Russian attacks against Ukraine’s natural gas production facilities have precipitated yet another energy security crisis for the beleaguered country. Ukraine will be forced to rely on expensive gas imports to meet its needs, putting additional financial strain on the country.

Attacks on gas production are the latest development in Russia’s constantly evolving campaign to cripple Ukraine’s economy: “First they tried to destroy the electricity system and gas storage. And this year, they’re attacking the gas production. It’s not only state-owned, but also private companies that are under attack,” said Artem Petrenko, executive director of the Association of Gas Producers of Ukraine.

Whilst exact figures are not disclosed for security reasons, some estimates put the damage this year alone at around 35-40% of Ukraine’s gas production taken offline. 

Ukraine’s state-owned gas company Naftogaz, which produces around 75% of Ukraine’s domestic output, has reported eight strikes on its production facilities this year.

Private producers have also been affected. DTEK Oil and Gas’s gas facilities in Poltava region were hit at the beginning of March, causing production at the field to be halted. 

Russia’s change of tactics appears to have caught Ukraine’s gas producers off guard, with reports that gas production facilities have been left with little protection against aerial attack.

"In contrast to the electricity infrastructure, gas extraction facilities appear to have been left entirely unprotected against drone strikes, or were protected only to a very limited extent," said Sławomir Matuszak, political analyst with the Centre for Eastern Studies (OSW).

Gas storage critically low

The timing of these attacks is particularly concerning as Ukraine's gas reserves have reached critically low levels. Data from Gas Infrastructure Europe indicates that by March 30, storage facilities were filled to merely 2.9% of capacity – approximately 800mn cubic metres – the lowest in at least a decade. While sufficient for the remainder of the current heating season, the shortage will necessitate substantial imports in the coming months.

Naftogaz has this year already imported 800 mcm 

Ukraine's transmission system operator GTSOU has said that Ukraine will need to purchase at least 4bn cubic metres of gas between April and October 2025, with a significant portion coming from American LNG delivered via EU terminals, including the Świnoujście facility in Poland.

“What it means for Ukraine is that we will need additional support from our international partners,” says Petrenko.

Ukraine’s key donors have moved quickly to address the potential shortages. The European Bank of Reconstruction and Development (EBRD) has approved a €270m loan to Naftogaz, matched by another €140mn in grants from the Norwegian government that will be used to fund gas imports for the next two heating seasons. 

“There is a clear determination by both Naftogaz and Ukrainian authorities on one side, and international partners on the other side, to ensure that it's not going to be a serious problem,” says EBRD vice president Matteo Patrone. 

“The question is difficult to determine. But if you ask me how serious we think it's going to be at the beginning of the winter, I think we're going to be fine,” says Patrone.

The need for imported gas will nevertheless place an additional financial strain on Ukraine’s already limited resources, with Naftogaz likely to have to pay higher prices at a time when other European countries are seeking to refill their own gas reserves. 

As bne IntelliNews has reported, Europe is facing a gas crisis of its own with record gas storage withdrawals and surging prices. 

Funding questions

Whilst Naftogaz has said that it needs €2bn to pay for the additional imported gas, Sergiy Makogon, former head of the GTSOU, thinks the figure will likely be closer to $2.5bn (€2.3bn). 

Naftogaz has already secured €410m from the EBRD and the Norwegian government, but according to Makogon, the gas giant may struggle to find the additional funds required. 

“Naftogaz just spent around $800mn on imports to fill the storage, so it doesn’t have the money. One option is to get this money from the state, but the state doesn't have $2bn to give to Naftogaz. The second option is to get money from the World Bank, from the IMF, etc. But I know those guys. They will not give this money unless they see that this makes economic sense.”

The major problem for Ukraine’s gas market is that the price of gas is heavily regulated by the state, with gas sold to households at prices well below market rates. As bne IntelliNews has previously reported, this gas subsidy has long been a point of contention between the IMF and President Zelenskiy’s administration. 

The public service obligation (PSO) requiring Naftogaz to supply discounted gas to the population was gradually phased out before the war, but was then reintroduced following Russia’s invasion, fixing gas prices for district heating companies at less than half the market rate. 

According to Makogon, the existence of the PSO regime makes Naftogaz an unattractive prospect for additional lending: “They will not lend Naftogaz $2bn to buy gas for $500 [per thousand cubic metres] that they'll sell to the population for $160 because it will be a loss-making business, because next year the situation will be the same. They will have to import about 6 bcm and they will again need the money for that.”

Time is also of the essence. Whilst Ukraine can easily import gas from its Western neighbours thanks to an extensive network of interconnectors, the daily import capacity is capped at around 52 mcm. If Ukraine is to import upwards of 4 bcm, it will need to start doing so well in advance of next winter. 

