Fundamentals: Russian flows, storage stocks to limit EU gas to Ukraine

Source: Heren


The restart of gas supply from Russia to Ukraine following a recent court decision, and high gas held in the country’s storage stocks may see EU flows to Ukraine plummet in the rest of the gas winter and the coming gas summer.

The Stockholm Court of Arbitration ruled on 22 December that Ukrainian incumbent Naftogaz would have to take annual delivery of 5 billion cubic metres (bcm) from Russian supplier Gazprom from the beginning of 2018 (click here to read story).

This may pressure Ukrainian imports from the EU in the coming year. The EU has been the main supply source for Ukraine since the country stopped receiving gas from Russia in November 2015.

In January 2015, Ukraine imported around 30 million cubic metres (mcm)/day of gas from Russia, and 33mcm/day in February, according to grid operator Ukrtransgaz data. In December 2017 so far, Ukraine has been importing around 31mcm/day from Slovakia, Poland and Hungary.

During last year’s gas winter, Ukraine imported around 9bcm in total due to an unusually cold winter and slightly lower Ukrainian storage stocks at the beginning of October compared to 2015.

In 2017, EU flows to Ukraine were around 3bcm between 1 October and 25 December, which is 1.3bcm less than the same period in 2016. This was a result of large Ukrainian storage stocks built up in the summer period, driving liquidity at central European markets.

The available supply may allow Ukraine to substitute EU flows with Russian imports in the gas winter and provide additional flexibility for Ukraine.

Ukrainian storage

Ukrtransgaz data showed that Ukraine has been in full withdrawal mode since 25 October with average daily off-takes reaching around 32 million cubic metres (mcm) up until 25 December.

A market source active in Ukraine told ICIS that Ukrainian storage withdrawal costs may rise by the gas summer, which may prompt storage capacity holders to keep withdrawals high and import less from the EU.

“[Storage] filling levels are better this year compared to previous years. If withdrawal fees are higher next year, it makes sense to take off from storage tanks as much as possible now and import the smallest possible volume,” said the shipper.

But the additional Russian supply may weigh on lower EU flows to Ukraine in the gas summer, when shippers active in Ukraine look for gas to inject in preparation for high demand in the winter.

A preliminary ruling of the Swedish court earlier this year decided that the price formula in the contract will be change from an oil-indexed formula to use an undisclosed European hub as reference. This may make the Russian supply more competitive than sourcing gas directly in Slovakia, Hungary or Poland.