Ukraine's Naftogaz in talks with Azerbaijan's Socar on transit, storage: CEO

Ukraine's Naftogaz is in talks with Azerbaijan's Socar on the potential transit of gas from Azerbaijan via Ukraine and the storage of Socar gas in Ukraine, Naftogaz CEO Oleksiy Chernyshov said Aug. 6.

In an interview with Ukrainian media outlet NV Business posted to Naftogaz's website, Chernyshov also reiterated that Kyiv had no intention of extending the current five-year transit deal with Russia's Gazprom.

The agreement expires at the end of 2024, with some 42 million cu m/d of Russian gas supplies via Ukraine set to be lost as a result.

"The contract with Gazprom is coming to an end this year and we have no intention of continuing it during the war," Chernyshov said, adding that currently the Ukrainian gas transit system was "not under fire".

Chernyshov said two scenarios were possible: a complete stop in flows or a model of alternative suppliers and owners to ensure "certain volumes" can be delivered to customers in the EU.

Chernyshov said the idea of Azerbaijan transiting gas via Ukraine had been initiated by Baku.

"We do not rule out negotiations with other companies, with Socar. But we do not have final contractual decisions," he said. "A prerequisite for cooperation from our side is an offer for Socar to store gas in Ukrainian storage facilities."

Asked whether Socar had agreed, Chernyshov said: "We are discussing it."

Russia role

Last month, Azerbaijan's president Ilham Aliyev said Baku was in talks with Russia regarding Ukrainian transit, having been approached by both Kyiv and the EU to help facilitate the potential extension of the Russia-Ukraine deal.

"We've been approached by Ukrainian authorities and the EU to facilitate in prolongation of this contract," Aliyev said July 20.

"We are also in the process of negotiations with Russia on this matter. If we can help, we will."

Chernyshov acknowledged Aug. 6 that for gas to reach Ukraine from Azerbaijan, it would have to transit Russia.

"It is obvious that the pipe enters Ukraine from Russia. And that's the only way this transit works. The main prerequisite is the impossibility of working with Gazprom for us," he said.

"Potential cooperation with Socar provides certain advantages. Azerbaijan is a large producer of gas with a desire to enter the European market."

Socar could not be reached for comment.

Asked whether transit gas could in fact turn out to be Russian gas, Chernyshov said: "This is manipulation and populism. The gas business, especially a large one, often works through swaps."

Chernyshov also said there had been an initiative by a company from Central and Eastern Europe regarding Russian transit.

"But this is purely a trading story, which has flaws," he said. "Because it must take into account the situation with Gazprom, and we want to move away from that. Socar as a producer can offer its gas."

Market concerns over Ukrainian transit have helped make European gas prices for January and February 2025 delivery the most expensive among future delivery periods.

Platts, part of S&P Global Commodity Insights, assessed the January 2025 TTF contract at Eur40.60/MWh on Aug. 6, compared with a day-ahead assessment of Eur35.90/MWh.

Storage capacity

Chernyshov also said the more gas that Socar might agree to store in Ukraine, the better.

"I will be happy if Socar will store gas with us. Our warehouses are the largest in Europe, their volume is 31 Bcm," he said. "You need no more than half for your own needs. The other part should be leased, operated and generate income."

Ukraine is looking to build its own stocks to 13.2 Bcm ahead of the coming winter, with 10.6 Bcm already stored.

Foreign traders also stored some 2.5 Bcm of gas in Ukraine last year, but the appetite for storage injection this year may have been dampened by attacks on storage sites and a narrower summer-winter price spread.

"Currently, certain factors influence the decision to store gas in Ukraine. There is the massive shelling of storage sites in March, April and May of this year," Chernyshov said.

But, he said, as European storage sites fill, it could make storing gas in Ukraine more attractive. According to data from Gas Infrastructure Europe, gas storage sites in the EU are already more than 86% full.

Chernyshov also said he expected the upstream companies of the Naftogaz Group to produce just under 15 Bcm in 2024 and private companies a further 3 Bcm.

But, he said, Russian attacks on Naftogaz sites continued. "This is a challenge for all business processes of our group, in particular for production."

The upstream companies of the Naftogaz Group -- UkrGazVydobuvannya and UkrNafta -- produced 8.6 Bcm of gas in the first seven months of 2024, an increase of 7% year on year.