streams. I will make a hypothesis: the Ukrainian authorities do not dare to take such a step because they have belatedly realized that without Russian transit, Ukraine’s gas transportation system will collapse. Such a collapse already happened once in early 2009, when Ukraine, in the interests of its Western partners, refused to sign a long-term contract with Gazprom on favorable terms and stopped transit to Europe. Since then, Ukraine has undoubtedly tried to take into account the mistakes of the past, but there is no systematic solution to the problem of transit refusal.

Transit of significant volumes of gas through Ukraine helps maintain the necessary gas pressure in its gas transportation system. If the pressure in the system drops below 30 bar, the gas compressors will automatically stop, effectively halting the entire Ukrainian economy tied to natural gas. To avoid gas suicide, Ukraine proposes to preserve transit by replacing Russian gas in its pipes with Azerbaijani gas. In such a scenario, Russia would receive from Azerbaijan the Turkish market, to which the country supplies 11 billion cubic meters per year, and Azerbaijan would receive from Russia the part of the European market, which it currently serves through Ukraine. However, the scale and complexity of such a swap mega-deal makes it seem impossible to implement before the end of the year. Obviously, neither the EU, much less the USA, is going to take on the role of brokers of such a deal. They care little about the fate of Ukraine and its gas transportation system. In the current system of relations, Ukraine is used as an expendable tool in the fight against Russian natural gas.

This means that Italy and Germany will almost inevitably have to take on the role of transiter of natural gas from west to east, to those countries that previously received gas from Russia via the Ukrainian route and cannot compensate for this loss through other supply channels. Austria and Slovakia will be in the most difficult position. Without Russian gas, Slovakia will also lose transit revenues.

The goal is to compensate for Austria’s shortfall of about 500 million cubic meters per month (6 bcm per year) and up to another 200 million cubic meters of gas per month (2.4 bcm per year) that Italy itself receives from Russia via the Ukrainian route. Gas market players in Italy are actively preparing for this new mission.

The preparation consists of booking enough transportation capacity towards Austria and deploying gas volumes towards Austria’s Arnoldstein via Italian Tarvisio, i.e. from west to east. For now, the gas is mostly moving in the opposite direction. For example, in July 2024, 686 million cubic meters of gas flowed from Austria to Italy via Tarvisio, which was 5.5 times more than in July last year. “Austrian” flows included Russian gas. Gas supplies from Austria were urgently needed by Italy to balance the market.

The first challenge seems to have been met by Italy. The export capacities for Austria booked in July this year at auctions for the 2024-2025 gas year should be enough to compensate for the cessation of natural gas supplies from Russia via the Ukrainian corridor after 2024. The booked capacity for supplies to Austria from Italy amounted to 6 bcm. Another 3.2 bcm should be added for imports from Germany. If these capacities are fully utilized, gas imports from Italy and Germany will fully cover Austria’s annual natural gas consumption that in 2023 amounted to 7.5 billion cubic meters.

Switching gas turbines to reverse operation is not a problem. However, there are risks of unscheduled repairs due to the switchover of equipment at the Baumgarten gas transportation coal plant in Austria to higher-load operation modes. Such a workload was typical of the pre-2019 mode of operation.

But Italian market players still have to work on the task of filling the pipes with the necessary gas volumes for export. Of course, gas consumption in Italy itself has been declining in recent years, which will make it easier. But starting 2025, the country’s gas consumption may start to rise due to the commissioning of new gas-fired power plants.

Italy’s own production is negligible, equal to 3 bcm in 2023. In order to supply Austria with gas, it will have to mobilize all gas supplies from external sources, namely pipeline gas and LNG.

As of the beginning of September, the situation with pipeline gas is as follows. Due to repair work at a plant in Libya, the Greenstream pipeline that carries Libyan gas to Italy is operating in a limited mode. Deliveries through this pipeline in August amounted to only 2.5 million cubic meters per day compared to the maximum capacity of 40 million cubic meters per day. The situation won’t change until at least October. Algerian gas flows through Tunisia in August are also reduced and amount to 54 million cubic meters per day, while the maximum capacity of the pipeline is 104 million cubic meters per day. Deliveries from Switzerland via Passo Gries point in July 2024 fell 27% compared to July last year to 443 million cubic meters.

Italy’s regasification terminals have a capacity of 28 billion cubic meters, covering 45% of the country’s demand. But only two of the four LNG terminals in Italy are currently operating. Panigalia LNG will be under maintenance until October 2024. The Toscana floating terminal was due to reopen at the end of summer, but there has been no information on the start of operations. However, the return to operation of these two regasification terminals will not be enough to meet the market’s growing demand for additional gas. The floating LNG regasification terminal at Ravenna is due to come online in the first quarter of 2025. This will add another 5 bcm to LNG receiving capacity.

ENI, Italy’s largest gas company, is betting on an increase in contracted liquefied natural gas purchases. In 2023, they amounted to 19 billion cubic meters. The company is going to increase it to 24 bcm in 2027 and is developing its own liquefaction project in Mozambique.

There is no unambiguous answer to this question. If the European market remains resilient, Italy, against the background of weak demand and high occupancy rates of underground gas storage in the EU, will manage just fine, provided, of course, that the above-mentioned logistical problems are solved. Austria will probably only have to pay a higher price for gas coming from the West in such a scenario.

But we should not forget that the gas market has a tendency to give surprises of various kinds. These surprises include hurricanes in LNG-producing countries and storms in the ports that receive it. Abnormal temperature spikes create demand for additional gas. In addition to this, there may be increased competition for LNG from Asian countries, which is currently almost non-existent.

In terms of consumption, the European gas market has not been under stress since the winter of 2021-2022. It is impossible to predict today what the winter of 2024-2025 will be like. The geopolitical situation in the Middle East also remains tense. According to the EU’s head of diplomacy J. Borrell, it “has reached a critical level.” For the natural gas market, this means risks of disrupting the main LNG transportation routes.

The emergence of any supply problems is a factor that undermines the solidarity of EU countries on energy security issues. Suffice it to look at Germany’s position on the unimpeded movement of gas across its border to replace the volumes of lost Russian gas in eastern and central Europe. The introduction of a special tax on gas exported from the territory of Germany has become a source of proceedings by the EC. Under its pressure, Germany agreed to abolish the tax starting 2025, but quickly found a new way to limit the export of gas out of the country.

On July 19, 2024, the Czech Republic complained to the European Commission against Germany for restricting volumes destined for other countries. Starting October 1, German gas transportation operator Gascade will limit its capacity to enter the Czech GTS at the Brandov border crossing from 6.7 to 1.41 million cubic meters per day. The Czech Republic said that gas flows from the west are crucial to reducing dependence on supplies from Russia and that restricting them harms this process and undermines the spirit of cooperation. Gascade justified itself by the fact that the reduction in Brandov’s capacity was a reaction to the general decline in gas volumes in the German gas transportation system following the cessation of imports from Russia.

Zuhreddin Zuhreddinov
Independent Expert Oil, Gas and Energy (Uzbekistan)