EU increases gas storage in Ukraine to ease winter shortage

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Europe’s energy industry, intent on avoiding gas shortages during the coming winter, has resorted to shipping large volumes of the fuel into Ukrainian storage, despite the Russian invasion.

As the ongoing war and continued sanctions force the EU to wean itself off Russian gas, traders have spotted an unusual opportunity presented by Ukraine’s ample storage capacity.

Naftogaz, the country’s energy company, said the number of non-Ukrainian companies injecting gas into the country reached 19 this year, up from four in 2021.

The capacity booked on pipelines into Ukraine from the EU reached a nearly three-year high in July, according to data from the state gas system manager, while the volume planned for this month is on course to double.

Naftogaz chief executive Oleksiy Chernyshov said: “[This] is a great opportunity for the EU to build strategic gas reserves.”

Ukraine has more gas storage capacity than any country in the EU — a legacy of its role as a key transit country for Russian gas.

The storage tanks are largely situated deep underground in the west of the country far from the front lines. The storage caverns are also underground, affording them some protection from long-range strikes.

But European traders were still cautious about using the facilities in the early days of the war.

After a mild winter last year, the refilling of EU storage facilities started from a high base, and is now close to 90 per cent of capacity. The region uses three times more gas during the winter months, compared with the height of summer.

EU gas storage facilities can only hold a maximum of about 100bn cubic metres, compared with annual demand in the bloc of between 350 bcm and 500 bcm, depending on the weather and other conditions. The Ukrainian facilities will provide an additional 10bcm-worth of storage.

“The continent is running out of options to store any gas supply surplus while consumption lulls,” said Natasha Fielding, head of European gas pricing at Argus, a price reporting agency.

The move followed efforts by Ukraine and the EU to better integrate their energy systems after Russia’s invasion drove prices to a record level, threatening blackouts in the winter. Before the conflict, the bulk of natural gas used by EU households and businesses came from Russia.

The current glut of gas has helped push down the European benchmark price to just €30 per megawatt hour, but they are expected to rise again this winter. Think-tank Bruegel said in a report last month that traders could collectively make about €2bn by using the Ukrainian sites ahead of the expected rise in the gas price this year.

Yuriy Onyshkiv, senior gas analyst at Refinitiv, said utilising Ukrainian storage could help “stabilise the market and ensure the security of supply in winter when demand peaks”.

The European Commission wants companies to increase their use of Ukraine’s gas storage and has held talks with banks about providing guarantees for traders, although no scheme has been established yet.

Ukraine has a so-called “customs warehouse” system to attract foreign customers, with gas stored there exempt from custom duties for three years, allowing it to easily be reimported to the EU.

The country’s own gas demand has fallen sharply as Russia’s invasion has disrupted industries and the wider economy.

UN figures show that, by the end of 2022, 5.7mn people had left Ukraine since the conflict began — a number that amounts to more than 13 per cent of the prewar population.

Ukraine aims to have about 14.5 bcm of gas in storage for domestic consumption before the heating season starts around late October. It currently has nearly 9 bcm.

Nominations into the country’s storage from the EU amounted to 443.5mn cubic meters in July this year, the largest volume since 2020, when European storage was similarly maxed out after Covid-19 lockdowns sapped demand. August has already seen nominations of more than 250 mcm in the first week.