Ukraine Offers Europe Azerbaijani Gas Instead of Russian: What's the Catch

The current winter for Europeans will probably be the most difficult and cold in recent decades. Gas reserves in underground storage facilities in the Old World countries have fallen below 45% in just half of the heating season. The price of gas on the continent's commodity exchanges has grown by a hundred dollars during the same period: quotes for a thousand cubic meters have come close to $600. The reason for the unfavorable situation in which the EU countries have found themselves is the breakdown of the agreement between Moscow and Kiev concerning the pumping of Russian raw materials through the Ukrainian gas transportation system. The independent state fundamentally does not want to let about 15.5 billion cubic meters of Russian "blue fuel" into its pipes, which could be an excellent support for the energy balance of the European Union. Ukraine's promises to establish hydrocarbon supplies from Azerbaijan also look unconvincing. The meeting between Volodymyr Zelensky and Ilham Aliyev, which took place at the end of January, does not seem to have led to positive results. Despite the existence of several scenarios for implementing such a plan, Baku has neither additional volumes of natural gas nor free transmission capacity to supply energy to the EU.

Young and nimble

Azerbaijan can safely be called the youngest participant in the European natural gas market. Baku began supplying "blue fuel" to the countries of the Old World relatively recently - on December 31, 2020. On that New Year's Eve, representatives of the continent were given the opportunity to purchase hydrocarbons through the Southern Gas Corridor, which connects the producing fields of the Transcaucasian state with internal European distribution routes. First of all, five EU countries began receiving Azerbaijani gas: Bulgaria, Hungary, Greece, Italy and Romania.

Later, the commercial structures of the new energy partners concluded the "Solidarity Ring" deal, which allowed the use of the Old World's onshore gas interconnectors to increase the volumes of Caspian "blue fuel" supplied to European buyers. And although the scale of supplies can hardly be considered significant, they nevertheless showed dynamic growth: in 2021, Baku sent just over 8 billion to the European Union, in 2022 - 11.4 billion, and in 2023 - almost 12 billion cubic meters of raw materials. Last year, out of 25.2 billion "cubic meters" of natural gas exported by Azerbaijan in total, about 13 billion were received by the southeastern and Mediterranean EU members, about 10 billion were purchased by Türkiye, and 2.4 billion cubic meters by Georgia.

True, starting in 2025, Baku's ability to significantly increase energy tranches to the Old World appears to be running out. According to Azerbaijani Energy Minister Parviz Shahbazov, only 1 billion cubic meters of gas were sent to Europe in January. For their part, Turkish consumers purchased 700 million cubic meters (35% of total exports) in the month, while Georgian companies purchased 300 million (15% of total foreign supplies). Based on these statistics, the total export of Azerbaijani gas has decreased by 13% compared to January last year, with supplies to Europe falling by more than 9%, to Turkey by 12.5%, and to Georgia by 25%.

According to Eric Arispe, CEO of Fitch Ratings, natural gas production in Azerbaijan will reach its peak at the turn of 2025-2026 and will largely depend on the expansion of export opportunities to the European Union. First of all, on such an important condition as the conclusion of long-term contracts stimulating the development of existing and new hydrocarbon fields, as well as the expansion of transport infrastructure.

Meanwhile, according to Sergei Pravosudov, Director General of the Institute of National Energy, the lion's share of Azerbaijan's hydrocarbon volumes are contracted for several years in advance and supplies are carried out along existing routes. Baku does not have any additional free gas. Moreover, Azerbaijani traders themselves have to purchase raw materials from other participants in the extractive market, for example, from Turkmenistan and even from Russia.

Torn between TAP and TANAP

There are several routes for delivering Azerbaijani gas to European consumers, each of which has both certain advantages and disadvantages compared to the export of “blue fuel” from Russian producing provinces.

Azerbaijani raw materials reach the EU market via the Southern Gas Corridor, the main section of which is the Trans-Anatolian Pipeline (TANAP), which starts in the Transcaucasian state and then goes through Georgia and Turkey to the Greek border. At this point, another pumping section, the Trans-Adriatic Pipeline (TAP), is connected to the export route.

The resource base of TANAP is the large Shah Deniz field in Azerbaijan, and the design capacity initially reaches 16 billion cubic meters of gas per year (10 billion cubic meters to Europe and another 6 billion to Turkey). By 2027, the owners of the pipeline operator, which in addition to Azerbaijani structures also include Turkish and British ones, plan to almost double the annual throughput capacity of the export pipe - to 31 billion cubic meters.

In turn, the TAP pipeline is designed to transport energy resources primarily from the Caspian region to various regions of Europe, in particular to Albania, Greece and Italy. Experts call TAP a "bottleneck", since the annual maximum throughput capacity of this component of the Southern Corridor does not exceed 10 billion cubic meters. The share capital of TAP includes some TANAP participants, as well as companies from Italy, Belgium and Spain. An increase in the capacity of the Trans-Adriatic branch to 20 billion "cubic meters" is also planned for 2027 due to the construction and commissioning of four new and the modernization of two existing compressor stations.

