Gazprom was once Russia’s golden goose, consuming a rich diet of European money and laying a seemingly endless supply of nuggets into the Kremlin’s welcoming hands. All that ended after February 2022, when Vladimir Putin wrongly calculated that Europe cared more for cheap energy than Ukrainian independence.
In May, the company registered a $7bn loss, its first dive into the red in 25 years. But while the West can allow itself a measure of pleasure at the gas giant’s humbling, there are multiple warnings that the Kremlin is covertly working its way back into the European market with the help of opportunistic friends, especially Azerbaijan and Turkey. If this is allowed, Russia might yet pluck success from the current gas disaster.
At the heart of this campaign is a simple fact — you can’t tell the nationality of a gas molecule. Its origins are unknowable.
There are now growing signs that the Kremlin and its friends are exploiting this to covertly resume gas shipments to wealthy Central European markets where greed outweighs politics. There are even signs that Ukraine itself is being tempted by the prospect of cheap Russian gas.
Why Azerbaijan? After all its gas production accounts for less than 1% of the world’s total annual output. But its close political ties to Russia and Turkey, its geographic position, and its pipelines give it an outsized role on both sides of the Eurasian landmass.
Emboldened by Ursula von der Leyen’s plea to Azerbaijan to export more gas at the height of the energy crisis in 2022, Central and Eastern European companies have been courting the authoritarian regime in Baku for additional supplies shipped via Turkey to Europe.
The Caspian country already delivers 10 billion cubic meters (bcm) annually via Turkey to southern European buyers as part of long-term contracts.
With growing internal demand and limited production, Azerbaijan is unable to respond to the soaring and sudden demand.
But it has another way to please the Kremlin, so raising its status and making lots of money. Azerbaijan is promising to send more gas that it doesn’t have, at least for the time being, as it needs more investment to increase production and export capacity.
The only plausible way of meeting the immediate demand is by working with resource-rich Russia to step in to plug the shortfall. The Russians could send more gas to Azerbaijan itself, or to a transit country like Turkey, where it would be “blended” with gas imports of other origin and sold under respectable labels.
And, in fact, this has already been happening.
Turkey’s Russian spot gas imports have more than doubled in recent months and Central and Eastern European buyers have been able to secure more volumes via this route, reportedly at knockdown prices. They then resell it at a premium on European hubs.
Several market sources have told this author that this gas has been making its way as far north as Poland, using either Bulgaria or Romania as transit routes via Hungary, or by more circuitous routes.
Now, Azerbaijan is sidling up to Ukraine, where a five-year contract for the transit of Russian gas into Europe expires in January next year. This has raised questions about whether it would be renewed or extended.
Ukrainian officials have so far rejected the possibility of entering any negotiations with Russia to continue the transit. Slovakia’s prime minister has however suggested the deal may be extended.
In early June, discussions took an unexpected turn, amid reports that European officials were encouraging Azerbaijan to offer itself as an intermediary to Ukraine from next year.
The proposition is surprising and should raise eyebrows on several accounts.
Azerbaijan is a resource-rich country, but (as noted above) is in no position to supply abundant volumes of gas both to Southern and Central European buyers.
It is unknown how much gas might transit through Ukraine should there be such an arrangement after this year, but the level of enthusiasm among trading companies for more supplies via this route is high, despite war-related risks and the fact that the region has alternative supplies.
There are further problems. Physically transiting Azeri gas via Ukraine would also mean its movement through Russia. And it’s highly unlikely the Kremlin would allow a foreign company, even from a friendly state such as Azerbaijan, to use its transmission system, even if that meant raking in some revenue in transit fees.
Ukraine repeatedly pleaded with Russia in the past to allow Central Asian producers to sell their gas via Ukraine, but the offer was always struck down because Moscow feared loss of control over strategic assets such as transmission pipelines.
And yet, Russia is desperate to sell its gas (all the more so since the idea of a new pipeline to China seems further away than ever.) It’s an urgent issue: Russia needs to keep producing gas because lengthy shut-ins of its wells caused by its own 2022 decision to curtail supplies to Europe could cause irreversible physical damage.
This means Russia must keep open as many transit routes to Europe as possible, even if officially that would mean selling it under a different label and possibly swapping some customers with Azerbaijan in Europe and the Caucasus.
Thirdly, it is also surprising that Azerbaijan’s proposal is now supported by European and Ukrainian officials. As recently as February, the EU said there was no need to continue the transit via Ukraine.
In April, the European Parliament urged the Commission to suspend energy relations with Azerbaijan amid serious and continuing human rights breaches and accusations of ethnic cleansing of the 100,000-strong Armenian population in the now-Azeri-controlled Nagorno-Karabakh province.
Russia’s war in Ukraine and the resultant political volatility in Europe’s backyard are arguably distracting politicians from applying greater scrutiny to these issues.
In recent months, Russia has been building economic cooperation with Azerbaijan in exchange for turning a blind eye to Baku’s military offensive to recapture Nagorno-Karabakh last autumn. Armenia not only lost that three-decade-long conflict, but had the Kremlin reject pleas for support.
Russia is meanwhile tightening its grip over Georgia — through which Azeri gas must pass en route to Turkey — and is using Turkey itself, which, reportedly has a ballooning debt to Russia for past gas deliveries, to help rebuild its lost European market share.
The stakes are high. If the Ukrainian transit deal is extended beyond this year, it is possible that Central and Eastern European countries will once again become dependent on Russian gas, even if it is sold under a different label.
The irony is that unlike a few years ago when there were few alternative gas suppliers, a rising tide of supplies is expected to reach global markets from next year onwards. This could depress prices, and allow Europe to safely diversify.
This really isn’t complicated stuff. Europe’s leaders should get their act together and emphatically reject Russian gas, now and for the foreseeable future.
Aura Sabadus is a senior energy journalist writing for Independent Commodity Intelligence Services (ICIS), a London-based global energy and petrochemicals news and market data provider. She is also a Non-resident Senior Fellow with the Democratic Resilience Program at the Center for European Policy Analysis (CEPA).
Europe’s Edge is CEPA’s online journal covering critical topics on the foreign policy docket across Europe and North America. All opinions expressed on Europe’s Edge are those of the author alone and may not represent those of the institutions they represent or the Center for European Policy Analysis. CEPA maintains a strict intellectual independence policy across all its projects and publications.
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