One of these involves SOCAR’s trading division purchasing Russian gas from Gazprom at the Ukrainian border and injecting it into the Ukrainian gas transmission system as Azerbaijani gas. The price will be determined by exchange, spot prices, or other mutually agreeable means. Additionally, there is a possibility that within this framework, SOCAR will acquire several Ukrainian gas infrastructure facilities (gas storage facilities) to ensure the security of these facilities. Naturally, Moscow, with whom Baku has established a constructive partnership, will act as the “third party” in this scheme.
For obvious reasons, this information is presented as a leak published through Bloomberg. However, it is no secret that representatives of European governments and companies are discussing with their Ukrainian counterparts how to maintain gas supplies from Ukraine starting January 1, 2025, when the current Russian-Ukrainian agreement (the contract for gas transit to EU countries through Ukraine signed in 2019) expires.
Critical Level Balances
Despite the optimistic statements of several European politicians expecting a complete abandonment of Russian gas soon, this is not happening. The cost of refusal is the curtailment of industry, primarily German, which has been heavily dependent on the cost and supply of blue fuel from Russia since the late 1970s and early 1980s.
The International Energy Agency (IEA) released a forecast ahead of the Baku Energy Week, predicting the stabilization of pipeline gas supplies from Russia to Europe this year at the level of the previous year, around 45 billion cubic meters. However, it should be noted that this IEA statistic also includes the Turkish gas network, which takes part of the gas in the direction of the EU and sells part domestically. In pure terms, EU countries purchased 25 billion cubic meters of Russian pipeline gas in 2023—the lowest level since the early 1970s when the USSR began supplying gas to COMECON countries but had not yet started actively supplying Western Europe.
Incidentally, on June 3, Ilham Aliyev met with IEA Executive Director Fatih Birol, and among other things, they might have discussed how quickly Azerbaijan can increase its own supplies to the EU to the current Russian level or participate in supply schemes in some way, as hinted at by Bloomberg’s publication.
It should be noted that the current export of Azerbaijani gas in 2024 (January-May) amounted to 10.6 billion cubic meters (3.4% more than in 2023). EU countries received 5.3 billion cubic meters (10.4% more than last year).
Overall, Azerbaijan plans to supply 24.3 billion cubic meters to external markets this year, half of which will be supplied to Europe. However, for the level of European consumption, this is not much.
Therefore, the European Union, despite its political goals, simply cannot completely abandon Russian gas. As of today, the share of Russian pipeline gas in overall European consumption is about 10%, the same as in 2023. Domestic production in European countries, including Norway, accounted for 40%, pipeline imports from North African countries 7%, and imports from other countries, including Azerbaijan, around 6%.
A significant share of supplies was provided by liquefied natural gas (LNG) imports, making up 37% of the EU’s total consumption. Within this figure, the majority comes from the United States. American oil and gas companies and traders have benefited the most from Europe’s shift away from Russian gas after the sabotage of the Nord Stream pipelines.
Meanwhile, Russian LNG plants are also trying to stay on the European market. In 2023, EU ports (mainly terminals in Zeebrugge, Belgium; Montoir-de-Bretagne, France; and Bilbao, Spain) received more than 15.6 million tons of Russian LNG (half-year production of Russian LNG plants), a 37.7% increase compared to 2021. Thus, the share of Russian LNG in EU imports reaches 15%.
The Relay from Gazprom to SOCAR
Setting aside various formalities, the essence of the negotiations on replacing Russian contracts, according to Bloomberg’s sources, is for European companies to purchase and inject gas from Azerbaijan into Russian pipelines running through Ukraine. The legal European recipient of Azerbaijani gas could be Germany’s Uniper SE. At least, its management is involved in discussing the details. Recall that Uniper Vice President Michael Gilmer, who previously met with Ilham Aliyev during a German delegation’s visit to Azerbaijan this spring, also participated in plenary discussions on the topic “Gas Dialogue: The Role of Gas Supplies During the Energy Crisis” at the Baku Energy Forum.
According to Gilmer, “Germany is taking steps towards transitioning to green energy, but the country keeps gas in focus. After abandoning Russian gas, prices on the continent increased sevenfold, leading to an energy crisis. Therefore, Azerbaijani gas in Europe is highly sought after and will be for a long time…”
In turn, a representative of the German Ministry of Economics confirmed that Berlin is conducting such negotiations within the EU framework, but decisions can only be made by the end of the year when the Ukrainian transit agreement with Gazprom expires.
Azerbaijan can expand its presence and, accordingly, its significance for the European gas market through a combination of two options.
