Watch your hands. Russian gas is turning into Azerbaijani...

Baku is ready to supply additional volumes of gas to Europe, but the key question is where will it get it?

On September 9, Hungarian energy giant MOL, which controls oil refineries in Hungary and Slovakia, made a surprise announcement. It followed: the company assumes responsibility for the supply of Russian oil to the EU countries from the border of Belarus and Ukraine. Previously, the Russian side was responsible for the delivery of oil through the Ukrainian section of the Druzhba oil pipeline to the border with the EU countries.

However, in July, the transit of oil from the Russian company Lukoil was blocked due to sanctions imposed by Ukraine on Lukoil. Now, formally, not Russian, but European (Hungarian) oil will be transported through the territory of Ukraine, so it seems that it should not be subject to sanctions.

Ukraine pumps Russian oil through the Druzhba pipeline under a ten-year contract dated 2019 between the Ukrainian Ukrtransnafta and the Russian Transneft. After the European Union imposed sanctions against Russian oil, an exception until 2025 was made only for Friendship, until Hungary, Slovakia and the Czech Republic find other sources of oil supplies.

There are suspicions that the oil story has become a kind of rehearsal for future agreements on the transit of Russian gas to Europe, which passes through Ukrainian territory and has not stopped, despite the war. The agreement ends at the end of this year, and the Ukrainian side has repeatedly made it clear that it will not continue. The logic of such a step is obvious: energy revenues are the main source of the militarized Russian budget, from which the war is paid.

But, despite this, there remain options in which Russian gas will continue to flow through the Ukrainian pipeline next year. President Zelensky openly announced this possibility back in early July. Denying the continuation of a direct contract with the Russian Federation, the head of state mentioned “alternative steps, how we can use the pipe with another gas supplier, another country.”

In particular, he clarified that officials are discussing a proposal to replace Russian gas with Azerbaijani gas in order to maintain the status of a transit country and help Western neighbors ensure energy security. An important nuance is that in this case, the transit of Azerbaijani gas will still take place through the territory of Russia, so without its consent this project will not work.

Big Trouble

Azerbaijan supplied 11.8 billion cubic meters to Europe last year. m, this is half of its total gas exports. Baku is not against increasing these volumes at the expense of the Ukrainian gas transportation system. There are already clients for this gas in Europe - “friends” of Ukraine and the largest lobbyists of the Kremlin in the European Union, Slovakia and Hungary. Slovakia, unlike other EU countries, was in no hurry to get off the Russian gas needle, and Hungary, which now receives gas via the Turkish Stream, wants to return to the Russian route, which it used until 2021.

Austria and Italy still receive Russian gas through Ukraine, but it is Slovakia and Hungary that are sounding the alarm loudest. This attraction of Budapest specifically to Russian gas and oil is explained by the fact that it gets them at prices lower than the average European ones. The “economic miracle” of Hungarian Prime Minister Viktor Orban and the welfare of his ruling party are largely based on cheap Russian oil.

Certain movements regarding the future fate of transit began in advance. Back in January, Slovak Prime Minister Robert Fico, after a meeting with his Ukrainian counterpart Denis Shmygal in Uzhgorod, expressed satisfaction: the transit of Russian gas through Ukraine will probably continue. At the same time, the press service of the Ukrainian Prime Minister made it clear: there will definitely be no extension of the contract with the Russians. Another meeting between Shmygal and Fico took place in April, and energy issues were also raised at it.

In August, the Chairman of the Board of NJSC Naftogaz of Ukraine, Alexey Chernyshov, traveled to Slovakia, met with Fico and stated following the meeting that the key topic was “cooperation to strengthen common energy security in the face of modern challenges.”

It is obvious that under these abstract final formulations the issue of Ukrainian transit of gas and oil to Slovakia was camouflaged.

At the same time, other events took place, to which Ukraine had no direct connection. The Slovak Prime Minister visited Baku in May, where he discussed gas exports with the President of Azerbaijan.

The Slovak government has said it will make every effort to import gas from Azerbaijan in order to get rid of Russian gas.

Then Hungarian Foreign Minister Peter Szijjártó went to Moscow in August to negotiate cooperation in the energy sector and noted there with statements that the energy security of Hungary and the heating of Hungarian homes cannot be guaranteed without Russian gas (the country has a 15-year contract with Gazprom ).

