Unfavorable spreads, war risk deter European gas traders from Ukrainian storage

European gas market players are watching Ukrainian storage closely, but continued energy infrastructure attacks and less favorable spreads than a year ago remain a hurdle for many.

Since late March, Ukrainian energy infrastructure increasingly has come under attack from Russian military forces, with gas facilities and underground storage units hit several times by missile and drone strikes.

Russian attacks on Ukrainian gas infrastructure are a part of broader series of assaults on oil, gas and power facilities between the two nations, initiated by Russia's full-scale invasion of Ukraine in 2022, with an attack on Russia's Salavat refinery by Ukrainian drones May 9 being the latest development

"It is just too sudden and unpredictable for me," a Netherlands-based trader said, reflecting on the risk of a rapid deterioration of the situation in Ukraine.

"We sadly watched a series of attacks on our energy infrastructure and were forced to respond," Russia's president Vladimir Putin said during a meeting April 11 with Belarus' president.

Similar to the country's gas storage infrastructure, Ukrainian gas production facilities were also subjects of shelling and power cuts, but Naftogaz's upstream arm, UkrGazVydobuvannya, posted 12% year-on-year gains(opens in a new tab) in Q1 2024.

"The risk is too high," a European gas trader said. "We have considered [using Ukrainian storage], but it's too hard to put the case together because it's impossible to know Russia's next moves."

Ukrainian storage capacity benefits from customs warehouse regime

In a report published May 7, analysts at S&P Global Commodity Insights revised their projections and now consider it "more likely than not" that Russian gas flows through Ukraine will cease by 2025.

This development has prompted Europe to look at several flexibility and contingency options. For the Central and Eastern European, or CEE, markets, an option is to utilize Ukrainian gas storage facilities under the country's customs warehouse regime. The Ukrainian customs warehouse regime has more storage capacity than any other EU country, a legacy of the high volumes of Russian gas exported through the country.

The regime bundles all Ukrainian storage facilities as one, meaning if one facility is hit, participants can continue to withdraw gas from other facilities. Moreover, UkrTransGaz also offers custom duty exemptions for three years, meaning gas can easily be reimported back into the EU.

Up to 10 Bcm of capacity was on offer under the customs warehouse regime, according to Agneta Kutselim, UkrTransGaz head of commercial.

By comparison, German storage's working gas volume stands at roughly 25 Bcm, with the country boasting the EU's largest underground storage capacity, data from Gas Infrastructure Europe shows.

A Hungary-based trader wondered who would ultimately take the financial hit for the gas lost due to infrastructure attacks.

"Domestic players or foreign companies?" the source asked, pointing out that the current replacement arrangement would cause operational problems but is "is doable until a certain level" of infrastructure damage.

The prior mentioned analytics report forecasts that, based on current gas storage levels and continued injections throughout summer 2024, 2.5 Bcm of gas would be available for withdrawals during the winter season.

Winter premiums remain weak

Market participants continued to see the seasonal spreads as currently unfavorable in pushing enough injections into Ukrainian storage by the end of summer.

"I do not think that the current spreads between summer contracts and winter will incentivize a lot of players to fill storage beyond the EU into Ukraine" a UK-based gas analyst said, "If there is less gas in Ukrainian storage, or if they become less available [due to attacks], the gas system in winter will be much tighter, and Eastern European countries will have to also rely more on imports from Northwest Europe."

Platts, part of S&P Global Commodity Insights, assessed the Winter 2024 premium to the month-ahead at Europe's bellwether Dutch TTF hub at Eur5.32/MWh May 11, with the spread having averaged around Eur5.325/MWh since the summer season began.

In comparison, Platts had assessed the TTF Winter 2023 premium to the month-ahead at Eur20.075/MWh as of May 11, 2023. This spread would then reach a peak of Eur20.6/MWh by May 24, remaining between the Eur15-20/MWh for much of the previous summer season.

European gas market participants have highlighted persistent concerns surrounding risks of further escalation alongside unfavorable pricing dynamics.

"The spreads are the driver," a Switzerland-based trader said. "If the spreads were Eur10-12/MWh, which was a decent level for last year, would a trader inject in light of these new attacks?"

Another European gas trader said: "It is about portfolio management and risk appetite. Personally, I would not use any Ukrainian source as long as Russia is active in the field. ... My opinion now is that the market isn't focused on this."

"If storage infrastructure is damaged, it may cause a reactive price spike but shouldn't have a long-term effect on prices because they are not being utilized in the market," the same source said.