The first is to increase the physical volumes of gas produced in Azerbaijan. There are clear data on the current situation and understandable, non-speculative information regarding prospects. According to statistics, over the past three years, annual Azerbaijani supplies to Europe have increased from 8.2 billion cubic meters to nearly 12 billion cubic meters. Most future supplies are tied to the Trans-Adriatic Pipeline.
The pipeline’s capacity is 11 billion cubic meters per year. Previously, it was planned that by 2027, the pipeline’s capacity would increase to 20 billion cubic meters with the commissioning of two new compressor stations and the modification of existing ones. However, according to Azerbaijani Energy Minister Parviz Shahbazov, confirmed expansion of TAP to 1.2 billion cubic meters by 2026. Speaking at the Baku Energy Forum session, Shahbazov once again drew attention to “certain difficulties in negotiations on increasing Azerbaijani gas supplies to Europe.” According to Shahbazov, increasing export volumes to Europe requires long-term contracts, strong political support, and sufficient investment packages. Currently, negotiations in this direction “are not going as well as expected.”
What is causing the slowdown in European investments in Azerbaijani production and delivery infrastructure?
Perhaps decision-making centers for European energy are rushing too far ahead, trying to focus all efforts on alternative sources (renewable energy) and corresponding infrastructure. Based on a report by Deloitte expert Johannes Trubi (presented at the Baku Energy Forum), gas demand in the EU could drop by 80% in the coming years, with an emphasis on hydrogen. Experts’ assessments attempt to find the balance between the political feasibility of Euro-ideologues’ statements and their economic necessity—operating with realities. Hence the conclusions of Deloitte. According to their forecasts, global demand for pure hydrogen will be 60-100 million tons, but the EU, for instance, will not be able to produce such a volume. Therefore, all of Europe’s attention is turned to countries with gas pipelines leading to the EU, particularly African countries, Azerbaijan, and partly even Ukraine.
It is clear that Azerbaijan needs a full-fledged hydrogen strategy: the cost of the hydrogen economy (industrial production and delivery to consumer markets) is quite high and requires massive investments, primarily from the consumers themselves. Incidentally, it is interesting to note that in the feasibility study for expanding the Trans-Adriatic Pipeline, the potential for transporting hydrogen mixtures (a 10% mixture of hydrogen and gas) is mentioned. Possibly, this is how things will develop in the medium to long term.
But what about the “here and now”?
That is, in the winter of 2024-2025 and other EU heating seasons, until it reaches the “hydrogen energy” plateau and effective all-weather renewable energy systems. Here a legal loophole arises, a certain opportunity to saturate the European market with gas, solving EU energy security issues with the help of Azerbaijan and personally Ilham Aliyev.
Russian pipeline gas can be supplied to the EU as purchased by a third country, particularly Azerbaijan. By a similar scheme, LNG produced in Russia is legally supplied to the EU through broker companies (not violating the sanctions regime). It is worth noting that due to gas market shortages and potential severe energy crisis consequences, the US and the EU have not yet imposed a direct ban on gas supplies from Russia by pipeline or as LNG. This should not be confused with sanctions pressure on specific LNG projects and companies (NOVATEK’s Arctic LNG-2 plant fell under the US Treasury’s SDN-List), and the 14th package of sanctions even discusses a ban on transshipping Russian gas in European ports.
Azerbaijan is in an exclusive position as a mediator/trader. First, Baku (SOCAR) has deep and extensive relations with Gazprom, Lukoil, and other Russian companies.
Second, it’s the relationship between Ilham Aliyev and Vladimir Putin. According to the Russian president himself, their dialogue is developing “successfully, reliably, very pragmatically,” with a high level of constructiveness and ideological alignment. Of course, the presidents’ views do not have to align, but the fact that such schemes between countries can be resolved by phone speaks to the unique opportunities of Aliyev’s diplomacy.
And it seems that consultations on this topic are consistently developing. Recently, during the St. Petersburg International Economic Forum, another meeting took place between SOCAR President Rovshan Najaf and Gazprom head Alexey Miller. Notably, it had been just over a month since their last meeting in St. Petersburg on April 26—a very short period for typical contacts between the heads of two companies.
Thus, if Baku manages to bring together two camps: an ideologically driven Europe immersed in the idea of a green energy transition and a war with Russia, and Moscow, aiming to isolate itself from the West through the war with Ukraine but suffering from a decline in gas exports, then Ilham Aliyev could indeed go down in history as a unique politician on par with old European leaders of the 1980s-1990s.
Alexander Karavaev
Translated from haqqin.az