“This is not a question of ideology, but of physics and mathematics,” he noted.

And also in August, Russian dictator Vladimir Putin and his retinue were greeted with honors in Baku, for whom any trip outside Russia is now a big event. The visit resulted in an agreement on a strategic partnership between Gazprom and the state oil company Socar. This caused a wave of indignation in Ukraine, including calls to boycott the company’s network of gas stations.

Socar Energy Ukraine responded to the “Commander-in-Chief” that calls for a boycott could not have mass support among Ukrainians because they had signs of a targeted attack. The company referred to an article in one of the specialized resources, which proves that the real reason for the hate was the winning of tenders by the Sokar Ukraine trading house for the supply of diesel fuel to Ukrzaliznytsia.

But President Ilham Aliyev did not particularly hide what actually stood behind the agreements between Socar and Gazprom. The leader of Azerbaijan complacently said that earlier the EU and Ukraine allegedly approached him with a request to facilitate negotiations with Russia on a gas transit agreement and announced “the grounds for a breakthrough.” “We just want to support these (European) countries, as well as Ukraine, because if transit stops, Ukraine’s gas distribution system will be completely paralyzed,” Aliyev played gas diplomat.

Of course, the interest in energy cooperation between Baku and Moscow, which is desperately trying to enter new and at least partially regain closed old markets through Turkey, is not limited only to the topic of Ukrainian transit.

Moldova also joined the gas turmoil. Occupied Transnistria, as part of it, exists exclusively at the expense of Russian gas. And it is Transnistria, with Russian gas, that is the main supplier of electricity at prices significantly lower than market prices for the right bank, controlled by Chisinau. For 30 years, not a single Moldovan government has been able to get rid of this “energy stranglehold” of Russia. The pro-Western government of President Maia Sandu was no exception. It was no coincidence that the omnipresent head of the Hungarian Foreign Ministry, Szijjarto, visited Chisinau, during which he accused Ukraine of undermining the energy security of its European partners. The very fact that such a statement was voiced in Moldova indicates that Chisinau is in solidarity with its Hungarian “partners” on this issue.

Strong "Friendship"

The fate of gas transit is just being decided, but a rather unexpected way out of the situation with the transportation of sanctioned Russian oil, which simply formally changed its owner, raises a number of questions for the Ukrainian side. It seems that Kyiv has succumbed to pressure from the Hungarian and Slovak governments and their manipulations around the lack of alternative to Lukoil oil for the energy security of their countries. Ukraine was even threatened with consequences due to the blockade of transit; in particular, Hungarian Foreign Minister Peter Szijjártó began to blackmail him by blocking 6.5 billion euros within the European Peace Fund, from which the supply of weapons to Ukraine is financed.

It is significant that the European Commission, to which Budapest and Bratislava applied with a request to begin consultations within the framework of a trade agreement with Ukraine, washed its hands: they say that the Hungarians and Slovaks are to blame for the fact that over the years they have not found other sources of oil supplies. The European Commission generally distances itself from the transit case, because the EU, except for several of the above-mentioned countries, has long gotten rid of its dependence on Russian energy resources.

“For Orban, this oil is so important because there are long-term contracts at special prices,” explains Mikhail Gonchar, president of the Strategy XXI center. “There was a 20% discount on Lukoil’s raw materials, that is, a very good margin. As for the alleged shortage of oil, which the Hungarians and Slovaks are talking about, the same MOL, back in 2015, when our problems began, loudly announced that it had completed work on the modernization and expansion of the Druzhba-Adria oil pipeline link. This allows the Hungarian and Slovak oil refineries to receive all the oil from the Mediterranean market from the Adriatic Sea, and even a little more can go to the Czechs.”

The Ukrainian side reacted to the Hungarian-Slovak “victory” with silence, and only the next day after the resonant announcement of MOL, Prime Minister Denis Shmygal said at a press conference that he learned about the existence of these agreements... from the news.

“The Hungarian company MOL announced that it is now the owner of the product that is being transited through Ukraine,” the prime minister stated. – This suits us, this is not a Russian company. If MOL transits its product through the Ukrainian pipeline system, then Ukraine fulfills our obligations under the Association Agreement with the EU. And for Hungary, perhaps for Slovakia, Austria...”

