CZECH REPUBLIC RETURNS TO RUSSIAN GAS

Over the past two years, Europe has sought to wean itself off Russian energy, but increasingly expensive alternatives are forcing some landlocked countries to return to the old source.

One example is the Czech Republic, which in the summer of 2023 declared complete independence from Russian natural gas and reduced its imports to almost zero. It now imports at least some Russian fuel through Slovakia, network data shows.

These relatively cheap supplies are set to end abruptly at the end of the year, when the deal allowing gas to flow from Russia to the European Union through Ukraine expires. Although Central European countries have said they have sufficient gas supplies, they may still face higher costs. This week, benchmark gas prices in Europe rose to their highest level of the year.

For now, some traders in the region are buying gas from the east, partly because Germany charges a controversial transit fee for supplies in the opposite direction.

“Russian gas enters the Czech Republic simply because it makes economic sense,” Dominik Rusinko, an analyst at the Czech division of KBC Groep NV, wrote in a report. “One factor is the transit tariff of 2.5 euros per megawatt hour introduced by Germany.”

The flows highlight the challenge some countries face in trying to limit their dependence on Russian fuel, even as they oppose the Kremlin’s war in Ukraine. Slovakia and Austria import large volumes of Russian gas, while the Czech Republic and Italy receive it indirectly from their neighbors.

Austrian energy company OMV AG said on Friday that Gazprom PJSC had told it it would suspend gas supplies to the Central European country from November 16. OMV has promised to recover 230 million euros ($242 million) from the Russian company in arbitration.

The Czech Republic has no contractual obligations with Gazprom, but compared to last year, supplies from neighboring Slovakia have increased significantly.

Data from Czech operator Net4Gas shows that the estimated amount of Russian natural gas flowing into the country from the east increased to about half of all inflows last winter and to 74% in the current quarter. A small portion goes in transit to Germany and Poland.

German duties

Since the conflict in Ukraine, the Czech Republic has increased gas imports from non-Russian sources, including Norway and a liquefied natural gas terminal in the Netherlands. But the gas must pass through several countries to reach its destination, and exit fees at the German border and storage fees make it more expensive.

According to Maggie Xueting Lin, energy research strategist at Citigroup Inc., the total cost of transporting gas from Germany to neighboring countries is now 3.50 euros per megawatt hour. That equates to an 8 percent increase in value at current base prices.

German tariffs have made supplies more expensive and are one of the main reasons for the resurgence of supplies from Russia, according to the Czech Ministry of Industry and Trade. Several EU countries have asked Berlin to abolish these taxes, but the political crisis in Germany has put an end to the pending legislation.

"We expect that once the tax is abolished, imports via Germany will start to increase again," ministry spokesman Marek Vosahlik said by email, adding that the Czech Republic has sufficient supplies even without Russian gas.

Czech utility CEZ AS has already turned to LNG to diversify its supply sources away from Russian gas. The company has booked capacity at the Eems Energy Terminal in the Netherlands for 3 billion cubic meters per year, enough to meet a third of the country's annual gas demand.

Following the completion of this transaction, CEZ has also secured 2 billion cubic meters of annual capacity at the Stade onshore terminal under construction in Germany starting in 2027. These supplies will cover more than a quarter of the Czech Republic's annual gas consumption.