Ukraine gas storage injections to rise on widening gas price spread

LONDON (ICIS)–Ukrainian gas storage injections are set to increase by a third in August as a widening price spread is incentivising EU traders to shrug off war-related risks.

Average daily imports are expected to exceed 35 million cubic metres (mcm)/day in August, being at least 10mcm/day higher than the previous month, according to capacity booking data.

On 1 August, a total of 39.5mcm/day were entering Ukraine via all EU and Moldovan border points. These included physical flows via the more expensive Budince interconnector with Slovakia, which resumed for the first time since spring and stood at 14.7mcm/day.

The inflows are driven by the summer-winter price spread which has now widened to €24.525/MWh and is prompting non-resident companies to import and inject gas in Ukrainian underground facilities.

Another driver may be related to the fact that EU storage sites are now 85% full and as they fill up the injection rate tends to slow down, prompting companies to seek alternative solutions to store excess volumes.

A source close to the Ukrainian operator Ukrtransgaz said there were 13 foreign companies storing gas in customs warehouse in July. This is a regime which allows users to keep volumes in storage without customs clearance for three years.

The source said more companies had expressed interest in importing volumes in Ukraine in August, including new outfits which had not used Ukrainian storage so far.

The last time Ukraine had such high storage injection rates was in 2020 when Ukraine’s storage facilities mopped up the excess gas volumes which had accumulated because of covid-related falling demand.

UPWARD TREND

If injection rates trend up in August and September, as much as 1.7-2 billion cubic metres (bcm) of gas could be stored by non-resident companies in Ukrainian facilities, including some 0.5bcm by Moldova’s state-owned wholesale buyer, Energocom, the source added.

“In 2022, the total injections in customs warehouse regime were 845 mcm, most of which, around 500-600 mcm were stored in October and November when price spreads were attractive enough to make it worthwhile.

Nevertheless, much will depend on the price spread and traders polled by ICIS said that companies which are now storing gas in Ukraine may be looking to withdraw it before the end of the year amid concerns Russia could target facilities.

“It is easier to withdraw when there is gas in storage that towards the end of the heating season when facilities empty and there is not enough pressure,” a trader said.

WAR RISK INSURANCE

War-related risk remain a concern for most traders as Russia had been systematically targeting energy infrastructure since the start of its all-out invasion of Ukraine in February 2022.

Many companies have been urging financial institutions to provide war risk insurance to cover their assets.

Despite traders’ interest, insurers are reluctant to provide coverage as they depend, in turn, on reinsurers who are also unwilling to underwrite guarantees because of the high level of risk.

Even so, despite the stalemate, companies are willing to take the risk and may do so as long as the summer-winter price spread remains above €20.00/MWh, the trader said.

He pointed out that companies were even prepared to pay higher long-haul tariffs, such as that at the Budince border point, because spreads were attractive enough to afford higher costs while also expecting to make a profit.

DOMESTIC DEMAND

Although imports are now driven by non-resident companies, there are expectations that Ukrainian companies may also start importing volumes.

This is because the Ukrainian front month price has started to converge with the TTF equivalent and in recent days has even flipped, being quoted at a premium over the TTF front month.

Imports may be driven by rising domestic demand, particularly in the electricity and fertilizer sectors as well as agriculture, where gas is needed to dry up grains and sugar beet.

Nevertheless, some companies, including the incumbent Naftogaz, may also be considering importing volumes from EU hubs to inject into storage.

Currently, there are 11.7bcm in underground facilities, but the target is to increase volumes to 14.7bcm by the start of the heating season in October.

For the time being, however, Naftogaz also has the option to buy volumes from domestic producers, who can sell 1.2bcm.