“We have to start importing from April. But nobody will give gas without prepayment. The government should decide very soon how they will finance this. So the situation is very difficult from the financial point of view. And it will require a lot of political will from the state of Ukraine and from the President, and definitely the IMF and World Bank,” says Makogon.

Self-sufficiency

The crisis marks a change in fortunes for Ukraine’s natural gas industry, which for most of the war has been able to meet domestic demand without the need to import gas. 

In the years leading up to Russia’s full-scale invasion in 2022, Ukraine was producing around 20 bcm of natural gas a year, but consuming between 27-30 bcm. The shortfall was made up with imported gas.

Russia’s invasion ironically made self-sufficiency a realistic possibility, as the destruction or occupation of major industrial facilities such as the Azovstal steel plant in Mariupol were either destroyed or occupied by Russia, reducing industrial consumption of natural gas by 50 per cent.

“For the last two winters we did not import gas for consumption. We've been using Ukrainian gas, which was produced in the territory of Ukraine for us to consume it for our economy,” says Petrenko. 

The gas industry was riding high last year, with Naftogaz CEO Oleksiy Chernyshov boasting in May that Ukraine had become self-sufficient. In October last year Ukraine reported its highest levels of gas production since the war began. According to Expro Consulting, Ukraine produced 1.6 bcm of gas that month, the highest level since January 2022.

“Over the three years of full-scale war, Ukrainian gas production companies have drilled around 400 wells. Nobody understands how they were able to do it,” says Petrenko. 

However whilst gas production has recovered during the war, production is still below 2021 levels. 

Foreign investment needed

The war has however dashed long-held hopes of a significant expansion of Ukraine’s gas production. 

Before the outbreak of hostilities, Ukraine had ambitious targets to fully cover demand with its own production. In 2021 Naftogaz chairman Yury Vitrenko said that Ukraine would be able to abandon the need for gas imports within five years, as bne IntelliNews reported at the time. 

According to the International Energy Agency (IEA), Ukraine has proven reserves of 1.1 trillion cubic metres, making it home to Europe's second-largest gas reserves after Norway. 

The Dnieper-Donets basin, which spans the Poltava, Kharkiv and Sumy regions, accounts for approximately 80% of the country's proven reserves, with the most productive fields in the Poltava region. 

Most of Ukraine’s currently active gas fields are reaching the end of their useful lives however. According to Petrenko, further exploitation of Ukraine’s gas reserves will require the drilling of much deeper and more expensive wells, which Ukraine can’t do without foreign assistance.

“In order to increase natural gas production, you need to drill deeper wells using new high-end technologies. But the technology is lacking [amongst Ukrainian producers] to access the deeper reserves and it will require foreign investment. However, due to the war, lots of service companies left Ukraine due to safety reasons,” says Petrenko.

Despite the war Naftogaz has been trying to attract foreign investment, holding talks in 2023 with ExxonMobil, Halliburton and Chevron, according to The Financial Times. Naftogaz was reportedly close to signing a contract with Halliburton to increase gas production, but this deal appears to have been put on hold.

Ukraine also has significant offshore reserves in the Black Sea. Before Russia’s illegal annexation of Crimea in 2014, Ukraine was producing almost 2 bcm of gas from just four offshore rigs. 

“It was a huge amount of gas,” says Makogon. “It's not even comparable to onshore. If you have production from a well of 1,000 cubic metres per day onshore, you believe that this is a huge discovery. But offshore, it was around 1 or 2 mcm per day. So it’s a completely different size.”

Under current conditions, however, these reserves are inaccessible. “It will require a lot of money and a peace agreement because nobody will come to Ukraine to do it otherwise. And Ukraine doesn't have the capabilities to do it by itself,” says Makogon.

End of gas transit

Whilst not directly affecting its ability to meet domestic demand, the end of Ukraine’s gas transit deal with Russia is also causing problems. 

In 2023 Ukraine transited 14 bcm of gas to Europe, amounting to around 5% of the continent’s requirements. 

Whilst the volume of gas transported from Russia via Ukraine had dropped off considerably in recent years, Naftogaz was on paper collecting around $800mn a year from Gazprom in transit fees. With the end of the transit deal, this revenue stream is now lost. 

Ukraine must also decide what to do with its enormous gas pipeline network, now that it is no longer pumping Russian gas. This was previously paid for by transit fees, and Ukraine has been forced to implement a fourfold increase in gas transmission tariffs to make up for the lost revenue. 

Ksenia Orynchak, executive director of Ukraine's National Association of Extractive Industries, said that the tariff hike will negatively affect gas production and could lead to extra costs of UAH7bn (€153m) per year for gas producing companies.