(Bloomberg) – About 60 miles from Ukraine’s border with the European Union, a collection of pipes and pumps hint at what is set to become an important part of the bloc’s efforts to secure energy supplies and thwart Vladimir Putin.
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Nestled between agricultural fields and forests, the Bilche-Volytsko-Uherske storage facility can store more than four times as much natural gas as Germany’s largest site and easily connects to the bloc’s networks, thanks to the role of Ukraine as a transit route for decades. for Russian energy.
Storing vital fuel in a country subject to missile strikes and attacks on critical energy infrastructure might seem like a crazy idea. But it’s winning backers because the facilities are far enough from the front line to be considered safe, and some traders feel the risk is worth it.
European officials are now considering supporting links to Bilche-Volytsko-Uherske and other facilities scattered across Ukraine – home to the continent’s largest network of underground caverns that can hold gas when demand and prices spike in winter. With EU sites already close to capacity – currently more than 70% full – fuel storage in Ukraine could avoid a glut in the coming months.
“Ukrainian storage can help balance supply and demand in the second half of summer 2023, given their excellent connection to EU gas markets,” said German utility RWE AG, which has used Ukrainian storage in the past, in a statement to Bloomberg.
For gas storage in Ukraine to be viable, prices will have to come down enough to justify the costs. The EU will also likely need to step in to provide a safety net against potential conflict-related losses.
The evolving initiative is part of efforts to avert the panic that led to record prices and state intervention last year. To protect businesses and consumers, EU governments have rolled out 646 billion euros ($694 billion) in aid, according to think tank Bruegel, and they can ill afford a repeat.
While European energy companies stockpiled gas in Ukraine ahead of Russia’s invasion in February 2022, supply in a country embroiled in fighting would normally be unknown, and deliberations reflect the narrow range of options for the EU. Europe and how the war reset the risks.
Energy has been a weapon in the conflict from the beginning. The explosion last week of the Kakhovka dam on the Dnipro is the latest example. Last year, the Kremlin gradually cut gas supplies, wreaking havoc on European energy markets. These concerns remain and Ukraine offers its assistance.
Storing gas for Europe would not only generate much-needed revenue for the country, but strengthen ties with the bloc and serve as a snub to Russia after the Kremlin sought to use the energy to weaken support for Kiev.
The country’s gas storage capacity – located in relative safety up to 2 kilometers underground – totals more than 30 billion cubic meters. The operator Ukrtransgaz provides a third of this space, equivalent to around 10% of EU demand in the fourth quarter of last year.
“The Ukrainian market offers storage at a fixed cost rate, which makes gas storage in Ukraine a very attractive and competitive option,” said Marco Saalfrank, merchant trade manager for continental Europe at Axpo, based in Ukraine. Switzerland, but noting that the risk must underneath.
With the insurance industry avoiding Ukraine, the extent to which traders are willing to store gas in Ukraine depends on prices and the willingness of the EU to provide a safety net. Talks are ongoing.
The European Commission – the bloc’s executive arm – is “exploring whether and how guarantees issued by public institutions could perhaps support unlocking access to natural gas storages in Ukraine”, the spokesman said. Commission, Tim McPhie, during a briefing with reporters last week.
For its part, Ukrtransgaz is working on implementing service guarantees to reduce war-related risks as it seeks to become “an energy bank for Europe”, the company said in a response by e-mail to questions from Bloomberg, adding that the request had exceeded its initial expectations.
Time is running out to put a system in place. European storage sites should reach their capacity limits at the beginning of September. Heating demand usually does not kick in until later in the fall, creating the risk of oversupply, which could then occur in the event of a cold snap.
Without Russian gas pipeline deliveries – which have largely ceased – European gas markets are more finely balanced than in the past. This means that increases in demand or disruptions in supply can have outsized impacts.
Using Ukraine’s facilities would help avoid a price crash before winter, but if usage is ‘unexpectedly high’ it also poses risks of lower rates next year, according to the consultants Energy Aspects Ltd. premium to summer prices, making storage in Ukraine or on offshore tankers an increasingly attractive option.
Swiss trader Axpo stockpiled gas in Ukraine before the war and is ready to do so again, but it is watching developments closely and government guarantees will be essential.
“Since the beginning of the war, the risks related to energy infrastructure in Ukraine have increased significantly, as we have unfortunately seen with the recent dam explosion,” Saalfrank said.
Learn more about the potential summer gas glut:
Falling LNG prices place U.S. export cancellations in context
Traders say some of Europe’s gas demand may never return
European gas traders watch for sub-zero prices during summer glut
–With help from Anna Shiryaevskaya, John Ainger and Samuel Dodge.
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