(Bloomberg) -- Ukraine is in talks about supplying Azeri gas to Europe through its network of pipelines but hasn’t yet reached an agreement.
Kyiv and Moscow are both willing to find a solution that could involve swapping supply with Azerbaijan, according to people familiar with the talks speaking on condition of anonymity. Ukraine wants to prevent Russian gas traversing its territory but there is acknowledgment that some gas sold as Azeri could originate in Russia, one of the people said.
Talks are still continuing on alternatives to keep gas flowing through Ukraine to Europe once a pact with Russia expires at the end of the year, the people said.
European benchmark gas prices settled 6.1% lower at €33.08 a megawatt-hour, the lowest since late July. Earlier in the day, they slumped as much as 9.1% after a media report about a possible deal.
The end to the transit deal in its current form is almost inevitable. Some European government and company officials have in recent months been seeking alternative ways to keep the gas flowing, including buying from Azerbaijan or Turkey. Kyiv wants to cut Moscow off from the billions it gets from sales to Europe but doesn’t want to forfeit its estimated $800 million a year in transit fees.
Europe has tried to wean itself off Russian gas since supplies were cut following the invasion of Ukraine. Several eastern states continue to receive it through a pipeline that crosses Ukraine. That agreement ends this year, potentially cutting off countries such as Austria and Slovakia from about 15 billion cubic meters of supply.
Read: IEA Anticipates End of Russian Gas Flows Via Ukraine
Ukraine’s President Volodymyr Zelenskiy in July said a deal to replace Russian gas with Azeri supplies was “one of the proposals” being discussed. However, Azerbaijan’s gas production is insufficient as a full substitute. That means a swap using Russian gas could be an option.
“A swap where Azerbaijan might take Russian gas for itself and instead export its domestic gas volumes to the EU appears most likely in our view,” Adnan Dhanani, an analyst at RBC Capital Markets, said in a note Thursday.
Output from the State Oil Company of the Azerbaijan Republic, the main gas producer, is forecast to rise in 2025 but domestic consumption will soak up much of that increase, consultants Energy Aspects Ltd. said, leaving a small amount for exports. There is also limited spare capacity on Turkey’s pipeline with Azerbaijan.
“There is little way to reroute Russian supply to avoid Ukraine,” Energy Aspects analysts wrote in a note in July. “An easier option might be a Gazprom–Socar financial swap, but this effective re-labeling of Russian gas is likely to face opposition from both Ukraine and European leaders.”
For Russia’s part, President Vladimir Putin said he’s ready to keep supplying gas to Europe but has alternative export routes via Turkey if a deal can’t be found.
--With assistance from Elena Mazneva and Anna Shiryaevskaya.
(Updates with gas prices in fourth paragraph, analyst comment in eighth.)
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