If the government is quite satisfied with the deal that MOL carried out with openly sanctioned oil, then why might it not be satisfied with the scheme for the transit of Russian gas, especially if it is positioned as Azerbaijani? Interestingly, at the same press conference, Shmygal noted Hungary’s “responsible chairmanship” of the EU Council and spoke about a constructive dialogue with Budapest, citing as an example the opening of the first Ukrainian school in Hungary.

The fact that the authorities do not have a clear position regarding the future of “Friendship” or that it is not conveyed to everyone in the government team was demonstrated not only by Shmygal’s reasoning, but also by the very revealing hesitations of the adviser to the head of the Presidential Office, Mikhail Podolyak. First, he categorically stated on one of the TV channels that the Druzhba pipeline would stop operating on January 1, 2025 (this is the period the European Union gave its members to refuse Russian oil). But then he was forced to explain that Ukraine would fulfill its obligations to European partners in accordance with previously concluded contracts until their completion.

Moreover, for Ukraine, the benefits from the politically toxic transit of Russian oil, around which there is so much talk, are “meager”: we are talking about an amount of about $250 million per year. And yet, a certain inconsistency in the actions of government officials, who either say that it is illogical to help the aggressor wage a war against us, or are no longer against Russian energy resources moving through Ukrainian territory under a different label, can be explained.

The Hungarians and Slovaks, in addition to methodically creating obstacles to Ukraine’s European integration, have other “neighboring” levers of pressure on Kyiv. And they may well become clear to our domestic audience if Russian gas continues to flow through the Ukrainian “pipe”.

We are talking about Ukraine’s forced dependence on electricity imports, including from neighboring countries. Before the difficult winter, negotiations are underway with European partners to increase import capacity from the existing 1.7 GW to 2.2 GW. In addition, Orban and Fico, unlike their Polish friends, did not use such a painful tool as blocking borders with the hands and feet of “caring” local citizens.

But Ukraine also retains its leverage. “We still retain every opportunity to stop this transit,” says Sergei Kuyun, director of the consulting company A-95. “We can simply join European sanctions against Russian oil (because they are not against specific companies). The embargo itself from 2025 for Slovakia and Hungary did not cease to apply thanks to this assignment. In addition, we have shelling every day - and suddenly something can break.”

The Kremlin's pain point

But the issue of gas transit is much more painful for Russians than oil transit. They won’t have any particular problems selling the latter, even if direct deliveries to Eastern European countries fail. The loss by Gazprom of those remnants in the EU gas market, where this monopolist ruled the roost not so long ago, will be a significant blow for the bankrupt Russian giant.

According to European Commissioner for Energy Kadri Simson, the share of Russian gas in the EU is now 15%, compared to the pre-war 45%. The actual volume of Russian gas pumped by the Ukrainian gas transportation system is about 15 billion cubic meters per year, although back in 2021 it was at around 40 billion.

If Ukrainian transit is stopped, Gazprom will lose Europe almost completely, and the Chinese partners, on whom Putin had great hopes, stubbornly refuse to make themselves dependent on Moscow for gas.

“The Russians simply have nowhere to put gas in such volumes: all the pipes are under contract, and there is no potential for increasing exports,” says Kuyun. “They also cannot send more gas by sea, and this means a decrease in production and an increase in prices for domestic consumers, who were kept in warm bath just due to export. And I really hope that our leaders will make the most of it.”

Actually, purely in terms of money, Ukraine receives an order of magnitude less from both oil and gas transit than Russia. If Moscow pays about $800 million a year for gas transit, a significant part of which is consumed by GTS maintenance, then it earns $5-5.5 billion for gas sales. Do not forget about another important point for the Kremlin, which is accustomed to using gas as a tool : While Slovakia, Hungary and Austria depend on cheap Russian gas, this allows them to be manipulated and influence EU policy.

“When we talked about the same Russian oil with the Hungarians and Slovaks, we could have raised the question - okay, we agree to transit to you, but if you have such good relations with Putin, then ask him to get out of the Zaporozhye nuclear power plant, - Mikhail Gonchar gives an example of a possible political-economic agreement. “Somehow, I doubt that such conditions were put forward.”

We've already been through this

Former Minister of Housing and Communal Services, First Deputy Chairman of the Parliamentary Committee on Energy and Housing and Utilities Services Alexei Kucherenko (Batkivshchyna) notes: the current gas scheme makes it possible to subsidize not only Russian consumers, but also Ukrainian ones. In his opinion, if transit stops, this shortage of funds will be included in the bills.

