The only trade deal is about to end, Russia is ready to extend, Ukraine "ignores", seeks new direction

Ukraine has thousands of kilometers of underground pipelines that carry Russian natural gas to Western Europe. Before Moscow launched its special military operation in Ukraine, nearly 150 billion cubic meters (bcm) of natural gas were transported annually through Soviet-built pipelines.

Russia is ready to extend the gas transit agreement through Ukraine. (Source: Daily News)

Since the start of the special military operation, European Union (EU) countries have cut their dependence on Russian fossil fuels, while President Putin's country has slowed gas transit through Ukraine - from the 40 bcm agreed by both sides in 2019 to nearly 15 bcm last year.

A five-year deal with Russian state energy company Gazprom for Ukraine to continue serving as a gas transit route is set to expire at the end of 2024.

This agreement is the only remaining political and trade agreement between Moscow and Kiev at the moment.

Russia ready to extend agreement

Ukraine and the EU have downplayed the prospect of a new deal as diplomatic ties have been severed over the special military operation.

Brussels said the 27-member bloc's countries most dependent on Russian gas via Ukraine - such as Austria, Slovakia, Hungary and Italy - could increase imports of liquefied natural gas (LNG) or source gas via other pipelines into the EU.

Moscow, on the other hand, said it was ready to extend the agreement.

Russian state news agencies quoted Deputy Prime Minister Alexander Novak as saying: "Transit through their territory depends on Ukraine and this country has its own regulations. Russia is ready to supply gas through this transit station."

Instead, the EU has begun negotiations with Azerbaijan to import more of its natural gas, which could flow through Ukrainian pipelines and help maintain its role as an energy transit country.

Azerbaijan increased gas exports to Europe by 56% in the first year of Russia's special military operation and aims to double it by 2027.

If exports continue to grow as the “achievements” of the first six months of 2024 show, exports from Azerbaijan to Europe are expected to reach 12.8 bcm by the end of 2024.

Hikmat Hajiyev, an adviser to the President of Azerbaijan, told Reuters that both the EU and Kiev asked Azerbaijan to facilitate negotiations with Russia.

Ukrainian President Volodymyr Zelensky confirmed: "Negotiations are underway."

Is the new direction feasible?

Energy experts say Azerbaijan - which will host the 29th Conference of the Parties to the United Nations Framework Convention on Climate Change (COP29) in November - does not have enough gas in the short term to increase supplies to Europe.

“Azerbaijan’s gas production is not that large. It has a large domestic demand for gas and has exported gas to Georgia, Türkiye, and Europe,” said Aura Sabadus, a non-resident senior fellow at the Center for European Policy Analysis (CEPA).

Experts say it will take time and significant investment for the Baku government to increase gas export capacity.

Meanwhile, the 27-member bloc is trying to wean itself off fossil fuels in favour of renewable energy, so Brussels may be reluctant to sign a long-term deal.

"The agreement with Azerbaijan will help Ukraine pump larger volumes of gas to the EU at a time when the country is integrating its gas market into the European market," said Oleksandr Sukhodolia, an energy security expert.

Azerbaijan’s gas would likely need to be imported via Russia’s southern pipeline infrastructure, passing through Türkiye, Moldova and Romania, Sabadus said. Azerbaijan does not have a border with Ukraine.

“Transportation costs on the southern pipelines are exorbitant, which could make that route unviable,” Sabadus said.

Ukraine has the largest underground gas storage facilities in Europe, most of which are located in the west of the country. (Illustration photo - Source: RT)

How else could the Azerbaijan-Ukraine deal have happened?

One option is for Azerbaijani gas suppliers to sell their gas through Russia, allowing state energy monopoly Gazprom and other Moscow companies to earn transit revenue.

Earlier this year, Gazprom posted its first loss since 1999, as the company struggled to make up for lost exports in Europe through deals with China and Türkiye.

Ukraine has the largest underground gas storage facilities in Europe, mostly located in the west of the country.

Before the special military operation, Kiev had asked Moscow to allow it to transport gas from Azerbaijan and Turkmenistan to Europe. But the Kremlin refused.

“It is very unlikely that Russia will allow gas to be taken from its neighbors,” said Sabadus.

Another solution is a gas swap deal, in which Russia and Azerbaijan exchange volumes of fuel before re-exporting.

“In effect, the deal would see Russian gas sold to Azerbaijan at the Russia-Ukraine border, then transferred through Kiev and on to Europe,” Sabadus suggested.

How profitable is Ukraine's gas transit role?

Kiev received about $1 billion (€0.92 billion) in 2021 for the transit of Russian gas. Due to lower deliveries to Europe since the start of the special military operation, the profit has dropped to about $700 million a year.

“It is a small volume of gas and that level is not profitable for Ukraine,” said Sukhodolia.

Most of the fees are allocated to operating costs, including pipeline maintenance, so any new deal would have to include a significant increase in gas supplies to help Kiev address its budget woes.

“Unless the transit agreement is extended in a very large volume, the Ukrainians will not make any money,” Sabadus said. This may also be the reason why Ukraine is “knocking on Azerbaijan’s door” to find a new direction, instead of accepting Russia’s offer.

Source: https://baoquocte.vn/thoa-thuan-thuong-mai-duy-nhat-sap-ket-thuc-nga-san-sang-gia-han-ukraine-lam-ngo-tim-huong-di-moi-279123.html