EU challenges Russian gas laundering via Azerbaijan partnership
With the expiration of the Russian-Ukrainian gas transit agreement at the end of the year, there is a gap that needs to be filled by supplies from other sources. Azerbaijan has become a significant partner for the EU. The issue, however, is that this country could serve as a gateway for Gazprom, with which the Azerbaijani company SOCAR has agreements.
A considerable stir in Brussels was caused by reports from "Politico" suggesting that gas from Azerbaijan is actually Russian. According to these reports, Moscow is using Gazprom's strategic partnership agreement with the Azerbaijani giant SOCAR for "laundering" its resources, thereby evading sanctions.
The European Commission responded to the matter, strongly denying that the agreement with Azerbaijan could be a Trojan horse for Putin. As stated by Tim McPhie, the Commission's spokesperson for energy, the so-called Southern Gas Corridor, which supplies EU countries, is solely connected to Azerbaijani gas fields and not to the broader Azerbaijani natural gas system, where "mixing" with Russian gas might occur.
Azerbaijan's President Ilham Aliyev also refuted suggestions that his country re-exports Russian gas to the EU. Nevertheless, this agreement, which is crucial from Europe's standpoint, still raises controversies. Why? Firstly, tracking every molecule of gas in international trade is extremely difficult. Doubts arise due to the relationships between SOCAR, Gazprom, and Lukoil, which, according to Global Witness, holds a 19.99% stake in the Shah Deniz offshore field (operated by BP), among other interests, and gas for the EU is extracted from this field.
Secondly, even if the gas sent to the EU is "purely" Azerbaijani, it is still possible that the rising demand for resources from the Caucasus will be supplemented by Azerbaijani purchases from Russia. This would mean that Moscow benefits regardless.
Europe disarms Putin's grip
"The importance of Azerbaijan for the energy security of European Union countries has increased since Russia commenced a full-scale invasion of Ukraine in 2022. Azerbaijan, according to its agreement with the European Commission, has committed to increasing raw material exports to EU countries to 20 billion cubic metres annually by 2027," explains Dr. Michał Paszkowski from the Institute of Central Europe in Lublin in an interview with money.pl.
For the past two years, the EU has been attempting to free itself from Putin's grip on resources and become independent of Russian supplies. The aim is not only to ensure the community's energy security but also to deprive Moscow of revenue from hydrocarbon sales in Europe.
Therefore, the signed agreement with Azerbaijan, which has rich deposits estimated at 2 trillion cubic metres, was crucial. As the expert recalls, in 2023, the country's overall gas export increased by 5.3%, with exports to Europe rising by 3.5%, reaching 12 billion cubic metres compared to the planned 12 billion cubic metres in 2024.
Currently, the country exports natural gas to nine EU countries, with Slovakia recently joining them. On December 2, 2024, SOCAR delivered raw materials to the SPP company from Azerbaijan. This resulted from an agreement concluded on November 12, 2024, though the agreement's terms have not been disclosed – presumably, these are small deliveries," notes Dr. Paszkowski.
Slovak Prime Minister Robert Fico held talks in Baku in May 2024 about natural gas supplies. According to various reports, there were two options discussed. The first involves using existing infrastructure through Bulgaria, and the second concerns an agreement with Russia and Ukraine to replace the transit of Russian gas with Azerbaijani raw material.
According to Marianna Sobkiewicz, senior analyst at the Polish Economic Institute, the second alternative appears cheaper for Slovakia. However, there is still the issue of the origin of the raw material. In this setup, Russia would continue to supply gas (labelled as "Azerbaijani gas") to Ukraine, while Azerbaijan would receive gas from Russia (labelled as "Russian gas").
"There would be no actual change in the gas flows: EU traders would buy gas from Azerbaijan, which would buy gas from Russia. Such a solution is not ideal considering the EU's goal of complete independence from Russian fossil fuels. Furthermore, the agreement with Azerbaijan could set the stage for similar agreements in the EU," explains the analyst.
Azerbaijan's role may increase
In the first quarter of this year, about 7% of all gas transmitted via EU pipelines was imported from Azerbaijan, according to "Politico". The country sold about 10 billion cubic metres of gas to Europe this year alone.
"In theory, Azerbaijan could play an even greater role in Europe's energy market following the expiration of the Russian-Ukrainian transit agreement, which ends on December 31, 2024. However, given existing contractual obligations, it will be challenging for SOCAR to redirect additional supplies to Europe," notes Dr. Paszkowski.
It's estimated that at the beginning of 2025, Azerbaijan could have additional resources from several sources:
- a reduced contract between AGSI (Azerbaijan Gas Supply Company) and BOTAŞ of Turkey;
- resumed swap agreement with Turkmenistan;
- increased production at the Shah Deniz field;
- early exploitation of the Absheron field;
- increased natural gas production at the Umid field. It's estimated to be about 2-3 billion cubic metres in 2025.
"However, this is not a volume that would fully fill the gap left by resources from Russia," notes Dr. Paszkowski.
Not only gas, but oil
However, Azerbaijan is not only about gas but also oil. This small Caspian Sea country is listed among the top 30 oil-rich countries globally and is the 20th largest exporter of this resource.
According to official government data, the country's oil reserves amount to 15 billion barrels.
Azeri Light is a type of crude oil that is light and clean, allowing for more fuel to be produced from one barrel compared to, for example, Russian raw material.
In Azerbaijan, the Hungarian company MOL holds shares in oil fields. Hungarians use the southern corridor to supply raw materials to the country, thus diversifying imports from Russia.
The oil extracted from the Azeri-Chirag-Gunashli (ACG) oil field, in which MOL Group owns 9.57% of the shares, is transported to Hungary and Slovakia via the port in Ceyhan, Turkey, to Omisalj in Croatia. Then, 90,000 tonnes of crude oil are transported to the only refinery in Hungary – in Duna near Budapest and to Bratislava via the Adria pipeline.