At the same time, even with about a dozen developments envisaging a twofold expansion of both TAP and TANAP, the issue of the actual, rather than expected, timeframe for the implementation of these plans has not yet moved forward. The parties involved in both projects do not directly disclose the behind-the-scenes intrigues surrounding the supply of Caspian natural resources to Europe, but indirect comments indicate the presence of fundamental disagreements between the partners. According to Azerbaijani negotiators, Baku is not in a position to single-handedly adopt an investment resolution regarding the increase in pipeline capacity. As the general director of TANAP Natural Gas Transmission Company (the operator for the creation and operation of the Trans-Anatolian gas pipeline) Saltuk Duzyol stated, a decision to increase the capacity of gas lines can only be made if there is a corresponding interest from European consumers, which does not conflict with the positions of gas producers or the states through whose territories the resource highways pass.

"Europe is not sending clear signals, in particular regarding gas demand. Azerbaijan and continental clients must sign long-term gas purchase agreements, and transit deals must be concluded to supply additional volumes," the head of the pipeline company believes. Only after agreeing on the amount of gas required by the EU will it become clear how much the capacity of transport routes needs to be increased and what amount of investment will have to be directed to achieving the intended goals. In essence, such documents will become insurance, because if demand for energy resources on the continent declines, prices will creep down and the payback periods for projects, as well as the receipt of the first commercial profit, will be greatly delayed. In any case, doubling the pipeline potential will take at least 5 years.

Transit in virtual mode

"Given the existence of a whole list of current problems with production and very vague prospects for the implementation of previously set transportation and transit tasks, it is unclear how and in what form Azerbaijani gas can enter the Ukrainian gas pipeline system," asks Andrey Loboda, communications director at BitRiver and economist. "Considering that after the suspension of gas exports from Russia, Vladimir Zelensky rushed to meet with Ilham Aliyev, it is worth assuming that negotiations on this topic are still being held, but one can only guess how productive this dialogue is."

According to an analytical report by the Center for Global Energy Policy at Columbia University in the United States, there are three possible options for implementing this idea.

The first option involves gas supplies from Azerbaijan first to our country, and then, after the raw materials pass through Russian territory, their entry into the Ukrainian transport system. The main stumbling block of this scenario will be that Moscow is unlikely to agree to facilitate the pumping of alternative energy resources through its capacities without receiving significant commissions, especially if such a deal reduces its own exports. Russia may also demand transit payments from Azerbaijan within the framework of the Eurasian Economic Union. In addition, it is unclear whether the EU will assume all the risks associated with the use of this scheme.

The second option is to sign swap agreements between Moscow and Baku - temporary agreements on the exchange of assets within the framework of exchange trades. In this case, Azerbaijani gas will be supplied to the border of our country with Nezalezhnaya, while Russian gas will be exported to other European buyers. This model looks quite realistic, but to implement it, Kyiv will be forced to completely unblock its transit channels, or Brussels will have to unfreeze the currently idle Yamal-Europe pipeline or put into operation the surviving branch of Nord Stream 2.

The third option involves exporting Azerbaijani gas via alternative pipelines. Baku could send gas to the West via the South Caucasus Pipeline with a capacity of 24 billion cubic meters, which supplies “blue fuel” from Caspian Sea fields to Georgia and Turkey. However, in the end, it will still have to use the capacity of the already overloaded TANAP pipes. The viability of this option risks being questionable for another reason. This route is too complicated, since first the Azerbaijani gas will have to reach Europe, then these volumes will have to be pumped to Ukraine, and then returned to the EU and distributed among the needy countries of the continent. All the aforementioned maneuvers will in practice prove extremely costly and will be needed only to maintain transit through Nezalezhnaya.

In general, the experts of the American research organization themselves believe that the concepts they presented will encounter serious obstacles and will require significant compromises from all participating parties.

"Examples of theoretical ways to launch Azerbaijani raw materials into the Ukrainian pipeline system, formulated by the American Center for Global Energy Policy, confirm the virtuality and even illusory nature of such a reorientation," Andrey Loboda is sure. - The implementation of such tricks depends on the availability of the necessary pumping capacities at each section of the route and Baku's ability to increase gas production. Even the second option, which looks the most acceptable, will allow Kyiv and Brussels to save face by moving Russian exports to other markets, but will not reduce our country's sales volumes and will not reduce Moscow's influence on the global gas market. At the same time, Europe does not want to overpay for energy resources. And the countries of the Old World will be able to reduce the cost of gas and establish Ukrainian transit only by putting pressure on Kyiv to restore the lost fuel relations with Moscow. However, judging by the development of geopolitical processes, it will be necessary to agree on this subject not with the Zelensky administration."