Foreign traders opting to sell stored gas in Ukraine

LONDON (ICIS)–Foreign companies storing gas in Ukraine may be looking to sell volumes domestically as spreads to European hubs have narrowed and local market conditions are becoming more attractive.

Speaking to ICIS, Sergii Pereloma, acting CEO of storage operator Ukrtransgaz (UTG) said 3.4 billion cubic metres (bcm) of gas held in customs warehouse regime (CWR) was sold by non-residents to residents since the beginning of 2021.

This is more than a third of the 10bcm which had been injected in CWR by the end of October 2020.

In contrast, 0.682bcm was exported to Europe in the five months to June 2021, which means that there is now around 4.77bcm of gas in CWR.

Ukraine had a bumper year in 2020, when a record 28.3bcm were stored locally, almost reaching full storage capacity of 31bcm.

However, with Ukraine’s heating season extending over 194 days, the longest on record, and European prices currently hovering well above €30.00/MWh, gas companies active in the country may now be looking to change their strategy.

CWR allows them to hold gas in storage without customs clearance for three years but they also have the option to withdraw it earlier and trade it locally subject to an exit fee.

This option has become attractive for two reasons.

NARROWING SPREADS

The first relates to price differences to European hubs. Over the last six years since the Ukrainian gas market has started to develop, spreads to the benchmark TTF hub have flipped.

Ukraine was initially seen as a premium market.

For example, in 2019 when ICIS started assessing front month Ukrainian prices, the latter had an average €2.50/MWh premium over the TTF equivalent. Its premium shrank to an average €1.80/MWh in 2020 and as of end of June, it now stands at an average €0.80/MWh discount to the TTF.

This means that with spreads almost converging, companies are neither encouraged to export nor to import the gas to and from Europe as they would have to pay additional cross-border capacity fees.

“The trend we have seen is that even some companies, which have been using customs warehouse regime preferred not to execute exports but to sell gas domestically. Foreign companies see Ukraine as a promising market and there is about 10bcm of local demand, which has to be satisfied from sources other than local production,” Pereloma said.

MARKET CONDITIONS

The second reason why companies are looking to trade locally is that the Ukrainian gas market has been developing at a fast pace in recent years.

Companies such as UTG, the gas transmission system operator GTSO and the local exchange UEEX have been offering a stream of new products to attract local and non-resident customers.

Earlier this year, UTG and UEEX teamed up to offer products for trading gas in storage. These are currently used by local companies for volumes held in facilities outside the customs warehouse regime.

However, Pereloma said a new product would be launched by the end of the summer, which would extend to volumes in CWR.

“At the beginning of the year we asked non-resident companies what new products we could offer and 80% wanted to trade CWR gas through exchange.

“We are finalising the technical details between UEEX and UTG and are looking forward to launching this product by the end of the summer,” he added.

UTG has also teamed up with the European Federation of Energy Traders (EFET) to launch a customs warehouse storage appendix to EFET’s well-established gas market agreement.

The appendix can be used by Ukrainian gas companies seeking to trade volumes held in CWR with non-Ukrainian resident companies, or between two non-Ukrainian resident shippers.

UTG is expecting the appendix to help increase trust in the Ukrainian market and to help companies minimise risk.

STORAGE INJECTIONS

Although many companies may remain focused on trading gas locally this year, Pereloma said he expects storage injections to pick up from July and more companies to sign agreements with UTG.

Currently, there are 104 non-resident companies mostly registered in the EU and US but latest additions include outfits registered in Hong Kong, Singapore or the United Arab Emirates and 813 local companies holding contracts with UTG, Pereloma said. To compare, a total of 56 non-resident companies and 664 local companies had agreements with UTG in June 2020.

“Even last year when we had record injections, interest woke up in late June. May and June are not very active months. It’s a historical fact. The speed of injection will pick up and local companies including Naftogaz would be more active starting from July.”

Earlier this year, the Ukrainian government issued a decree requiring Naftogaz, as the mother company of UTG to ensure the country has a minimum 17bcm of gas in storage by the beginning of the heating season. Ukraine had 15.9bcm of gas in storage as of 24 June, according to UTG data.

“One can refer to previous years’ statistics to see we had many examples in the last seven years when we entered the heating season at levels of 16-17 bcm – which is the level we are at right now,” he added.