Ukraine gas storage: EU needs more capacity
June 27, 2023
After big inflationary spikes in energy prices when the war in Ukraine kicked off in February 2022, Europe now faces a potential oversupply of gas and subsequent dramatic price falls. It also needs more storage capacity.
"As the summer approaches, the European Union is confronting an unusual situation amid the worst energy crisis in its history: too much gas to handle," warned Akos Losz and Ira Joseph, researchers at Columbia University's Center on Global Energy Policy, in a recent paper.
Last August, EU prices jumped to an all-time high of €350 ($380) per megawatt hour due to shortages caused by Russia cutting supplies, before slumping in 2023 due in part to a milder than expected winter.
The 2022 spikes led to massive state intervention, with EU governments forking out €646 billion to protect companies and consumers, according to the Bruegel think tank.
Without gas deliveries from Russia, European gas markets are more finely balanced than in the past, which means a surge in demand or disruption to supply may have disproportionate impacts, according to Kamil Lipinski from the Polish Economic Institute (PIE).
Ukraine storage as market balancer
German gas storage, covering 22% of overall EU storage capacity, was able to provide sufficient supply for the EU to avoid demand curtailment of solidarity protected customers and critical gas-fired power plants, Lipinski says. But on its own it is insufficient to balance EU-wide price swings, so the bloc is looking further afield.
European Commission spokesperson Tim McPhie confirmed for DW that EU Member States will need to fill their storages to 90% of capacity by November.
"Europe needs to utilize as much Ukrainian underground storage capacity as possible to cover potential winter demand spikes," Jacopo Casadei of energy think tank Energy Aspects told DW.
In 2020, Ukraine harmonized its regulatory framework with the EU and cut the cost of warehousing gas in domestic storage facilities for EU-based traders by reducing tariffs and customs duties. Two months ago, Ukrtransgaz, a gas storage operator, was certified under the EU gas storage regulations.
The Ukrainian market also offers storage at a fixed rate, which avoids spot market fluctuations.
Ukraine's storage facilities, which are owned by the state gas company Naftogaz, have a total capacity of 31 billion cubic meters (bcm) in 11 underground storage facilities. Ukraine's large gas storage capacity is surpassed only by the US and Russia and is due to its former role as a major transit country for Russian gas to Europe.
Naftogaz, the parent company of Ukrtransgaz, says it can offer 10 bcm of storage capacity for EU countries, a 10% addition to the existing EU gas storage capacity of 100 bcm. This could be extended to 15 bcm if Ukraine retakes Russian-occupied territory, according to Naftogaz.
About 25 bcm of storage capacity, or 80% of total Ukrainian gas storage capacity, is located in western Ukraine, near the Polish and Slovakian borders: Bilche-Volytsko-Uherske, Dashavske, Uherske, Oparske and Bohorodchanske.
Another two bcm is in central Ukraine, far from the war's frontlines and under Ukrainian control. A further four bcm is closer to the eastern entry points for Russian gas, partially on occupied territory. The Verhunske facility, with a storage capacity of 0.4 bcm, is located in the Russian-controlled Luhansk region.
The Bilche-Volytsko-Uherske storage facility, the largest in Europe, can stockpile more than four times as much natural gas as the largest site in Germany and experts say connects easily to the EU grids. EU officials are reportedly weighing support for links to the facility, which can store 17.05 bcm of gas.
The Gas Transmission System Operator of Ukraine says the country's gas transmission system has over 100 transportation routes between its facilities and the EU borders.
Risk mitigation needed
"Russia is methodical in the way it attacks infrastructure, mostly to impose pain and suffering on Ukrainian populations, but keeping its gas transit intact. Not sure whether it is thinking it can use it in the future," said Anna Mikulska of Rice University's Baker Institute for Public Policy.
Russia still sends some gas via Ukraine too. Under tight market conditions it could become another way to pressure Europe, Mikulska added.
Damage to physical gas infrastructure, loss of control over specific facilities, and government bans on natural gas (re)exports in supply emergencies are just some risk factors facing European traders, a PIE report notes.
Storing third-party gas in Ukraine would require public guarantees for commercial companies to utilize the state-owned capacity, think the Center on Global Energy Policy experts.
One of their suggestions includes the European Bank for Reconstruction and Development. The lender could provide guarantees to cover political and war-related risks, they suggested. But the bank told DW it was too early to release any details.
Tim McPhie confirmed that the European Commission is exploring how guarantees issued by public institutions could provide adequate insurance coverage for natural gas stored in Ukraine. But time is running short.
Edited by: Tim Rooks