Europe stores gas in Ukraine

European companies are returning to the active use of Ukrainian underground gas storage facilities, which was almost interrupted after the outbreak of hostilities. In July, about 589 million cubic meters were transferred to Ukraine for storage, which was the highest figure since February 2022. Traders are attracted by extremely low rates, as well as expected high gas prices in Europe in the winter, despite the fact that European UGSFs are almost full. Ukraine is ready to offer foreign companies up to 10 billion cubic meters of capacity, and, according to analysts, the injection of such volumes is quite likely.

Against the backdrop of filling European gas storage facilities by more than 85%, European traders began to use Ukrainian UGS facilities more actively. In July, about 589 million cubic meters of gas were transported to Ukraine for storage in the “customs warehouse” and short-haul (that is, in reverse mode) — this is the highest level since February 2022, the GTS operator of Ukraine (OGTSU) announced on August 2.

The main volumes were imported into the country for storage by non-resident traders through a virtual reverse.

Including 223.8 million cubic meters from Hungary, 142.9 million cubic meters from Moldova, 119.6 million cubic meters from Slovakia, and 102.8 million cubic meters from Poland. The first three countries now receive mainly or exclusively Russian gas both in transit through Ukraine and through the Turkish Stream system. By the end of July, the reverse reached 9 million cubic meters per day; in July, the Russian Federation pumped 1 billion cubic meters of gas through the territory of Ukraine.

After the reduction of the transit of Russian gas through the territory of Ukraine, the occupancy of its largest gas storage facilities in Europe with a capacity of up to 31 billion cubic meters was under threat. This also created risks for maintaining the volume of storage facilities, since if UGS facilities operate at a non-design level for a long time, they may lose their volume. Ukraine has offered European companies to use more than 10 billion cubic meters of free UGS facilities located near the western border, assuring that storage tariffs will not change until the end of 2024. The tariff for injection is now about $6.8 per 1,000 cubic meters, for extraction – $6.6 per 1,000 cubic meters, and storage – $0.01 per 1,000 cubic meters per day. These tariffs are several times lower than in UGS facilities in Europe.

Now high gas reserves in European UGS facilities and weak demand have led to the fact that gas on the continent has nowhere to go.

As writes Bloomberg, LNG supplies to the continent in July decreased by 7% compared to the same period last year, to 8.6 million tons, which is the lowest since November 2021. The reduction in supplies was caused by a decrease in prices, which have fallen by more than 80% since July 2022, to $300 per 1,000 cubic meters. Falling prices encourage European traders to stockpile raw materials for the winter, taking advantage of the large spread with winter contracts. Now gas futures for January 2024 delivery on the TTF hub in the Netherlands is trading at €49 per 1 MWh, while the September futures is only €28.9.

The “customs warehouse” regime allowed Ukrainian and foreign traders to pump gas received from the EU into Ukrainian UGS facilities without paying customs duties and VAT for three years from the date of injection, recalls Sergey Kondratiev from the Institute of Energy and Finance. So, in 2020, 10.1 billion cubic meters were pumped into Ukrainian UGS facilities in this mode, and 7.54 billion cubic meters in 2021. At the beginning of 2022, foreign companies were actively withdrawing gas from Ukrainian UGS facilities, and by the end of February, the volumes had fallen to less than 0.1 billion cubic meters.

At the beginning of March 2022, the Ukrainian authorities imposed restrictions on gas supplies abroad, including those pumped in the “customs warehouse” mode, then the ban was limited only to gas of “Ukrainian origin”.

This led to the fact that already in the fall of 2022, foreign traders began to return to the use of Ukrainian UGS facilities.

According to Mr. Kondratyev’s estimates, they now contain up to 1.1 billion cubic meters of foreign traders, of which 0.8 billion were pumped in May-July. He notes that bringing the volume to 10 billion cubic meters is an ambitious goal, but it may well be achieved, since Polish UGS facilities are already 89% full, Hungarian ones are 79% full, while in Ukraine 75% of UGS capacities remain free.

Tatyana Dyatel