Gaslighting

For now, Austria is procuring the volume of gas it requires from Slovakia, which receives Russian gas for Central and Eastern Europe via a Russian pipeline that transits Ukraine. But from January, transit through Ukraine is likely to stop, and Austria will be forced to find alternative sources of natural gas to maintain its supplies, along with the rest of its European neighbours who continue to rely on gas delivered via Ukraine.

‘Special’ conditions

Austria is among the few European countries that still greatly depend on Russian natural gas. Despite Russia’s war against Ukraine, Vienna continues to pay billions of euros a year for the massive amounts of gas Russian energy giant Gazprom supplies via a transit pipeline through Ukraine. After reaching Slovakia, the gas is further distributed to Austria, Hungary, and Czechia.

In February, a full two years after the Russian invasion of Ukraine began, it emerged that in late 2023 Gazprom was continuing to supply 98% of Austria’s total gas imports. In early 2024, that figure still hovered at around 97% before gradually going down to 80% in the last couple of months. Austria is not seeking out alternatives to Russian gas because it has grown used to it and traditionally considers Russia to be a reliable supplier.

Despite the EU’s push to cut Russian fuel ties because of the war, Austria has been reluctant to diversify its gas supply, claiming its landlocked geographical position made it impossible to buy the alternative, liquefied natural gas (LNG), at affordable prices. However, the political factor was also important. The Kremlin was prepared to make concessions in exchange for loyalty of the Austrian elites. Last month, for example, Reuters reported that Austria has saved billions of euros procuring Russian gas since the beginning of the Ukraine war.

At the height of the 2022 energy crisis, while gas prices for the rest of Europe soared to over $1,000 per 1,000m³, Austria continued to buy Russian gas at a mere $300–400, making Austrian gas storage facilities Gazprom’s last stronghold in Central Europe.

Yet another reason why Austria has resisted its decoupling from Russian gas is because its largest fossil fuel company, OMV, is bound to Gazprom by the longest-running supply contract in Europe, which remains in effect until 2040. This is a take-or-pay contract, meaning OMV is obligated to buy a minimum amount of gas whether it needs to or not. Naturally, the company was in no hurry to give up its guaranteed annual gas supply of 6 billion cubic metres.

Despite the Austrian government being unprepared to put pressure on OMV, and the company itself having no legal basis for cancelling its contract with Gazprom due to the EU’s failure to directly sanction the import of Russian natural gas, this situation suddenly changed in mid-November.

Supply suspension

On 14 November, OMV announced that it had won its arbitration case against Gazprom. The proceedings had dragged on since January 2023, when OMV filed a lawsuit against Gazprom and demanded it pay compensation for making irregular supplies to Germany in 2022. Gazprom denied any wrongdoing, but nearly two years later a German court took OMV’s side and ordered Gazprom to pay the company €230 million in damages.

OMV immediately said that instead of obtaining the compensation money directly it would do so by offsetting its claims against invoices under the Austrian gas supply contract — that is, simply not paying Gazprom for one month’s worth of supplies.

OMV conceded that its decision was likely to worsen the contractual relationship between the two companies to the point that Gazprom might decide to turn off the taps altogether, but that it nonetheless intended to proceed with seizing the gas.

A source told Reuters that OMV saw taking Gazprom’s gas supplies for October “for free” as the last chance to cover its losses should Ukraine stop Russian gas transit. If Ukraine did so, Austria would likely be unable to buy any more gas from Russia at all, let alone take Gazprom to court over its lost compensation.

For Gazprom, however, this was the first case of a European client not paying up. Gazprom considered OMV’s decision as non-payment and informed the company on the following day that it would cut off its supplies citing breach of contract. Following the news, gas prices in the EU rose to their highest level in a year — over $500 per 1,000m³.

OMV stressed that it had long been preparing for a halt in Russian gas supplies, diversifying its suppliers and filling up storage facilities, and would therefore be capable of meeting demand.

Austrian Chancellor Karl Nehammer also confirmed that the development had been expected and that the country was ready. He promised that “no one will freeze this winter, no home will be cold”, adding that Austria had reliable alternatives and wouldn’t “be blackmailed”.

Austrian ingenuity

Nevertheless, the sudden rupture of the relationship between Gazprom and OMV took many other players in the gas sector by surprise, many of whom viewed the potential end of the 50-year relationship between the two energy companies with concern. However, in reality, little has changed.

While the flow of Russian gas to Austria was expected to end on 16 November, it continued as usual and has done so since then. Indeed, the flow of Russian gas via Ukraine and Slovakia even increased slightly, meaning that Austria will probably continue to receive the same volumes of Russian gas as it did before, only via Slovakia.

