Ukraine outlines its vision for continuing gas transit through its territory after the contract with Gazprom expires in four months. This will only be possible if the gas is not Russian but comes from Central Asia. Why might Russia agree to such an arrangement, and who could gain access to Ukraine’s pipeline instead of Gazprom?

Ukraine will not extend its transit contract with Gazprom, President Volodymyr Zelensky announced last week. This statement was not surprising, as Ukrainian authorities have repeatedly stated this intention. The current contract for gas transit with Ukraine expires in December 2024.

Experts had speculated that Gazprom might still be able to transit Russian gas through Ukraine without a formal contract by booking gas transit capacities via auctions, as is common practice in Europe, for periods of one, three, or even six months.

However, Mykhailo Podolyak, an advisor to Zelensky’s office, recently stated that starting January 1, 2025, Ukraine is prepared to transit gas only if it originates from other countries via Russian territory. According to him, this could involve gas from Central Asian nations such as Kazakhstan or Azerbaijan.

“If any European country deems it necessary to receive Kazakh or Azerbaijani gas, Ukraine is ready to transit it, provided there is appropriate logistics, legal grounds, and contractual agreements,” Podolyak explained.

This suggests that Ukraine does not intend to allow Gazprom to participate in auctions for booking pipeline capacities but is open to working with other non-Russian companies.

On the surface, the advisor’s statement might seem somewhat unrealistic, as the entry point to Ukraine’s gas pipeline system is through Russian territory. Without Russia’s consent, this scheme is unfeasible. On the other hand, the proposal to hand over Ukraine’s gas transit to a non-Russian supplier could potentially align with Russia’s strategic interests, experts believe.

Who could transport their gas through Ukraine with Russia's consent, and how might this benefit Russia?
Among neighboring countries, Azerbaijan appears to be the only viable candidate. Kazakhstan and Uzbekistan are unlikely to have sufficient gas supplies to transit through Ukraine. “Kazakhstan and Uzbekistan are struggling to meet domestic gas demands and lack significant export capacity. In fact, Russia is currently working to increase its gas supplies to Uzbekistan and plans to expand gasification in northern Kazakhstan in the future,” says Alexey Gromov, Director of the Energy and Finance Institute.

Turkmenistan mainly exports its gas to China. While it has shown interest in diversifying its export routes, its relations with Russia remain strained due to competition with Gazprom in the gas market.

“Turkmenistan has both the gas reserves and the technical capability to supply gas via Russia and Ukraine through the Central Asia–Center pipeline system. This system was widely used in the 1990s and early 2000s when Gazprom purchased Turkmen gas for resale to Europe, utilizing Ukraine’s gas transit system built during the Soviet era,” notes Sergey Tereshkin, CEO of the Open Oil Market.

However, this pipeline is currently used for reverse gas flows from Russia to Uzbekistan, Tereshkin points out. The Central Asia–Center pipeline system is controlled by Gazprom and consists of pipelines running from Turkmenistan through Uzbekistan and Kazakhstan to Russia.

This leaves Azerbaijan as the most realistic partner in this scenario. Currently, Azerbaijan delivers gas to the European Union via Turkey using the TANAP and TAP pipelines. Azerbaijan supplies 10 billion cubic meters of gas annually to countries such as Turkey, Greece, Albania, and Italy.

“Russia could negotiate a swap arrangement with Azerbaijan. Russian gas that used to transit Ukraine could instead flow through Azerbaijan to Turkey and Europe under Azerbaijani contracts, while Baku would supply Azerbaijani gas through Ukraine, possibly under Gazprom contracts,” Gromov suggests.

In practice, this would mean that physical deliveries of Azerbaijani and Russian gas would continue as before, but on paper, the arrangement would appear different: legally, Russian gas would transit Turkey via the TAP pipeline, while Azerbaijani gas would transit Ukraine. The exact volumes—whether equal or not—would be subject to negotiation. Azerbaijan currently exports 10 billion cubic meters of gas to Europe via Turkey, while Russia transits around 15-16 billion cubic meters through Ukraine.

Why would Russia invite Azerbaijan to replace Gazprom in Ukrainian gas transit?
First, Gazprom has existing contracts to supply gas to Austria, Hungary, and Slovakia that it wants to maintain. While Hungary and Slovakia could potentially be supplied via the TurkStream pipeline, Austria cannot—its gas needs can only be met via Ukraine. Therefore, Azerbaijan’s involvement would help Gazprom fulfill its contractual obligations to European buyers.

Second, Azerbaijan is crucial to Russia’s strategic goal of organizing pipeline gas deliveries to Iran, Gromov explains. In June, a Gazprom delegation visited Iran and signed a confidential memorandum to explore long-term pipeline gas supplies to Iran.

While Gazprom has remained silent on this issue, Iranian officials revealed plans for a new gas pipeline system under the Caspian Sea to deliver up to 110 billion cubic meters of Russian gas annually to Iran and further to South Asian and Middle Eastern markets. “South Asia and the Middle East are markets with untapped demand. Gas consumption in these regions is often limited by supply constraints,” Gromov notes.

“This effectively involves creating a ‘Caspian Stream’ system to replace the Nord Streams. However, this project can only be realized if Azerbaijan or Turkmenistan agree to the pipeline’s construction in their territorial waters.

Given the traditionally complex relations with Turkmenistan, Azerbaijan is a more likely partner. In exchange, Russia could support Azerbaijan’s gas transit ambitions,” Gromov adds.

On August 19, 2024, Russian President Vladimir Putin visited Baku for the first time in six years for two days of talks. During this visit, the two leaders held closed-door discussions on strategic gas cooperation.

“For Russia, building a gas pipeline to Iran is a strategic endeavor. With other export routes facing limitations, such as Europe’s move away from gas and China’s cautious stance, Iran represents a crucial opportunity. For example, the Power of Siberia-2 pipeline, according to Mongolia (the planned transit country), is unlikely to proceed until 2028,” Gromov explains.

What benefits could Azerbaijan gain from this arrangement?
First, Azerbaijan could increase its gas exports through Ukraine’s transit system, which offers greater capacity than its current routes through Turkey. This would be a direct economic benefit for Azerbaijan. For instance, Azerbaijani pipelines through Turkey supply only 10 billion cubic meters annually, but Baku could increase exports by 3-4 billion cubic meters via Ukraine, according to Gromov. This could be achieved without the need for additional infrastructure.

Second, by using Ukraine’s pipeline system, Azerbaijan could further expand its export capacity in the future, as the Ukrainian gas transit system has significant unused capacity, Gromov concludes.


Translated using  ChatGPT

Sourse: https://vz.ru/economy/2024/9/2/1284693.html