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Ukraine may hold key to Europe’s gas storage crunch

Published by , Senior Editor
Tanks and Terminals,

European gas storage is almost full to the brim – and with the mild weather, coronavirus lockdowns hitting demand and an over-supplied market, levels are not likely to drop soon.

New analysis from Wood Mackenzie suggests October may prove critical for the market – and highlights a potential solution to the storage crunch.

At the end of March, Europe had 57 billion m3 of storage in place, a record for this time of year. The high level of storage further weakens an already oversupplied summer market.

Graham Freedman, principal analyst at Wood Mackenzie, said: “While the oversupply does cause concern for the market, it opens up potential to use Ukraine’s so-far under-utilised storage facilities to park some of this gas until the market improves - either next winter or during following years.”

At the end of October 2019, Europe had a record 103 billion m3 in storage. Withdrawals over the winter were low, leaving 94 billion m3 available at the beginning of 2020. Storage utilisation in 1Q20 continued to be below average.

The very mild winter, combined with the large oversupply of LNG and pipeline gas trying to access the market and low prompt prices, affected utilisation. Coronavirus containment measures hit demand across the continent from mid-March, particularly in the industrial and commercial sectors.

Freedman said daily storage withdrawals fell from a peak in early February of over 600 million m3/d to around 360 million m3/d during the third week of the month. Average daily withdrawals for March were 212 million m3/d, approximately 23 million m3/d below average for the month.

He added: “By the end of March, when annual storage contracts finish and a new storage cycle begins, Europe had a record 57 billion m3 of gas in storage – 13 billion m3 above the high set in March 2014 and 25 billion m3 higher than the five-year average of 32 billion m3. This is a very different picture to 2018, when there was a record low of 20 billion m3 in place at the same time of year.

“To get back to the five-year average inventory of 92 billion m3 by the end of October, Europe will only need to inject 35 billion m3 into store. In 2018, it needed to inject 71 billion m3, and last year required 50 billion m3 in 2019. In an average year, injections total about 60 billion m3.

“The injection of 35 billion m3 during the summer is likely to be completed by early September and will not be sufficient to satisfy all the supply that will be available during this period. As a result, we forecast an additional 13 billion m3 will be injected taking overall gas in store by the end of October to 105 billion m3.”

Given the large global oversupply of LNG and pipeline gas, the injection of 48 billion m3 of gas into European storage may not be enough to satisfy the demand for capacity this summer, Freedman said.

“One option to resolve this would be to use Ukrainian storage,” he added. “With 32 billion m3 of capacity, this would represent a significant extra resource for storing gas.

“Like Europe, Ukraine had a very mild winter, so it was left with nearly 15 billion m3 in stock at the end of March. If it then refills during the summer at the same rate as the historical average it will have around 23 billion m3 in store by the end of October. This leaves 9 billion m3 unused for the coming winter, which could be used by European traders if the economics continue to make sense.

“The aggregate cost of using Ukrainian storage, taking into account associated pipeline transportation fees between neighbouring countries, is no higher than €3.16/MWh, giving sufficient incentive to use this capacity.”

While Freedman said it is possible for a total of 57 billion m3 to be injected into storage this summer, it will be highly dependent on summer-winter price spreads remaining at or above €4/MWh at European hubs, providing enough incentive to use this additional available capacity.

He added: “Should this 57 billion m3 be injected, that would bring this summer’s injections close to the 60 billion m3 average injections historically seen in Europe, which will help to support the market during this period of oversupply.

“This would also leave Europe going into next winter with a record 114 billion m3 available to supply the market. Unless we get an exceptionally cold winter, there could be a large storage overhang to deal with going into 2021, further extending the period of oversupply in the market.”

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