Europe has gone fearful of storing its gas in Ukraine, but it is still buying maximum volumes of Russian gas transported via Ukraine. Why are Europeans leaving Kiev without receipts from using underground gas storages, what risks does it pose for the Ukrainian energy system and why Russian gas is in such a great demand?
Ukraine has been an important gas storage hub for the European Union, however, European countries are curbing their use of Ukrainian gas storages lately, writes the German Berliner Zeitung newspaper.
The reason is that Europeans are afraid that the surface infrastructure can be destroyed after Russia’s attacks and that they will not be able to withdraw gas from Ukrainian underground storages when they need it. This deprives Ukraine of 200 million euro receipts per year, the German newspaper estimates.
Experts agree that the main reason for Europeans’ refusal to store gas in Ukraine is the fear that the surface infrastructure will be compromised, which will make getting their gas back impossible. And underground storages are filled with gas in summer for a reason, to be able to withdraw it during the winter heating season when demand is high and prices tend to be higher. Or it can be done during summer demand peaks, which have been similar to winter ones in recent years due to abnormal heat and the high demand for air conditioning.
‘Russia has repeatedly targeted surface facilities of Ukraine’s largest underground storage. The surface infrastructure was damaged, but neither the transit, nor gas supplies to internal regions have been affected’, says Igor Yushkov, expert, Financial University at the Government of Russia and the National Energy Security Fund (NESF).
Naftogaz of Ukraine reported the damage of UGS equipment in Lviv region and everybody thought they were referring to Bilche-Volitsko UGS, the largest UGS in Europe with a working storage capacity of 17 billion cubic metres.
‘It is not certain it is still technically possible to inject gas into Ukrainian underground storages to the full extent, at least some storages could have been affected’, the NESF expert assumes.
The risk of imposing a full moratorium on any gas exports from the Ukrainian territory, apart from the transit, could be another reason why Europeans refuse to store gas in Ukrainian underground storages.
Because Ukraine already imposed a gas export ban several years ago. Ukraine had a very cold winter at that time and there was little gas injected in underground storages, that is why the authorities had to impose an energy supply emergency, restrict industrial consumption to make sure there was enough gas for public facilities and people. At that moment, only the export of the gas produced in Ukraine was banned, however, one cannot rule out that, in case of another emergency, Kiev might decide to impose a full moratorium for gas exports, even the gas purchased from Gazprom and injected into storages by European traders, or non-Ukrainian gas, Yushkov says.
Finally, the third reason why Europe left Ukraine without the 200 million euro for the services to store European gas in its storages is that Europeans might not need Ukrainian storages at all. ‘Europe has enough of its own underground storages, there have been quite plenty of them built in the recent decade So, they do not need storages located elsewhere, even in Ukraine. Moreover, in the recent two years Europeans have injected maximum volumes for the heating season: their underground storages are 95–100 per cent full and have a decent volume remaining after the heating season being 55–60 per cent full. Why would they need Ukrainian storages?’ – Yushkov says.
According to him, Ukraine attracted Europeans only with its damping, but the emerging risks outweighed the economic benefit.
This can become a problem for Ukraine. And the reason is not just that Ukraine loses income from the storage of ‘someone else’s’ gas, which the German newspaper estimates to be 200 million euro.
‘There is a technical aspect: the more gas is injected in underground storages, the more can be daily off-taken from there during the heating season. The less gas is there, the lower the pressure is and the less gas can be withdrawn from the storage. Therefore, both for Ukraine and Europe the biggest challenge was when freezing weather hit at the end of the heating season. Because there is little gas remaining in the storage and big volumes cannot be withdrawn. In one case, when a strong cold wave hit Europe in March, Europeans allowed a full-scale launch of Nord Stream 1, allegedly for testing purposes. Although the pipeline ran at its half capacity due to EU’s anti-monopoly laws’, continues Yushkov.
Besides, without European money Ukrainian businesses will bear the costs to maintain the gas storage infrastructure.
The importance of underground storages for Ukraine’s domestic market will increase, if on January 1, 2025 (when the contract terminates) or even earlier the transit of the Russian gas through Ukraine stops.
‘Because when the east-west transit is stopped, Ukraine will need to deploy a gas transmission network to pump gas from west eastwards. Both gas fields and underground storages are located in the west. And there are consumers in the east. And it is not finally clear whether everything is going to work properly in the new conditions when there will be no gas transit during the heating season and they will need to reconfigure the gas transmission network. Maybe, it will be necessary to inject more gas to underground storages to be able to feed it to the pipeline going eastwards in winter’, the speaker says.
At the same time, Europeans are transporting maximum volumes via the Ukrainian transit again. As of August 13, the volume of gas fed through Sudzha gas metering station is 42.4 million cubic metres per day. Before this, the fed volume reduced to 39 million cubic metres – right after the news about the potential threat of damaging Suzdha GMS due to Ukraine’s strikes on Kursk region. But the reduction did not last long and now the transit volume is at its maximum supported rate.
This is because right now it is beneficial for Europeans to purchase gas under the contract with Gazprom. Because the prices in the European spot market have increased just now over the concerns about the transit stop. And in Gazprom contracts the prices remain unchanged, they will grow not in an instant, but some time later – this is how pricing works.
Since August 6 the gas price has leaped by 12 per cent reaching 450 USD per thousand cubic metres for September futures. At the beginning of the week, the prices have increased to 480 USD per thousand cubic metres after media reports with photos of ruined Sudzha facilities in the border between Russia and Ukraine in Kursk region. But the transit is still on, with Europeans receiving maximum volumes.
‘The leaping prices are currently good for Gazprom, which is exporting the same volume as a week earlier. The increase of prices by 100 USD per thousand cubic metres should result in 13 per cent EBITDA growth.
TTF gas futures, to a large extent, define Gazprom’s sales prices for a month ahead: the longer the high-price period is, the better it is for the company. Besides, the increasing gas price makes Gazprom’s rates more beneficial for European customers than spot rates and the gas powerhouse can also benefit from the volume factor’, notes Kirill Bakhtin, Senior Analyst, Sinara Investment Bank.
According to him, a negative scenario entails a loss by Gazprom of 10 billion cubic metres of gas per year due to the stop of transit via Ukraine, with Gazprom’s EBITDA potentially decreasing by 6 per cent. ‘The only transit route through the Ukrainian territory used to transport 15 billion cubic metres of gas per year. According to our estimates, the Black Sea and Türkiye can compensate 5 billion cubic metres meaning Gazprom’s annual export volume could reduce by 10 billion cubic metres in the worst case, which makes just 2 per cent of the gas consumed by Europe’, Bakhtin says.
The growing prices are also bringing benefits for the Russian LNG. ‘First, when global gas prices are growing, there is an increase in Novatek’s own LNG sales revenue and, second, in the EBITDA level of Yamal LNG project’, notes the expert.