“We are gradually being led to the conclusion that according to the papers some other gas will come in - in fact it will be stinking “Gazprom”, but according to the documents it will be clean,” confirms Kucherenko and reminds that such a substitution has already been practiced - there is no need to pretend a chaste girl: the former leaders of Naftogaz Kobolev and Vitrenko did the same thing - very large volumes of gas were passed through Slovakia and legally it was European gas, but in fact physically it was Russian.”

Sergei Nagornyak, a member of the energy committee from Servant of the People, admits that there is definitely no good solution to the dilemma with the continuation of transit that the authorities are facing. “To preserve the gas transportation system, it is important that it be used for transit, but given the current situation, of course, this cannot be the transit of Russian gas,” he is categorical. – That is, a contract must be signed, relatively speaking, between Austria and Azerbaijan, and transit must be ensured through Ukraine. This option, in my opinion, could benefit: Ukraine, European countries that would have gas in winter, and our potential partner Azerbaijan.”

However, Nagornyak notes that Russian gas cannot be allowed to continue flowing through Ukraine under the guise of Azerbaijani gas: “If there is no such guarantee, it is necessary to completely stop transit until some kind of peace agreements are signed with Russia and it withdraws their troops from Ukraine. I think that stopping transit would be more correct for us in the short term than allowing Russians to earn extra money.”

Azerbaijani gas...which doesn't exist?

But the key question is how to distinguish Russian gas from non-Russian gas? The former head of the Ukrainian GTS Operator company, Sergei Makogon, proves that free Azerbaijani gas for the Ukrainian “pipe” simply does not exist.

“Azerbaijan now exports about 24 billion cubic meters. m: 10 to Turkey, less than 13 to Europe and 1.5 to Georgia,” Makogon argues, “That is, the gas they produce is already exported through Turkey, through the TANAP gas pipeline, in which the pipe is 60% owned Azerbaijan itself. If he had free gas, then it would make sense for him to export it not through Russia, but through his own gas pipeline. TANAP's throughput capacity is now 16.2 billion cubic meters, but without laying additional pipes its capacity can be almost doubled. The construction of four additional compressor stations would require a little more than $1 billion - and it would have its own pipe, independent from Russia. And Ukrainian transit of Azerbaijani gas will also take place through Russian territory. So let's think about why the Russians would allow competitors to supply gas to Europe? This is nonsense."

Accordingly, Makogon concludes that the only opportunity to carry out these supplies is to call Russian gas Azerbaijani, as similarly happened with the “Hungarian” oil of Lukoil.

The expert draws another, slightly more complex, scenario: “Azerbaijan consumes 10 billion cubic meters. m of our own gas, and it is this that can be replaced with cheap Russian gas, and our free gas can be exported.”

What will happen to the GTS?

If transit is stopped, the Ukrainian gas transportation system will be used to ensure domestic consumption (less than 20 billion cubic meters in 2023) and pump gas into underground storage facilities. The latter have now lost their attractiveness among European partners due to the fact that they are becoming targets of regular attacks by Russian missiles. People's Deputy Nagornyak does not rule out that in case of refusal of transit, the risk of Russian shelling of other gas infrastructure will increase, but argues that this is not the case when one should succumb to blackmail.

“In principle, the gas transportation system has prepared for such circumstances and is preparing to operate in a lighter mode,” he says.

The former head of the Ukrainian GTS Operator company, Sergei Makogon, confirms that such preparations have been ongoing since 2020, when the Russians almost completed the construction of Nord Stream 2 to launch their gas bypassing Ukraine.

“Some of our experts say that supposedly some kind of pressure must be constantly maintained in the system, the buffer gas in it must be replaced with something - this is all nonsense,” says Makogon, “Currently Ukraine is producing 20 billion cubic meters, which will be pumped by our GTS. It will work perfectly, but it needs to be optimized - to close unnecessary compressor stations that are already 40 years old. If transit stops (and from a business point of view there is no point in it), then the system will be cheaper to maintain - now we have 74 compressor stations, and without transit we will only need 10.”

Kyiv has more than enough time until the “2025 problem” is resolved, especially if we recall the long-standing Ukrainian precedents for resolving gas issues “in a herringbone manner.” But the Ukrainian authorities will have to behave very delicately in the socially resonant transit story, where too many interests are intertwined.