Ukraine to supply EU with Azeri gas?

Following discussions with the Ukrainian President, the Prime Minister of Slovakia confirmed that Ukraine is prepared to facilitate the supply of Azerbaijani gas through its own territory. However, this development has not been met with universal enthusiasm. The logistics of arranging gas supplies from Azerbaijan to Europe through Ukrainian territory have yet to be fully explored, and the most profitable alternative may not be immediately apparent.
Following his discussions with Ukrainian President Volodymyr Zelensky, Slovakian Prime Minister Robert Fico announced Ukraine's readiness to act as a transit route for Azerbaijani gas to the EU, suggesting that Slovakia played a key role in this decision.
He added that the most beneficial option for Europe would be to resume Russian gas pumping through Ukrainian territory, which would contribute to more stable energy supplies.
Slovakia maintains its position on the matter and has stated that it will veto the 16th package of new sanctions if the EU does not resume gas transit through Ukraine. It has also threatened to veto the decision on the next financial aid package from the EU to Ukraine. This has been a point of contention in the past.

However, Hungary did not exercise its veto right over the extension of previously adopted sanctions, but did secure a commitment from the EU to continue negotiations with Ukraine on gas transit and the impossibility of blocking oil transit.
Slovakia had previously threatened to halt electricity supplies to Ukraine if gas transit was halted, but this remained a theoretical possibility. Concerns remained, however, that Ukraine could respond by stopping oil transit.
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Slovakia may not fulfil its new threats either, but it is clear that the fight to extend transit has intensified, and countries that suffered from the halt in Ukrainian transit are beginning to express their position more boldly," says Igor Yushkov, an expert at the Financial University under the Government of the Russian Federation and the National Energy Security Fund.

"By agreeing to extend the sanctions adopted back in 2014, they at least tried to cover their rear by reaching an agreement with the EU to force Ukraine to resume gas transit, stop attacks on the Russkaya gas compressor station and, in any case, maintain oil transit via the Druzhba pipeline. The negotiating position of Slovakia and Hungary has improved slightly, since the EC has now promised to act as a guarantor that Ukraine will not stop oil transit in response to Slovakia's actions. The proposed scheme is commendable; however, it remains to be seen whether Ukraine will agree to maintain oil supplies. Ukraine's orientation is more towards Washington than Brussels, and it has even been willing to offend European politicians," Igor Yushkov argues.

The situation with Azerbaijani gas has also attracted attention from experts, who have expressed surprise at the developments. "The primary concern is the source of the additional 16 billion cubic metres of gas (equivalent to the volume pumped through Ukraine in 2024), or at least 13 billion cubic metres, without considering the 3 billion cubic metres allocated to Transnistria and Moldova," says Igor Yushkov.

"Azerbaijan does not have any excess gas volumes. Consequently, the proposal appears to lack feasibility. It would only make sense if Azerbaijan were to buy gas from Russia and supply it exclusively on paper," says Alexander Frolov, Deputy General Director of the Institute of National Energy and Editor-in-Chief of the industry media outlet InfoTEK.
In practice, Russian gas will continue to flow through Ukraine, but Azerbaijan will be listed as the owner on the official documents. Essentially, Azerbaijan will act as an intermediary, receiving a share of the profits for its role.

For instance, the Azerbaijani company SOCAR could reserve capacities for gas transit through the territory of Ukraine on behalf of Gazprom. However, the question arises as to why this is not simply moved to the border of Russia and Ukraine, where the buyers themselves would become the owners of the gas, as is the case in Slovakia, and the gas would be pumped through the territory of Ukraine without a third intermediary.

He also stated that from Russia's perspective, it is not financially viable to use Azerbaijani gas instead of Russian gas. "It appears that Gazprom will have to terminate all its contracts with Slovakia and others, and cede this market to Azerbaijan. It remains unclear why Gazprom would choose to pursue this course of action. Yushkov poses the question.

From Ukraine's perspective, the introduction of Azerbaijani gas (assuming the discovery of additional volumes) is also illogical. "Ukraine's position is that it is not allowing gas of Russian origin in to ensure that Russia does not benefit financially. However, if Kyiv allows the import of Azerbaijani gas, Azerbaijan will still have to pay Russia for the transit of its gas through Russian territory. In essence, Russia will once again accrue revenue, this time from gas transit," Yushkov clarifies.

Ukraine's actions appear to be a deliberate tactic to gain time, while giving the impression of agreeing to some Azerbaijani gas.

"The entire situation with Azerbaijani gas appears to be part of Ukraine's strategy to prolong the negotiation process. Ukraine perceives the halt in gas transit as strengthening its negotiating position in the peace process with Russia as a whole, and as a lever of pressure on Russia.
The EU is encouraging Ukraine to address this issue independently from Russia, which is advantageous for Ukraine as it allows time for the matter to be resolved.

The domestic gas crisis in the country may weaken Ukraine's position and make it more accommodating to Slovakia. The Ukrainian editorial office of Forbes magazine has reported that Naftogaz of Ukraine has begun purchasing natural gas abroad. To date, imports have reached 100 million cubic metres, but ten times more may be required to ensure uninterrupted supply throughout the winter. Concurrently, gas reserves in underground storage facilities are at a critically low level, a quarter lower than last year. If frost hits, these reserves will be insufficient to ensure a stable winter without imports or consumer disconnection. This assessment was provided by the former head of the company "Operator of the GTS of Ukraine" Sergey Makogon.

The combination of pressure from the EU on Slovakia, along with the threat of frost, creates a scenario that could potentially lead to the resumption of gas supplies via Ukraine.

"The resumption of supplies will alleviate some of the market tension in Europe and allow prices to decrease marginally. Slovakia and Austria will eliminate some of the risks associated with energy security. Slovak gas producers will resume reselling gas to their Austrian colleagues, thereby improving their financial situation," says Frolov. Ukraine will receive payment for transit, and will also have a better chance of importing gas from the EU and getting through the winter, and will also eliminate the risk of losing imported electricity. In turn, Russia is expected to regain a portion of the European market share it had previously lost.