(Bloomberg) — European buyers are nearing a commercial agreement with Azerbaijan to keep natural gas flowing to the continent after a transit deal between Russia and Ukraine expires at the end of the year.
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Companies from Hungary and Slovakia are close to signing a contract for as much as 12-14 billion cubic meters of gas a year from Azerbaijan, according to people with knowledge of the matter. It would use the same pipeline network that now carries Russian gas across Ukraine to the European Union.
The supplies would effectively substitute for shipments that Europe now receives under the transit deal. The contract would need to involve a so-called swap agreement between Azerbaijan and Russia because Azerbaijan doesn’t have enough export capacity to replace the existing supplies.
European gas for December plunged as much as 8.1% on the news of progress in the talks, before paring the loss.
A deal — which has yet to be finalized — may help keep a lid on prices following recent volatility in the market. Still, the European Commission, the EU’s executive arm, has previously said the region’s energy security won’t be at risk after the transit deal ends. Slovakia and Austria are among European countries that continue to import Russian supplies by pipeline.
Under the commercial agreement, Azerbaijan’s state-energy company Socar would deliver gas to Sudzha on the Russian-Ukrainian border. Hungary’s MVM Zrt. and Slovakia’s Slovensky Plynarensky Priemysel AS would then take over and bring it to Europe. Any commercial agreement would need political support from Ukrainian authorities in order to enable the nation’s gas-grid operator to book capacity.
Ukraine’s state-run energy company Naftogaz didn’t immediately comment, and the Gas Transmission System Operator of Ukraine declined to comment. Socar, SPP, MVM didn’t immediately respond to a request for comment.
Austria’s OMV AG said it has diversified its supply contracts and can continue delivering the fuel to its customers even if gas deliveries from Russia are halted. Russia’s Gazprom PJSC declined to comment.
Before the war, Gazprom supplied Europe with more than a third of its gas, but the region has since moved to diversify supplies. The EU now relies more on other sources, including Norway, North Africa, Azerbaijan and liquefied natural gas from the global market.
The deal would mean Ukraine will continue to receive transit fees to utilize its pipeline network, which have brought the country about $800 million annually in recent years. For Azerbaijan, the accord cements energy ties with Europe. The Caspian Sea nation already supplies gas to eight countries on the continent via a pipeline running through Turkey.
–With assistance from Jonathan Tirone, Daryna Krasnolutska, Veronika Gulyas, Daniel Hornak, Kateryna Chursina, Elena Mazneva and Zulfugar Agayev.
(Updates with gas price in fourth paragraph, OMV comment in eighth.)
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