European gas reserves post biggest drop since 2009 amid Ukraine crisis

By ISIS ALMEIDA, ANNA SHIRYAEVSKAYA and VOLODYMYR VERBYANY
Bloomberg

European natural gas prices are reversing their biggest slump in five years as concern mounts that tension between Russia and Ukraine will again disrupt flows to the region.

Gas for next-month delivery in the UK rallied 21% over the past six weeks as Ukraine said it may ban OAO Gazprom, Europe’s biggest supplier, from shipping the fuel across its territory because of Russia’s support of separatists.

The Moscow-based company, which meets 15% of European gas demand through Soviet-era pipelines across Ukraine, halted supplies to its neighbor on June 16 in a debt and price dispute.

Gas storage in Ukraine is less than half full and the nation began this month to limit domestic use to conserve fuel. UK prices, the regional benchmark, fell to their lowest since 2010 last month after a mild winter left storage sites across the 28-nation European Union at their fullest for this time of year since 2008.

Wholesale costs next quarter will be 11% higher than what companies are paying for that period now, according to a forecast by Societe Generale in Paris.

“The continued threat of gas transit interruption is putting upside risk into gas prices,” said Nick Eagle, director of sales and trading at Clean Energy Trading in London. “While there’s no denying European gas storage levels are in a very healthy position, there would be significantly more concern if any disruption was to occur during the winter period.”

Seasonal Low

UK gas for next-month delivery has gained 7.4 pence since falling to a four-year low on July 8 to close yesterday at 42.65 pence a therm ($7.10/MMBtu), according to broker data compiled by Bloomberg. The front-month price is the lowest for this time of year since 2010.

Gas flows to Europe were interrupted for 13 days during freezing weather in January 2009 in a similar dispute between Russia and Ukraine. Gas for same-day delivery surged as much as 27% the day before the stoppage.

In Ukraine, Kiev’s biggest utility restricted Eka Beradze-Fokina’s hot water to save gas, leaving her to use an electric immersion coil and a pot to prepare her 3-month-old son’s bath.

Beradze-Fokina, 35, lives in one of 8,856 residential buildings affected after utility PAT Kyivenergo, which supplies 75% of Kiev’s heating and all its power, cut hot water to 57% of its customers.

The limits may last through the end of September, Kiev Mayor Vitali Klitschko said Aug. 4.

Heating Water

“It’s good it’s summer now and a lot of people are on vacation,” said Beradze-Fokina, a director at OAO Interregional Stock Union (MFS) who lives on the 19th floor of a 145-apartment building. “When they all return to work and it becomes cold, there will be a lot of pressure on electricity” as people try to heat water.

Ukraine’s parliament on Aug. 14 approved a bill allowing it to impose sanctions on 65 Russian companies and 172 individuals for supporting separatists in east Ukraine. More than 2,000 people have been killed in the conflict since the middle of April, according to the United Nations.

Gas flows to Europe probably won’t be disrupted as Gazprom depends on revenue from the sales and Ukraine won’t tap transit fuel for its own use as it seeks closer ties to the European Union, said Daragh McDowell, a senior analyst at risk consultants Maplecroft in Bath, England.

Former President Viktor Yanukovych was ousted in February after refusing to sign a deal to strengthen ties with Europe.

“Gazprom still needs to sell its gas to Europe and Ukraine needs to be on the good side of the European Union,” McDowell said.

Norwegian Alternative

Europe may be able to cover its needs under normal winter conditions by using existing inventories, importing more liquefied natural gas and pipeline fuel from Norway, Citigroup said in an Aug. 11 report.

Central Europe will probably be the most affected region if supplies are cut, said Trevor Sikorski, head of natural gas, coal and carbon at Energy Aspects, a London-based consultant to the industry.

In 2009, Balkan nations were forced to use emergency supplies, ration gas, employ backup generators and cut power usage. Latvia and Estonia are completely dependent on Russian gas, while Slovakia, Hungary and Bulgaria get 80% to 90% of their fuel from Russia.

Raising Prices

Ukraine owes Gazprom $5.3 billion for past deliveries, according to the Russian gas exporter. Naftogaz, Ukraine’s national supplier, refused to pay after Gazprom raised costs in April by 81 percent to $485 per 1,000 cubic meters and says it can buy gas from the EU below the $385 level later proposed by the Russian company.

UK gas will average 64 pence in the fourth quarter, according to Societe Generale. The contract for that period was at 57.85 pence on Tuesday.

“I’m still more bullish than the curve,” said Thierry Bros, an analyst at the bank in Paris. “Ukraine has a long history of not paying for its gas bill. This will end badly soon.”

Ukraine can cope without Russian gas through the winter if it imports enough fuel from other European nations and cuts demand, said Andriy Kobolyev, Naftogaz’s CEO.

European Utilities

The country will allow European utilities to buy Russian gas at its eastern border and sign new transit contracts with Naftogaz to bring it through its pipes even if a ban on Russian gas is imposed, he said.

Such renegotiations can’t be done in the “short term,” EU Energy Commissioner Guenther Oettinger said. The bloc, which has been trying to broker a deal between Gazprom and Naftogaz since May, is working to set up trilateral talks in “early autumn,” he said, without providing dates.

“Ukraine respects European buyers’ long-term Russian natural gas contracts and understands that amendments require time and careful negotiation,” Naftogaz said. “The current situation cannot be considered stable. The possibility of a crisis similar to 2009, when Gazprom terminated gas transit to Europe, cannot be ignored.”

Russian President Vladimir Putin banned imports of some food items from the EU and other nations on Aug. 6 in response to sanctions against his country.

Putin “doesn’t seem to be in a hurry to end the conflict and nor does Ukraine,” said Ole Hansen, head of commodity strategy at Saxo Bank in Copenhagen. “We could easily see this confrontation drag on into the winter.”

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