Thursday, June 26, 2014

Europe Gas Storage Seen Enough for Ukraine Supply Cut

With just over 100 days until the start of the new winter gas season, and despite uncertainty over how the ongoing Moscow-Kiev gas dispute will affect European imports of Russian gas transiting Ukraine, the rate of gas injections in the key storage region of Germany remains little changed since the start of summer.

According to data from Gas Infrastructure Europe, German storage was 75.52% full Thursday, with 16.4 billion cubic meters of gas in stock.Since April 1, regarded as the first day of summer gas season, Germany has been injecting gas into storage at a rate of 30 million cubic meters/day at its weakest and at 83 million cu m/d at its strongest, with the average daily rate standing at just under 55 million cu m.In the past month, the rate has stood at 57 million cu m/d.

Were Germany to carry on injecting gas into storage at a rate around 55 million cu m/d, German gas stocks should be full by the second half of September, before the October 1 start of winter, with about 5.3 Bcm required to be injected before reaching full capacity.With that same rate, German storage should be 90% full by August 15.Withdrawals have been relatively limited, totalling 272 million cu m since April 1 and averaging 3.4 million cu m/d.

These stable rates indicate there has been no pressure for storage facilities in Germany to inject at a faster rate on the back of the Ukraine crisis, with Europe's markets continuing to be well supplied with gas despite Russia cutting off supplies to Ukraine at the start of the week.Furthermore, Germany receives gas from Russia not only through the Ukraine-Slovakia-Czech Republic route, but also directly from Russia via the subsea Nord Stream pipeline and via Yamal, a pipeline traversing Belarus and Poland.

Morning nominations showed that Germany would receive 101 million cu m/d of Russian gas on Friday via Nord Stream and 84 million cu m/d via Yamal.On August 15 and October 1 German storage was 68.34% and 82.96% full respectively during 2013, GIE data showed. However, a mild October allowed Germany to carry out robust injections into November, and by November 3 German storage was 91.46%, before withdrawals began to outnumber injections.

As a result of a mild 2013-14 winter, German storage was 58.35% full by the March 31, 2014 end of the season, compared with 21.52% full a year before.

Ukrainian and EU experts on Wednesday, June 25, began exploring possibilities for reverse-flow gas supplies to Ukraine, EU Energy Commissioner Gunther Oettinger said after talks with Ukrainian Energy and Coal Industry Minister Yuriy Prodan.

Prodan said Ukraine could become independent from Russian gas “if Slovakia begins large-scale reverse-flow supplies” and added that closely linked to this issue was “the pumping of gas into underground storage facilities is closely linked”.He said the sides had agreed to continue bilateral talks next week on an open and transparent basis.“Everything will depend on how much reverse-flow gas we can buy from Europe. We have been getting some very good offers from European companies at prices that are much better than those of Gazprom, even after discounts,” he said.

“We hope we will be able to begin ‘minor’ Slovak transit from October 1 even though some technical issues remain to be worked out,” Prodan said.

As for the “big” revere-flow supplies, he said “the gas transportation network in the direction of Slovakia is working at only 40% of its capacity. So there is a possibility.”Oettinger confirmed that the European Union was committed to reverse-flow gas supplies to Ukraine but this gas would be sold at market prices to be determined by the companies that sign relevant contracts.

Prodan said he was hopeful that “big reverse-flow supplies” would give Ukraine “up to 30 billion cubic meters a year”.Oettinger’s spokesperson Sabine Berger said Ukraine could count on no more than 8 billion cubic meters of reverse-flow gas a year through Slovakia a part of the “minor reverse-flow scheme”. Gas will be supplied by the Vojany-Uzhgorod pipeline, not the transit pipeline.

As for the “big reverse-flow supplies” there is no concrete agreement yet as it would require Slovakia to agree to reverse the flow of gas by a trunk pipeline, which it is not prepared to do because this would run counter to its contract with Gazprom.

Oettinger said reverse-flow gas supplies from Slovakia to Ukraine by the trunk pipeline would be impossible without Gazprom’s consent as it would run counter to the Slovak company Eustream’s contractual obligations.However he said such supplies by the Vojany-Uzhgorod pipeline would not require the Russian company’s agreement and would give Ukraine up to 10 billion cubic meters of a gas a year.