According to Reuters, the Slovak national gas operator SPP, which has a contract with Gazprom that runs until 2028, is now buying more gas from Russia for resale to the Austrian market, meaning that despite its dispute with Gazprom, OMV can still buy Russian gas, albeit at a higher price.

What’s more, the approximately 17 million m³ of Russian gas per day that was previously earmarked for supply to OMV is now finding alternative buyers in Europe, including Czechia. Though it’s unclear so far which European companies are buying — and potentially reselling — Russian gas, or at what price, Slovakia’s SPP intimated that there was still “great interest” in buying any excess in Europe, not least as Russian gas remains cheaper than that supplied by any other country.

Not only has the volume of Russian gas supplies to the EU not gone down in the month since the court ruling on OMV’s lawsuit against Gazprom, in November supplies actually increased by 1.5% on those in October and by 8.7% compared to November 2023.

Overall, Gazprom’s data show that Russian pipeline gas exports to the EU in 2024 rose by 15% compared to 2023. In September, the bloc paid €840 million for Russian gas, the highest amount in the last 18 months. However, that has to do less with an increase in volumes and more to do with a surge in prices: in May 2023, 1,000m³ of gas cost $350, but by September that sum had reached $450, with the gas mainly going to Austria, Hungary, Slovakia, Italy, and Greece.

The legal disputes between Vienna and Moscow have proven to be less damaging to Russian-European energy relations than the most recent US sanctions, which were introduced on 21 November, and blacklisted Gazprombank for the first time. The bank had played a key role in facilitating payments to Gazprom from European countries since the full-scale invasion of Ukraine in 2022, when Russia forced so-called “unfriendly” Western countries to pay for Russian energy supplies in rubles via Gazprombank.

While in theory the sanctions don’t entirely exclude the possibility of doing business with Russia, in practice most European buyers will be too anxious that doing so might attract secondary US sanctions. Experts say this is the most sweeping package of sanctions against the Russian financial market since the spring of 2022. However, the Kremlin was quick to point out that Russia will find other payment options. Indeed, Russia introduced a new procedure on 5 December, effectively allowing foreign companies to make payment through other banks.

However, the most serious blow to the Kremlin’s position in the European energy market will likely be the upcoming suspension of Russian gas transit through Ukraine from 1 January following the expiration of the contract between Gazprom and Ukraine’s Naftogaz. From then on, neither Slovakia nor Austria will be able to import gas as they do currently and would have to purchase fuel from their neighbours or hope for a rise in the volume of gas supplies from Türkiye or the Balkans.

Even in this scenario, though, Russia’s westward pipeline will likely not go empty: EU traders can try to conclude short-term contracts with Gazprom to organise the transit of Russian gas to Europe on their own. Another option would be procuring gas from Azerbaijan through the Ukrainian transit system — gas that would de facto be Russian.

Dropping Russia

Despite the existence of a number of workarounds that would allow it to continue buying Russian gas, Austria’s OMV is now seeking alternative sources of gas to end its reliance on Russian imports. Gazprom’s behaviour in November has provided it with grounds to claim that Gazprom breached its obligations, which would allow it to break its contract and end its long-term relationship with the Russian giant for good.

Potential substitutes for Russian gas exports could come from Norway, which signed a five-year contract with Austria in 2023 to supply it with pipeline gas. From 2026, OMV intends to buy LNG imported from the UK, while other potential transit nations through which OMV could source LNG include Netherlands, Italy, Germany, Poland, Greece, Croatia, and Lithuania. Alternatively, Austria could simply decide to focus on the development of new gas fields, as plans are already afoot for OMV to drill in Romanian coastal waters in the Black Sea, where gas reserves are estimated at 100 billion m³.

Additionally, calculations made by the Brussels-based Bruegel economic think tank show that Austria can hope to expand the capacity of the TurkStream pipeline, purchasing the missing volumes from Turkey. It could also receive assistance from its neighbours — Czechia, which claims to have enough gas network capacity to support other countries, and Italy, which imports pipeline gas from Algeria and LNG from around the world.

At present, Austrian gas storage facilities are full enough to ensure that domestic demand can be met this winter, and analysts at Bruegel calculate that even a complete shutdown of gas transit through Ukraine would not pose a direct threat to Austria’s energy security.

Naturally, switching from Russian gas to alternative sources comes at a price. The Austrian authorities have already announced that, starting from 1 January 2025, the price of electricity will rise by an average of 23%, while the price of gas will go up by 17%. In some regions, including Vienna, the increase is expected to be as high as 30%.

“The current developments surrounding the OMV supply contract for Russian gas need to be taken seriously, but do not pose an immediate threat to our security of supply,” according to Austria’s Energy Minister Leonore Gewessler. “We have always known that gas supplies from Russia were unsafe,” Gewessler continued, before adding, “We have been preparing for a possible supply disruption for a long time.”