Ukraine gas deadline heightens threat of shrinking storage

By ANNA SHIRYAEVSKAYA
Bloomberg

With less than two months before Ukraine’s Russian gas-supply agreement ends, analysts are warning of critically low storage that would threaten all of Europe.

There’s been little progress on a new deal before the March 31 expiry, with Russia saying it will revert to a standard contract based on disputed prices that won’t be reviewed by international arbitrators until 2016.

If the supply stops, then Ukraine’s inventories may shrink to the smallest in a decade by Oct. 1, says Eclipse Energy Group, a consultant in Norway.

That raises the risk that Ukraine will need to use Russian gas destined for the European Union next winter, according to Energy Aspects, a London-based consultant. The 28-nation EU is seeking to help broker a new deal because Russia supplies a third of its gas, with 40% flowing through pipelines across Ukraine. Flows to Europe via Ukraine were disrupted during pricing disputes in 2006 and 2009.

“If they cannot re-inject enough gas, the risks for Europe will be greater next winter than this winter,” said May Mannes, head of gas and liquefied natural gas (LNG) analysis at Stavanger, Norway-based Eclipse. “Ukraine’s need for storage re-injection has been overlooked by many.”

Traders have yet to price in that risk, driving down the cost of gas for next winter by 6 percent this year on the UK’s National Balancing Point, a regional benchmark. That’s in part because storage levels across the EU started the winter at record levels and the weather has been milder than normal.

Concern that the conflict between Russia and Ukraine would disrupt energy supplies last year caused prices to jump. On March 3, 2014, the first trading day after Russian forces advanced into Crimea, gas for this winter climbed 6.8%, its biggest daily gain on record.

Price Volatility

Should the dispute continue, and the EU draw down its own inventories, “then this will create price volatility and is likely to impact NBP next winter,” said Emily Stromquist, an analyst at Eurasia Group in London.

Ukraine had 9.25 billion cubic meters (327 billion cubic feet) of gas in storage on Feb. 1, making them 29% full, according to Gas Infrastructure Europe, a lobby group in Brussels.

Further withdrawals may leave as little as 3 billion cubic meters by the end of March, Trevor Sikorski, head of gas, coal and carbon at Energy Aspects, wrote in an e-mail Jan. 19. That compares with an average of 9.9 billion cubic meters since 2005, according to data from NAK Naftogaz Ukrainy, Ukraine’s national gas company.

Ukraine will have 10 billion cubic meters in storage in October if it only gets fuel from the EU and its own production, said Mannes, who has tracked the industry for two decades. That compares with 16.6 billion last October and 23.1 billion on average in the past 10 years.

Cutting Consumption

Naftogaz is seeking to refill inventories, including through talks with OAO Gazprom, the Russian supplier, increasing imports from the EU and cutting consumption, said Aliona Osmolovska, a spokeswoman for the company in Kiev. The company won’t tap transit gas destined for Europe, she said.

European suppliers can provide at least 60% of this year’s imports, Andriy Kobolyev, the CEO of Naftogaz, said in Davos, Switzerland. Transit flows to Europe weren’t affected during the current crisis.

Hungary Supply

Slovakia has been shipping gas to Ukraine since last year. Poland hasn’t supplied gas this year and flows from Hungary were interrupted last year. Flows via Hungary to Ukraine dropped to 5,000 cubic meters/day in the past weekend from previous average daily shipments of about 3 million cubic meters/day, Hungary’s daily Vilaggazdasag reported Tuesday, without citing anyone.

“Hungary isn’t selling any gas to Ukraine,” Hungarian Foreign Minister Peter Szijjarto said Tuesday on public radio Kossuth. “The amount of gas that transits to Ukraine via Hungary depends on Ukraine’s ability to purchase gas from European partners.”

Ukraine resumed imports of Russian gas in December after a six-month break, following the EU-brokered accord that ends next month. The agreement allowed Naftogaz to buy gas in the winter at a discount to contract prices pending the outcome of the international arbitration. Those hearings won’t start until February 2016 at the earliest, Gazprom said in a statement Jan. 29.

Gas is usually injected into storage in the summer for use in the following heating season, which runs from October through March.

This year, if Ukraine fails to replenish its gas stockpiles, it may “need to lift some of the gas that was destined for the EU to meet its own winter heating demands,” Energy Aspects’ Sikorski said.

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