Zelenskiy Says Ukraine Discussing Transit of Azeri Gas to EU

(Bloomberg) -- Ukraine is in talks to send natural gas from Azerbaijan to the European Union as it seeks to maintain its role as a transit country and help western neighbors ensure energy security, President Volodymyr Zelenskiy said.

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A deal to replace Russian gas with Azeri supplies is “one of the proposals” currently being discussed, Zelenskiy said in an interview with Bloomberg Television in Kyiv Wednesday. “It’s the cabinet officials who are dealing with this now.”

Europe has tried to wean itself off Russian gas since Moscow’s invasion, but some European states continue to receive it through a pipeline that crosses Ukraine. The agreement that covers this transit arrangement expires at the end of 2024, and with war still raging, many market watchers expect gas flows will come to a halt.

“Alternative steps are being considered now on how we can use the pipeline with another gas supplier, another country. Negotiations are under way,” Zelenskiy said. “We don’t want to extend the gas contract with the Russian Federation. We don’t want them making money here.”

European benchmark gas prices nudged lower after the the president’s remarks, extending the day’s losses below €33 a megawatt-hour.

The current deal between Ukrainian state-run energy company Naftogaz JSC and Russia’s Gazprom PJSC was signed in 2019. Bloomberg News first reported that European officials were in talks to keep gas flowing through Ukraine last month.

Making use of Ukraine’s extensive pipelines would help provide crucial funding for the war-torn economy, where transit revenue amounted to about $1 billion in 2021. There are also concerns that unused pipelines could become targets of military attacks or fall into disrepair that’s expensive to reverse. Moscow already tried to damage some of Ukraine’s gas storage infrastructure in strikes earlier this year.

“If this is a normal supply contract of non-Russian gas to European countries which are appealing to us, then we as future members of the EU, we would have to support our friends,” Zelenskiy said.

Ukraine was once a main conduit for Russian natural gas to Europe, meeting about a quarter of the EU’s needs. Transit shrank after Russia launched alternative routes bypassing the country, and when Moscow curbed most flows to big importers in Europe at the height of the energy crisis in 2022. It still ships around 15 billion cubic meters of gas to the region a year via Ukraine, mainly to Slovakia and Austria.

Azerbaijan has said it wants to boost its gas exports to Europe, but hasn’t secured enough long-term deals yet in order to invest in further production. Until it’s able to boost capacity, it could swap cargoes with Russia, which is not unusual in oil and gas markets when it’s not possible to physically deliver fuel from one location to another.

While that could in theory benefit Russia if it allows Moscow to send its gas elsewhere, such a solution would likely be temporary.

--With assistance from Mark Sweetman, Volodymyr Verbianyi, Greg Sullivan, Patrick Donahue, Priscila Azevedo Rocha, Rachel Morison, Annmarie Hordern, Aliaksandr Kudrytski, Piotr Skolimowski and Olesia Safronova.

(Updates with gas market reaction in fifth paragraph.)

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