Europe in Talks to Secure Gas Supply Amid Russia-Ukraine Pipeline Negotiations

Key Takeaway

• Europe is negotiating to maintain gas flow through the Russia-Ukraine pipeline, crucial for southeast Europe's energy supply without aiding Russia's finances.
• Alternatives include European companies injecting Azerbaijani gas into Russian pipelines, supported by Ukraine for transit revenue benefits.
• European gas prices rose 2.2% amid these discussions, with decisions expected by year-end as the current transit agreement expires in 2024.

Europe’s Gas Supply Discussions

Europe is currently engaged in intense discussions to maintain gas flow through a key Russia-Ukraine pipeline, aiming to ensure a reliable energy supply for southeast Europe while avoiding bolstering Russia's finances. German Economy Minister Robert Habeck emphasized the importance of these talks, stating, “not to fill Putin’s war chest even more, and still to ensure a reliable energy supply for southeast Europe.” The existing transit agreement, which allows Russian gas to flow through Ukraine to Europe, is set to expire at the end of 2024. Despite efforts to reduce dependency on Russian gas, several eastern European countries still rely on this pipeline.

Germany has expedited the development of liquefied natural gas terminals to replace Russian gas shipments. However, Gazprom PJSC continues to supply approximately 15 billion cubic meters of gas annually to Europe via Ukraine, primarily to Slovakia and Austria. Habeck noted the ongoing “intense talks between the EU Commission and those countries,” and highlighted his personal involvement in the discussions. Ukraine’s state-run energy company, Naftogaz, has ruled out any collaboration with Gazprom.

Alternative Gas Supply Options

One potential solution under consideration involves European companies purchasing and injecting gas from Azerbaijan into Russian pipelines destined for Europe. This arrangement would help Europe avoid directly purchasing Russian gas, thereby not contributing to Moscow’s revenues. The idea is gaining traction, with Ukraine showing support due to the significant transit revenue it generates, which amounted to about $1 billion in 2021. Oleksiy Chernyshov, CEO of Naftogaz, stated, “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.”

Azerbaijan’s state-run energy company Socar and the energy ministry in Baku have not commented on the matter. The Russian government and Gazprom also declined to comment. While the plan could theoretically benefit Russia if it allows Moscow to redirect its gas elsewhere, it remains a temporary solution as Azerbaijan currently lacks spare gas production capacity. Significant infrastructure upgrades and new long-term contracts would be required for a major boost in exports to Europe.

Market Reactions and Challenges

European gas prices remain sensitive to any perceived changes in supply, with benchmark futures rising by as much as 2.2% on Tuesday. The discussions are still in the early stages, with decisions expected towards the end of the year, coinciding with the expiry deadline and the onset of the European winter. Uniper SE, a gas giant nationalized by Germany, has been involved in the discussions. Slovakia and Austria are key beneficiaries of the pipeline, with Slovakia’s Prime Minister Robert Fico mentioning the possibility of importing gas from Azerbaijan.

Slovakian state-run gas importer SPP suggested that a consortium of European companies or countries could take over the gas deliveries from Gazprom at the Russia-Ukraine border. Austria, which relies heavily on Russian gas, has not commented on the discussions. Despite debates, Europe continues to import Russian LNG by ship and has not sanctioned Russian gas. The European Commission believes the bloc can manage without Russian transit via Ukraine by relying on alternative suppliers and pursuing its climate strategy.

Management Quotes

• Robert Habeck, German Economy Minister:

  "The discussions aim not to fill Putin’s war chest even more, and still to ensure a reliable energy supply for southeast Europe."
  "The Ukrainians don’t need these gas supplies, but not all European states have managed to become as independent from Russian gas as we are."
  "There were intense talks between the EU Commission and those countries. I personally am very engaged in this."