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European traders this summer are using only a fraction of Ukraine’s vast natural gas storage, following Russian attacks that drove up risks, depriving the war-torn country of scarce revenues.
Ukraine has the largest underground storage facilities in Europe and last year provided EU companies with valuable space to park their excess gas ahead of winter.
But after a Russian offensive in the spring homed in on Ukraine’s energy infrastructure, including pumping facilities for gas storage, European volumes in June and July dropped to just a tenth of the quantities stored over the same period last year.
“Persistent Russian attacks on Ukrainian storage facilities increase the risk of storing gas,” said Marco Saalfrank, head of continental Europe merchant trading at energy group Axpo.
Gas storage facilities in the EU can only hold a maximum of about 100bn cubic metres of natural gas, compared with annual demand in the bloc of between 350 bcm and 500 bcm, depending on the weather and other conditions.
Ukraine offered about 10 bcm of additional storage capacity last year, and European entities stored more than 2 bcm ahead of the winter months, as the country offered incentives such as cheap storage tariffs.
But this year there has been little injection, even with EU storage facilities at 86 per cent full — their highest level this year, according to Gas Infrastructure Europe.
European companies sent just 15.4 mn cubic metres and 51.9 mn cubic metres in June and July, compared with 102.7mn cubic metres and 586.6 mcm in those months last year, according to data from Argus.
While the actual gas tanks are located deep underground, keeping them safe from strikes, damages to overground facilities used to pump gas in an out of storage are a material risk traders worry about.
“The main issue is not losing the gas, but not being able to withdraw it when wanted and needed,” said Saalfrank of Axpo.
State energy company Naftogaz said “several attacks” occurred in March and April on above-ground infrastructure, and that repairs have been taken. There are “no issues, we are operating as usual” with regards to injection and withdrawal of gas, said Oleksiy Chernyshov, CEO of Naftogaz.
Ukraine is keen for European traders to continue using its gas infrastructure, partly as it brings valuable revenue to its war torn economy. However, “unless some extra incentive is introduced to park gas in Ukraine, it is hard to see” how European traders will return, said Natasha Fielding, head of European gas pricing at Argus.
The EU last year held talks with banks about providing insurance to cover the risks but they have since fizzled out.
A senior EU official said that the increased attacks have made such considerations difficult. Ukraine could make around €200mn from European traders storing gas, but the counter-guarantee would need to reach €1bn, the official said.
“If you want to support Ukraine, just give them €1bn,” the official said.
Last year’s lucrative price differentials have also all but vanished.
The build up of gas in Ukraine storage accelerates in the summer months, when gas prices are cheap relative to other seasons. Traders then sell it on when prices rise for profit, typically in the winter months when demand for heating raises the demand for natural gas.
Last year, the difference was often above €20 per megawatt hour in the summer, but this year it was only around €5/MWh, according to Argus, a price reporting agency.
“Price differentials are not attractive enough to justify the risk of injecting gas into a war zone”, said Axpo’s Saalfrank.