Oettinger believes that diversification of supplies will help to solve Ukraine’s gas problem in part. However reverse-flow supplies from Poland and Hungary by the Vojany-Uzhgorod pipeline will not be enough for Ukraine get through the coming winter comfortably.The European Union has promised assistance to Ukraine in diversifying natural gas supplies.Kiev is planning to buy about 290 million cubic meters of gas in Europe in reverse mode (about 140 million cubic meters will be delivered through Poland and the rest through Hungary).

Ukraine has been receiving natural in reverse flows from Europe since November 1, 2012. The gas is supplied across the Ukrainian border with Poland under a contract with from German RWE.The gas is supplied across the Ukrainian border with Poland. RWE planned to supply up to 5 billion cubic metres of gas to Ukraine until May 2013. Last year, Naftogaz imported 55 million cubic meters of gas using the reverse flow scheme.

Gazprom said it might impose restrictions on European companies which supply gas to Ukraine using reverse-flow mechanisms.“A reverse flow is a semi-fraudulent mechanism whereby gas runs in circles. But this is Russian gas,” Gazprom CEO Alexei Miller said.Miller said that the points where gas was delivered to and accepted by European consumers were located in Europe, but “Ukraine uses our gas [intended for Europe] on its territory any way it likes”.

“Reverse-flow gas supplies run counter to the contracts with European companies that buy Russian gas, and for that reason restrictions may be imposed on them,” Miller said.In 2013, Ukraine consumed about 50 billion cubic meters of gas.

Natural gas for winter delivery in the U.K. declined to the lowest level in more than three years amid high inventories, tanker arrivals and a reduced risk of interruptions in Russian gas supplies via Ukraine.

The contract for the six months from October fell as much as 1.2 percent to the lowest level for a next-winter contract since January 2011, according to broker data compiled by Bloomberg. A strengthening pound also led utilities in mainland Europe to favor buying under long-term contracts rather than on hubs such as the U.K.’s National Balancing Point, said Nick Campbell, an analyst at Inspired Energy Plc in Kirkham, England.

Europe’s mildest winter in seven years depleted demand and meant less gas was needed to replenish storage sites, which are currently 25 percentage points above last year’s, according to Gas Infrastructure Europe, a lobby group in Brussels. The winter contract has fallen 4.9 percent since June 16, the day Russia cut deliveries to Ukraine, as onward flows to Europe remained near normal levels, reducing fears of possible interruptions like those seen in 2006 and 2009.

“The continued rapid build in inventories is one of the main factors” damping winter prices, Ole Hansen, head of commodity strategy at Saxo Bank A/S in Copenhagen, said by e-mail. “It’s a reaction to the continued drop in spot gas and the fact that European gas inventories continue to build at a faster rate than anytime during the past five years.”

Winter gas declined as low as 57.8 pence a therm ($9.85 per million British thermal units) and traded at 58.1 pence a therm at 4:13 p.m. in London, broker data show. Same-day gas fell as much as 4.6 percent to 37.5 pence a therm as flows outpaced demand.

European storage sites were 68 percent full yesterday, the highest for this time of year since 2011. Gas deliveries at the border with Ukraine, which meets about 15 percent of Europe’s gas needs via pipelines from Russia, are proceeding as normal, according to Slovakia’s pipeline operator Eustream.

The reduced Ukraine risk “along with storage fullness, plentiful LNG and the strong sterling has led to European utilities favoring long-term gas rather than buying from the U.K., thus seeing more sellers than buyers of the seasonal contract” Campbell said by e-mail today.

The pound approached the highest since October 2012 versus the euro as the Bank of England’s Financial Policy Committee introduced measures to cool the housing market. Sterling strengthened 0.3 percent to 79.98 pence per euro after climbing to 79.59 on June 16, the highest level since Oct. 1, 2012.

Prices also weakened as Brent crude oil traded near its lowest closing level in a week after Iraq said oil exports from the south of country will still increase amid the northern insurgency. Futures fell 0.5 percent to $113.38 a barrel on the ICE Futures Europe exchange.

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