Kremlin distress + European greed = rising Russian energy sales

If you asked a European company whether it would be willing to buy Russian gas or oil, you would get a look of horror, followed by outright rejection.

Ask them if they would buy gas or oil that may be Russian but sold under a different label and you will learn that they are already in discussions about purchasing it.

As with the emperor's new clothes, what matters here are the fairy tales used to disguise the deals now intended to sell cheap Russian gas and oil to lucrative European markets.

Since Russia launched its full-scale invasion of Ukraine in February 2022, it has lost most of its European market share, either because of EU sanctions on oil exports or because of self-inflicted damage, such as cuts to gas supplies in failed attempts to secure Western support for Ukraine to undermine Kiev.

The Kremlin's efforts to launch major projects such as a new pipeline to China or increase production of liquefied natural gas (LNG) to rebalance its precarious financial situation have so far failed.

Still, oil and gas are difficult to block and continue to leak through the Western sanctions regime – as long as there are cheap products to sell and willing buyers to open (back) doors, anything is possible. Remember that gas molecules and crude oil do not have a national flag attached to them. They are predominantly origin-neutral.

Options abound.

Since the invasion of Ukraine, Turkey has repeatedly been singled out as a “pit stop” to camouflage Russian oil exports, helping Moscow evade sanctions and sell the crude on international markets.

Since the scheme works quite well, there is no reason not to reproduce it elsewhere.

Turkey has been increasing its gas exports to Europe for more than a year.

The sheer volume combined with a reported reduced selling price makes it difficult for alternative providers to compete.

Since Turkey imports gas from many sources, including Russia, Azerbaijan and Iran, as well as global LNG, it is easy to hide the true origin of the gas, although few producers other than Russia could beat Gazprom's discounts.

In recent weeks, Turkey's Energy Minister has been busy announcing a series of new LNG contracts with reputable international oil companies.

These could be needed to replace one of the country's expiring long-term supply contracts with Russia.

They could also help Ankara extend that agreement while concealing Russian gas in an emerging Turkish “mix” of sources.

A little further east, Turkey's long-standing partner, Azerbaijan, is also interested in opening back doors.

Oil and gas production may be limited, but that doesn't stop the company from offering countless opportunities.

President Ilham Aliyev is now being courted by both Ukrainian and Russian presidents as the country offers to transport gas to Europe via Ukraine once the current Russian agreement expires on January 1st.

Azerbaijan's annual production of 48 billion cubic meters (bcm) met foreign and domestic demand of around 40 billion cubic meters in 2023.

While Azerbaijan could burnish its green credentials ahead of the COP29 summit in Baku in November by promising to reduce flaring, it is doubtful that the excess quantities it could monetize would be enough to meet Ukraine's expected minimum transit needs of To cover 10 to 12 billion cubic meters per year.

But that doesn't matter to those who like to peddle the fairy tale that Ukraine will pass through Azerbaijani gas.

In fact, the market is so dependent on the cheap supplies currently on offer that in September, when Ukrainian and international media falsely reported that Ukraine had agreed to the transit agreement with Azerbaijan, gas prices immediately fell by 10%.

The articles have been withdrawn, but the companies are confident that Ukraine will sign the deal, even as many admit privately that the gas will be of Russian origin and will only be sold under a different label.

Maybe they're right.

Earlier this summer, Ukraine imposed sanctions on Russian oil passing through its territory. It was just a ruse, as it later turned out.

The sanctions targeted the Russian oil company Lukoil, but Russian oil continues to flow freely, albeit under a different name.

It was agreed that Lukoil would sell the crude oil to Hungary's MOL, which would collect the gas at the Belarusian-Ukrainian border and then send it to other parts of Europe.

It wouldn't be surprising if MOL also made a guest appearance on a possible gas transit deal.

As in the case of oil transit, it could buy gas on Ukraine's borders with Russia or Belarus and transport it to Europe via Ukraine.

In fact, MOL could be a good candidate, lending additional credibility to the story that Ukraine is transporting Azerbaijani gas to Europe.

The company is now one of the biggest players in Azerbaijan's upstream sector and this month signed a contract to develop gas reserves.

To strengthen his position, his path may cross again with Lukoil.

The Russian private oil producer holds a 19.99% stake in Azerbaijan's Shah Deniz offshore gas project.

Since Lukoil's fortunes appear to be changing as the company faces sanctions in Ukraine and its Bulgarian refining operations face headwinds, it would make some sense for the company to announce and announce its stake in Azerbaijan's offshore Shah Deniz gas project MOL would sell.

MOL's successful expansion may be a testament to its business acumen, but Hungary's close ties to the Kremlin may also have helped.

With Brussels seemingly unwilling to batten down the hatches, Russia's opportunities to return to European markets are varied and plentiful.

The only obstacle, ironically, would be the dependence on others opening back doors. After all, splitting the loot with too many buddies isn't likely to prove particularly profitable.

Dr. Aura Sabadus is a non-resident senior fellow in the Democratic Resilience Program at the Center for European Policy Analysis. She works as a journalist specializing in European energy markets for the London-based Independent Commodity Intelligence Service (ICIS). Twitter: @ASabadus.

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