Vladimir Putin has to deal with two pieces of news, one good and one bad. The bad news is that the Russian methane monopolist Gazprom, for the first time in its history, closed its balance sheet at a loss. And it closed it in the red due to the failure of its former best customer: the European Union. But there is also good news and it is the following: if the EU’s plans to increasingly increase methane imports from Azerbaijan, through the gas pipeline that lands in Italy, were to materialise, then revenues and profits would rise profits also of another Russian company, and not just any: the largest Russian oil company Lukoil. The inconveniences for the Kremlin are there and are destined to remain: Gazprom is a state company, Lukoil is private, and if the former is not able to quickly diversify supplies towards new customers, as it is already trying to do, the greater profits of the latter they will certainly not be enough to compensate for the lower income. But this does not mean that in the end a part of the lower proceeds from the sale of fossil fuels will still be amortized in other ways. In its energy strategy, Russia has also proven to be very pragmatic.
Last year, the Russian methane energy giant reported a loss of 629 billion rubles (or $6.9 billion), the worst in decades. Gazprom’s revenues thus fell by almost 30% year-on-year to 8.5 trillion rubles, with gas sales falling from 6.5 trillion rubles in 2022 to 3.1 trillion rubles. Analysts, reports the Financial Times, point out that Gazprom has failed to adapt to the loss of the European market, with revenues from gas sales outside Russia falling from 7.3 trillion rubles in 2022 to 2.9 trillion rubles last year. Profits from oil, gas condensate and petroleum products instead rose to 4.1 trillion rubles (+4.3%), successfully overcoming Western attempts to limit the Kremlin’s revenue from energy sales. However, it should be noted that in previous years, 2021 but above all 2022, Gazprom’s revenues were “drugged” by the decidedly dizzying prices of methane, due to the war and cuts to gas supplies by Russia. Prices that recorded dizzying numbers for the Russian monopolist, and which increased the Federation’s current account balance.
European countries, meanwhile, have found alternative sources of gas: Russia’s share of Europe’s gas imports fell from 40% in 2021, the last full year before the invasion, to 8% in 2023, according to the EU. This is not to say that Russia does not gain equally. Most of Putin’s little gas that arrives in the EU passes through Ukraine. The contract for the transit of methane in the invaded territory will expire at the end of December, and Kiev has made it known that it will not be renewed. Those cubic meters will thus disappear but in the meantime, barring any surprises, they continue to flow into European pipes, representing around 4% of EU consumption. But Russian methane, which is not subject to sanctions by the EU, continues to arrive via other routes. In particular by sea, as liquefied natural gas (LNG).
Russia, after the United States and Qatar, is still the EU’s third largest LNG supplier. Of all that arrives, just under 15% comes from Russia. Last year the EU saw LNG imports from Moscow grow by 40%. Among the major buyers of Russian LNG is France which purchased it in February for a value of around 320 million euros, 10% more than in January, despite the warrior rhetoric of its president Emmanuel Macron who a few weeks ago ago did not rule out a direct military confrontation with the Federation led by Putin. France, Spain and Belgium are currently the largest buyers of Russian LNG. For this reason, some Northern European countries such as Sweden would like to see a ban on the import of gas, at least liquefied gas, included in the next package of sanctions: “We will make sure to include both a ban on the import of liquefied natural gas and measures to slow down the Russian shadow fleet”, declared Tobias Billstrom, Stockholm’s foreign minister, a few days ago.
Although these are modest quantities, giving up Russian LNG would still be a commercial risk. Or at least this is what was believed by the European energy authority, Acer, which warned member states against sanctioning Moscow’s LNG: “Reductions in Russian LNG imports should be approached with caution, especially in light of the imminent expiration of the ship-or-pay transit contract for the supply of gas pipelines from Russia to Europe via Ukraine by the end of 2024,” Acer, the Agency for Cooperation between national energy regulators. And therefore “the reduction of imports of Russian LNG should be considered in gradual stages, starting from spot imports of Russian LNG”.
In the meantime, the EU must certainly continue on its path of diversification of methane supplies, relying more and more not only on LNG imported from the United States and Qatar, which has a higher price for all the processes it must undergo (first and subsequent liquefaction then regasification, transport, storage etc.) but also via pipe. Among the privileged sellers there is, for example, Azerbaijan.
In July 2022, the President of the European Commission Ursula von der Leyen went to Baku to sign an agreement which provides for the doubling of gas supplies to the old continent, bringing them to 20 billion cubic meters. By 2027, according to the memorandum of understanding signed by von der Leyen and Azerbaijani President Ilham Aliyev, maximum push will be given to the Southern Gas Corridor, a 3,500 kilometer long route which came into operation only at the beginning of 2021 and has already become vital.
This is a highly strategic infrastructure, in particular for Italy which hosts its final stretch, the famous TAP (Trans-Adriatic Pipeline) which lands on the coast of Puglia, in Melendugno. Azerbaijani methane is helping the EU a lot to free itself from Russian supplies and diversify its purchases, but its security is not unshakable. In fact, the pipe passes near a war zone, Nagorno Karabakh, at the center of the conflict between Armenia and Azerbaijan. However, in 2023 the EU received almost twelve billion cubic meters of “stable and safe gas from Azerbaijan”, recalled the European Energy Commissioner, Kadri Simson, in Baku last March. The Commissioner confirmed the EU’s “long-term” work with Azerbaijan “to expand the Southern Gas Corridor and double our gas trade by 2027”.
Now: Azerbaijani gas arriving in the EU is extracted from the Shah Deniz field, one of the largest gas condensate projects in the world and currently the only one in Azerbaijan exporting gas to Europe. The field is operated by the British company BP, of which Lukoil owns a 19.99% stake. Russia’s largest oil company is Azerbaijan’s third-largest gas producer, and was already so when the deal with the EU was signed in July 2022, accounting for 15% of the country’s production according to Rystad Energy.
Lukoil’s stake in BP will bring it huge profits in step with the increase in Azerbaijani gas exports to the EU. In fact, as the calculations made by the NGO Global Witness reveal, the Russian company Lukoil should make a net profit of seven billion dollars over the next decade, thanks to the Shah Deniz field. Clean money, net of taxes, operating costs and investments. Not only that: a Lukoil document obtained by Global Witness shows that European companies with long-term contracts to import gas from Shaz Deniz into the EU “include Shell, Uniper, Engie and Enel. The document shows that in 2021 Lukoil earned 757 million of dollars from the sale of Shah Deniz gas and gas condensate.”
Formally Lukoil, unlike Gazprom, is a private company and its public statements following the war in Ukraine were all aimed at demonstrating its extraneousness to political events. However, according to ResourceProjects.org, which shows tax reports published by Lukoil, from 2015 to 2020 the company paid almost $65 billion into Russian government accounts, which are currently being used to wage war in Ukraine. Like communicating vessels, the proceeds from the sales of fossil fuels – whether from public or private entities – still end up in Vladimir Putin’s pockets, which he then draws on to continue his military campaign at the gates of Europe.
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