How EU could use Ukraine's pipelines when Russia deal ends

Ukraine has thousands of kilometers of underground pipelines that bring Russian natural gas into Western Europe. Before Moscow launched its full-scale invasion of Ukraine, nearly 150 billion cubic meters (bcm) of natural gas flowed annually through the Soviet-built pipelines.

Since the war began, EU states have cut their reliance on Russian fossil fuels, while Russia has slowed gas deliveries through Ukraine from 40 bcm, which the two sides agreed to in 2019, to nearly 15 bcm last year.

The five-year agreement with Russian state energy firm Gazprom to continue Ukraine's role as a gas transit route expires at the end of 2024. The deal is the only remaining trade and political agreement between Moscow and Kyiv.

Russia open to renew gas transit deal

Ukraine and the EU have downplayed the prospect of a new deal, as diplomatic ties have been severed by the conflict.

Brussels said the EU states that rely most heavily on Russian gas via Ukraine — Austria, Slovakia, Hungary and Italy — could boost imports of liquefied natural gas (LNG) or source gas via other pipelines into the European Union. Moscow, on the other hand, said last week it was open to renewing the agreement.

"Transit through its territory depends on Ukraine. They have their own established rules. It depends on their desire. Russia is ready to supply," Russian state news agencies cited Deputy Prime Minister Alexander Novak as saying.

The EU has instead started negotiating with Azerbaijan to import more of the country's natural gas, which could potentially run through Ukraine's pipelines and help maintain the war-torn country's role as an energy transit country.

Azerbaijan increased gas exports to Europe by 56% in the first year of the war and aims to double them by 2027. If exports continue to rise as they have in the first six months of the year, deliveries to Europe are expected to reach 12.8 bcm by the end of 2024.

Hikmat Hajiyev, an Azerbaijani presidential advisor, told Reuters news agency last month that both the EU and Kyiv have asked Azerbaijan to facilitate talks with Russia. Ukrainian President Volodymyr Zelenskky confirmed last week in an interview with Bloomberg News that negotiations were underway.

How feasible is a deal with Azerbaijan?

Energy experts think Azerbaijan, which will hold the COP29 climate talks in November, doesn't have the available gas in the short term to increase supplies to Europe further.

"Azerbaijan's gas production isn't that big. The country has large domestic gas supply needs and already exports gas to Georgia, Turkey and Europe," Aura Sabadus, a non-resident senior fellow at the Center for European Policy Analysis (CEPA), told DW.

Experts say the government in Baku will need time and must make significant investments to increase its gas export capacity. EU states, meanwhile, are trying to wean themselves off fossil fuels in favor of renewable energy, so Brussels may be unwilling to sign a long-term agreement.

"[A deal with Azerbaijan] will help Ukraine to pump bigger volumes of gas to Europe at a time when the country is already integrating its gas market into the European market," Oleksandr Sukhodolia, an expert on energy security and critical infrastructure protection at the National Institute for Strategic Studies of Ukraine, told DW.

Sabadus, meanwhile, thinks the Azerbaijani gas would likely need to be imported via Russia's southern pipeline infrastructure through Turkey, Moldova and Romania, as Azerbaijan doesn't have a border with Ukraine. Sabadus told DW that transit costs on the southern pipelines are "exorbitant," which may make that route unfeasible.

How else could a deal between Azerbaijan and Ukraine work?

One option would be for Azerbaijani gas suppliers to sell their gas via Russia, allowing state energy monopoly Gazprom and other Russian firms to earn transit revenues.

Earlier this year, Gazprom announced its first loss since 1999, as the firm struggled to make up for lost European exports through deals with China and Turkey.

Ukraine has Europe's largest underground gas storage facilities, mostly located in the west of the country. Kyiv had asked Moscow before the war to allow it to transit gas from Azerbaijan and Turkmenistan to Europe. But the Kremlin refused, so this route is in doubt.

"It's highly unlikely that the Russians would open up their borders [to gas from neighboring countries] because it would mean losing control over their transmission system, which is seen as a strategic asset," said Sabadus.

Azerbaijan already imports some of its gas from Russia and Turkmenistan, which critics say effectively allows the re-export of Russian gas to Europe by the back door, an accusation that Baku denies.

Another solution would be a gas swapping deal, in which Russia and Azerbaijan exchange fuel volumes before re-exporting them.

"Effectively, the deal would see Russian gas sold to the Azeris on the Russia-Ukraine border, where it could then be delivered via Ukraine," Sabadus said, adding that it might be considered too big a risk for European buyers as the Ukrainian pipelines are still targets for Russian attacks.

How profitable is Ukraine's gas transit role?

Kyiv received about $1 billion (€0.92 billion) in 2021 in transit fees from Russian gas, but due to the lower deliveries to Europe since the war started, that figure has since fallen to about $700 million per year.

"It's a small volume of gas, and that level, it's not profitable for Ukraine," Sukhodolia said.

Most of the fees are allocated to operational costs, including pipeline maintenance, so any new deal would have to include a substantial increase in gas deliveries to help Kyiv with its budget woes.

"Unless the transit deal is renewed with very high volumes, the Ukrainians are not going to make any money at all," Sabadus said.

Edited by: Ashutosh Pandey