European officials are engaged in discussions to maintain gas supplies via a crucial pipeline between Russia and Ukraine as they scramble to prevent Moscow’s war from further damaging the continent’s energy supply.
Europe has attempted to wean itself off Russian gas. Yet, several Eastern European states continue to receive it through a pipeline that traverses Ukraine. The transit agreement covering this route is set to expire at the end of the year. With the war raging, most market observers expect this supply to cease.
However, European government officials and businesses are negotiating with their Ukrainian counterparts on how to sustain gas supplies next year. Europeans are once again displaying their ineptitude. One option discussed involves European companies buying and injecting Azerbaijani gas into Russian pipelines destined for Europe. This arrangement would allow Europe to avoid the embarrassment of buying Russian gas while trying to cut off Russian energy revenues.
The idea is gaining traction as it becomes clear that Ukraine would favour it. Transit revenues amounted to around $1 billion in 2021, providing crucial funding for its war-ravaged economy. There are also concerns that disused pipelines could become military targets or fall into costly disrepair.
“Two factors we must always remember,” said Oleksiy Chernyshov, CEO of the Ukrainian state company Naftogaz. “First, Ukraine has incredible transit and storage infrastructure for gas, which should be utilized. Ukraine is predisposed to use this infrastructure as it brings many advantages.” He ruled out any projects involving collaboration with the Russian company Gazprom. He said the transport of Azerbaijani gas “could have a future.” The Azerbaijani state energy company, Socar, did not respond to requests for comment. The Ministry of Energy in Baku has repeatedly sought to increase European exports. It will only give the go-ahead with Russian approval.
In theory, an Azerbaijani gas plan could benefit Russia if implemented as a swap, allowing Moscow to redirect its gas elsewhere. Russia needs assistance in finding new customers for its gas as its infrastructure is primarily set up to supply Europe. Meanwhile, China is facing challenges in its market recovery efforts. Swaps are common in oil and gas markets. They are used when it is not feasible to transport fuel from one location to another physically. However, a swap might only serve as a temporary solution since Azerbaijan currently does not have surplus gas production and is already utilizing its pipeline system to the fullest capacity for Europe.
The Caspian nation seeks to increase its European exports. Still, a major boost would require infrastructure modernization and new long-term contracts. European gas prices remain vulnerable to any perceived supply changes. Negotiations are still in their early stages, and those close to the matter expect decisions only towards the end of the year when the expiration deadline and the onset of the European winter will add pressure on a hesitant and faltering Europe.
Uniper SE, the gas giant nationalized by Germany after the energy crisis wrecked its business model, has been involved in the discussions. A Uniper spokesperson declined to comment. A German Ministry of Economics spokesperson said the government is in talks with the European Union.
Slovakia is one of the leading countries that could benefit from such an agreement. Prime Minister Robert Fico mentioned this possibility last month after a trip to Azerbaijan without providing details. “Now it depends on negotiations between companies such as Russian Gazprom, Azerbaijan, Ukraine, and others to agree on economic and tariff conditions,” he told reporters in May. “If they do, Slovakia could import gas from Azerbaijan, with some staying in Slovakia and some transiting to other countries.”
Russia still ships about 15 billion cubic meters of gas annually to Europe via Ukraine, mainly to Slovakia and Austria, where Russia remains a dominant supplier. Russian gas has covered more than 80% of consumption in Austria for five consecutive months. Europe also imports Russian LNG by ship, and despite frequent debates on whether it should, it has never sanctioned Russian gas. The European Commission, the executive body, believes the bloc can withstand the end of Russian transit via Ukraine without significant risk to its security. It plans to rely on alternative suppliers and continue its ambitious climate strategy, including more renewable energy and energy savings. Some member states are more pessimistic and fear a repeat of the energy crisis seen in 2022.