European Officials in Talks to Maintain Gas Flow Amid Russia-Ukraine Pipeline Uncertainty

Key Takeaway

• European officials are in talks to maintain gas flow through the Russia-Ukraine pipeline, exploring alternatives like sourcing from Azerbaijan.
• Uniper SE and Slovakia are key stakeholders, with Slovakia considering importing Azerbaijani gas for domestic use and transit.
• Despite efforts to reduce dependency, Europe still imports 15 billion cubic meters of Russian gas annually, mainly to Slovakia and Austria.

European Gas Transit Talks

European officials are currently engaged in discussions to maintain the flow of gas through a critical Russia-Ukraine pipeline, aiming to prevent further disruptions to the continent's energy supplies amid the ongoing conflict. Despite efforts to reduce dependency on Russian gas, several Eastern European countries still receive gas through this pipeline, which is set to expire at the end of this year. Market watchers largely anticipate that the gas flow will cease due to the war.

However, European government and company officials are in talks with Ukrainian counterparts to explore ways to keep the gas flowing next year. One potential solution involves European companies purchasing and injecting gas from Azerbaijan into Russian pipelines destined for Europe. This arrangement would allow Europe to avoid the embarrassment of buying Russian gas while still maintaining supply.

Oleksiy Chernyshov, CEO of Ukraine's state-run Naftogaz, emphasized the importance of Ukraine's gas infrastructure, stating, "Ukraine has incredible infrastructure of transit and storage gas, which should be used, and Ukraine is predisposed to use this infrastructure because it brings a lot of advantages." He ruled out any collaboration with Russia's Gazprom PJSC but acknowledged that bringing gas from Azerbaijan "might have some future."

Negotiations and Stakeholders

The talks are still in the early stages, with decisions expected closer to the end of the year when the current agreement expires and the European winter begins. Many details remain unresolved, and it is uncertain whether a deal will be reached. Developments on the battlefield could also influence the outcome.

Uniper SE, a gas giant nationalized by Germany, has been involved in the discussions. A spokesman for Uniper declined to comment, while a German economy ministry spokeswoman confirmed that the government was in talks within the European Union. Slovakia, a key beneficiary of such a deal, has also shown interest. Prime Minister Robert Fico mentioned the possibility of importing gas from Azerbaijan, with part of it staying in Slovakia and part passing through to other countries.

Russia continues to ship around 15 billion cubic meters of gas to Europe annually, mainly to Slovakia and Austria. In Austria, Russian gas has covered more than 80% of consumption for five consecutive months. Despite frequent debates, Europe has not sanctioned Russian gas and continues to import Russian LNG by ship.

Market Implications

The European Commission believes that the bloc can withstand the end of Russian transit via Ukraine without major security risks, relying on alternative suppliers and pursuing its climate strategy, which includes more renewables and energy savings. However, some member states are less optimistic and fear a repeat of the energy crisis, aligning their interests with those of Ukraine.

Chernyshov highlighted the importance of finding a solution to keep the Ukrainian gas transportation system operational, stating, "I’m doing everything to find a solution that the Ukrainian gas transportation system will continue to be operational because it’s a big asset and someone should be a customer. Otherwise, it’s loss generating."

Street Views

• Oleksiy Chernyshov, CEO of Naftogaz (Cautiously Optimistic on Ukraine's gas infrastructure):

  "One is that Ukraine has incredible infrastructure of transit and storage gas, which should be used, and Ukraine is predisposed to use this infrastructure because it brings a lot of advantages."
  "Bringing gas from Azerbaijan might have some future."

• Robert Fico, Prime Minister of Slovakia (Neutral on potential Azeri gas deal):

  "Now, it depends on negotiations between companies such as Russian Gazprom, Azerbaijani, Ukrainian companies, and others to agree on economic and pricing conditions. If they do, Slovakia could import gas from Azerbaijan, with part of it staying in Slovakia and part passing through to other countries."