As of January 1, 2025, the five-year Russian-Ukrainian agreement from 2019 on the transit of Russian natural gas through Ukraine will expire. This will significantly impact the availability and price of natural gas in Europe during the upcoming heating season. While Azerbaijan could potentially help fill the gap left by Russian supplies, the chances of this are limited. Implementing such a scenario would require numerous political and technical decisions, all of which are highly uncertain in the context of the current war.
The role of Ukraine as a transit hub. For years, Ukraine has played a crucial role in the European energy market due to its strategic position as a transit country. Its transmission system, capable of transporting up to 110 billion cubic meters (bcm) of natural gas annually, along with its underground storage facilities (“IEŚ Commentaries”, no. 930), has facilitated the flow of Russian gas to Europe. However, Russia’s foreign economic policy has aimed to reduce Ukraine’s role as a transit country, with projects like Nord Stream 1, Nord Stream 2, and TurkStream/Balkan Stream. These developments have gradually decreased the volume of gas transported through Ukraine. Delays in the completion of Nord Stream 2 led to the extension of the transit agreement between Russia and Ukraine in December 2019 for another five years.
This agreement is set to expire on 31 December 2024. Despite Russia’s full-scale invasion of Ukraine in February 2022, gas transit has continued, generating an estimated 450 million USD per year for Ukraine from the transport of around 14 bcm. This is only about 35% of Gazprom’s obligations to GTSOU (Gas Transmission System Operator of Ukraine) under the agreement, as the Russian company likely only pays for the capacity it uses rather than the full 40 bcm stipulated in the 2019 deal. Currently, natural gas supplies to Europe primarily depend on long-term contracts between Gazprom and companies like Slovakia’s SPP (Slovenský plynárenský priemysel) and Austria’s OMV (Österreichische Mineralölverwaltung), which expire in 2029 and 2040, respectively. If the transit agreement is not renewed, Gazprom will be forced to halt deliveries to Slovakia and Austria, compromising the energy security of these countries.
The role of Azerbaijan in natural gas supplies via Ukraine. In 2024, several European leaders expressed the need to maintain natural gas transit through Ukraine. In May, Slovak Prime Minister Robert Fico announced that discussions with Azerbaijan about gas supplies to Europe via Ukraine had taken place. Azerbaijan confirmed these talks in June, and by July, both Ukrainian President Volodymyr Zelenskyy and German Vice Chancellor Robert Habeck acknowledged that this possibility was under consideration. These discussions emphasised maintaining Ukraine’s transit role in Europe while limiting Russia’s revenue from energy exports.
As the expiry of the transit agreement approaches, some suggest that Azerbaijan could step in to fill the supply gap. However, Azerbaijan’s ability to increase gas production is limited, though it could redirect some supplies for export by 2025. In 2023, Azerbaijan produced approximately 47.4 bcm of natural gas, with 25.6 bcm used domestically (split between injection into oil fields and consumption), leaving about 21.8 bcm or 46% for exports. By early 2025, Azerbaijan may be able to allocate an additional 2-3 bcm for export, sourced from several areas: (1) a reduced contract between Azerbaijan Gas Supply Company (AGSC) and Turkey’s BOTAŞ; (2) a renewed swap deal with Turkmenistan; (3) increased output from the Shah Deniz field; (4) early production at the Absheron field; and (5) expanded production at the Umid field.
How this gas could reach Ukraine remains uncertain. Two potential routes involve the use of Russian infrastructure. The first option would require Azerbaijan’s SOCAR to reserve transmission capacity at both the Azerbaijani-Russian and Ukrainian-Russian borders, paying Gazprom for the transit service through Russia to the Sudzha metering station. The second option would involve a swap agreement between SOCAR and Gazprom, with Azerbaijani gas reaching the Russian border while Gazprom delivers an equivalent amount at the Ukrainian border. Both options involve complex political and logistical risks, as they require cooperation between multiple entities.
Conclusions
Michał Paszkowski
IEŚ Commentaries 1211 (186/2024)
Ukraine: limited prospects for Azerbaijan to fill the gap left by Russian natural gas