Europe wrestles with Russian gas controversy amid new deals
With the expiration of the Russian-Ukrainian gas transit agreement at the end of the year, there is a gap that must be filled by supplies from other directions. Azerbaijan has become a significant partner for the EU. The problem is that this country can be used as a gateway for Gazprom, with which the Azerbaijani SOCAR has agreements.
A real storm in Brussels was caused by reports from "Politico" claiming that gas from Azerbaijan is, in fact, Russian gas. According to the reports, Moscow is using Gazprom's strategic partnership agreement with the Azerbaijani giant SOCAR to "launder" its resources and circumvent sanctions.
The European Commission intervened in the matter, strongly denying that the agreement with Azerbaijan could become Putin's Trojan horse. Tim McPhie, the Commission's spokesman for energy, assured that the so-called Southern Gas Corridor, which supplies EU countries, is solely connected to Azerbaijani gas fields and not to the broader Azerbaijani natural gas system where "mixing" with Russian gas could occur.
Azerbaijan's President Ilham Aliyev also denied suggestions that his country re-exports Russian gas to the Union. However, the agreement, which is important from Europe's perspective, still raises controversies. Why? Firstly, it is very difficult to track every molecule of gas in international trade. Doubts arise due to the relationships between SOCAR and Gazprom, as well as Lukoil, which, according to Global Witness, holds a 19.99% stake in the Shah Deniz offshore field (operated by BP), among others, and gas for the EU is extracted from this field.
Secondly, even if we assume that the gas sent to the EU is "purely" Azerbaijani, the growing demand for resources from the Caucasus may still be offset by Azerbaijani purchases from Russia. As a result, Moscow will profit regardless.
Europe disarms Putin's grip
"The importance of Azerbaijan for the energy security of European Union countries has increased since Russia started a full-scale war with Ukraine in 2022. Azerbaijan, according to the agreement with the European Commission, has committed to increasing raw material exports to EU countries to 706 billion cubic feet annually by 2027," explains Dr. Michał Paszkowski from the Institute of Central Europe in Lublin in an interview with money.pl.
For the past two years, the Union has been trying to free itself from Putin's resource grip and become independent of Russian supplies. The goal is not just to guarantee the Community's energy security but also to deprive Moscow of revenues from the hydrocarbons it sells in Europe.
This is why the agreement with Azerbaijan, which possesses rich deposits estimated at 70.6 trillion cubic feet, was so crucial. As the expert recalls, in 2023, the country's total gas export increased by 5.3%, with exports to Europe increasing by 3.5%, reaching 416 billion cubic feet compared to the planned 423 billion cubic feet in 2024.
Currently, the country exports natural gas to nine EU countries, with Slovakia recently becoming one of them. On December 2, 2024, SOCAR delivered raw material to the SPP company from Azerbaijan. This is the result of an agreement concluded on November 12, 2024, although the terms of the agreement have not been disclosed—presumably, these are small deliveries," notes Dr. Paszkowski.
Slovak Prime Minister Robert Fico held talks in Baku in May 2024 about natural gas supplies. According to various reports, there were two options on the table. The first involves using the existing infrastructure through Bulgaria, and the second involves an agreement with Russia and Ukraine to replace the transit of Russian gas with Azerbaijani raw material.
According to Marianna Sobkiewicz, senior analyst at the Polish Economic Institute, the second alternative seems cheaper for Slovakia, but again we return to the problem of the origin of the raw material. Here's how such an arrangement would look: Russia would continue to supply gas (labeled as "Azerbaijani gas") to Ukraine, while Azerbaijan would receive gas from Russia (labeled as "Russian gas").
"There would be no actual change in gas flows: EU traders would buy gas from Azerbaijan, which would buy gas from Russia. Such a solution is not preferred considering the EU's goal of complete independence from Russian fossil fuels. Moreover, the agreement with Azerbaijan could set a precedent for similar agreements in the EU," explains the analyst.
Azerbaijan's role may increase
In the first quarter of this year, about 7% of all gas transmitted via EU pipelines was imported from Azerbaijan, according to "Politico." The country sold about 353 billion cubic feet of gas to Europe this year alone.
"In theory, Azerbaijan could play an even greater role in Europe's energy market following the expiration of the Russian-Ukrainian transit agreement, which ends on December 31, 2024. However, considering existing contractual obligations, it will be challenging for SOCAR to direct additional supplies to Europe," notes Dr. Paszkowski.
It is estimated that at the beginning of 2025, Azerbaijan could have additional resources from several sources:
- reduced contract between AGSI (Azerbaijan Gas Supply Company) of Azerbaijan and BOTAŞ of Turkey;
- resumed swap agreement with Turkmenistan;
- increased production at the Shah Deniz field;
- early exploitation of the Absheron field;
- increased natural gas production at the Umid field. It is estimated to be about 71-106 billion cubic feet in 2025.
"However, this is not a volume that would fully fill the gap left by resources from Russia," notes Dr. Paszkowski.
Not only gas, but oil
However, Azerbaijan is not only about gas but also oil. This small Caspian Sea country is listed among the top 30 oil-rich countries in the world and is the 20th largest exporter of this resource globally.
According to official government data, the country's oil reserves amount to 15 billion barrels.
Azeri Light is a type of crude oil that is light and clean, allowing for more fuel to be produced from one barrel compared to, for example, Russian raw material.
It is in Azerbaijan where the Hungarian company MOL holds shares in oil fields. Hungarians use the southern corridor to supply raw materials to the country, thus diversifying imports from Russia.
The oil extracted from the Azeri-Chirag-Gunashli (ACG) oil field, in which MOL Group owns 9.57% of the shares, is transported to Hungary and Slovakia via the port in Ceyhan, Turkey, to Omisalj in Croatia. Then 90,000 tons of crude oil are transported to the only refinery in Hungary – in Duna near Budapest and to Bratislava via the Adria pipeline.
