The EU's gas holding facilities are slowly being depleted
Continental Europe’s gas reserve tanks have fallen below 50% of their maximum holding capacity. The main reasons for the depletion include the reverse supply of natural gas to Ukraine, and a decrease in the volume of purchases from Russia’s Gazprom. As a result, the European gas market is unbalanced, and the price of spot contracts for gas are jumping. If the EU doesn’t abandon the reverse supply or increase purchases from Gazprom, the Old World could face a shortage of “blue fuel”.
In European underground gas storage facilities, they have recorded their lowest stock level in a decade. According to Interfax and the monitoring portal Gas Infrastructure Europe, on February 8th the storage facilities were filled only to the capacity 49.51%. This is significantly lower than the previous minimum records dating back to 2011.
European storage’s are empty despite the winter being quite warm. The Hydro meteorological Center in the UK states that winter 2014-2015 could be the warmest since 1659, that would make it the warmest winter ever on record. At the same time Europe met this winter with record gas reserves. In September 1, before the start of the heating season, gas storage facilities in Europe were at a capacity of 88.5% (according to the Association of European operators of underground gas storage facilities (GSE). This percentage equates to approximately 71.1 billion cubic meters of gas.
Before winter took hold at the end of 2014, the European Union stockpiled a vast amount of gas in it’s storage facilities afraid that the transit of gas from Russia via Ukraine would be disrupted during the winter months a midst the political turmoil. Gazprom also requested that all gas deliveries venturing through Ukrainian territory be prepaid by the government on June 16th 2014. Only in October of the same year, did Ukraine and Gazprom find an agreement..
The current decline of stored gas is partly caused by Ukraine. Europe provides reverse gas supplies to the country: according to the Ukrainian State Statistics, from January to November 2014 Kiev received from Europe 4.16 billion cubic meters of gas (the largest supplier was Germany, which provided 2.357 billion cubic meters).
“Moreover, the level of Russian gas flows to Europe decreased in the second half of the last year,” -pointed Alexey Grivach, deputy director of the National Energy Security Fund. “The sharp decline in the gas consumption in Europe in the first half of that year has, particularly, contributed to that gas flows decrease. At the same time volume of gas reserves in UGS remained unprecedentedly high in the countries at the end of the heating season, as Europeans were extremely afraid of possible transit crisis caused by the political instability”.
As a result, Europe needed less gas flows for fueling its UGS in the second half of the last year and there were no signs of the growth of the demand, although it has stabilized. This is the reason for low Russian gas flows to Europe which are stable under minimal contractual obligations since September.
High last year’s base effect occurred in January 2015 and the export from Gazprom to Europe fell by 25%.
“It’s no wonder that the European partners intensively extract the gas from their UGS, which amounted for approximately 0,8 – 1 billion cubic meters per day,” – said Grivach. “The volume is really significant and if such extraction continues, European UGS will be 30% full by the end of the month”.
According to Grivach, the current situation shows the imbalance of the European gas market. Last year local companies which pumped oil in UGS in summer 2013 suffered a loss, as they had to insure themselves and couldn’t extract the gas from the storages in order to offer it for sale. This year these companies extract the gas intensively, although the price of the imported gas has dropped following the decline in the oil price and, on the average, it is lower than the price of the gas pumped in European storage’s last summer.
“What’s more, too high speed of the gas extraction from the UGS creates the threat to the stability of the European gas industry at the end of the heating season,” – warned Grivach. “The consequenses will greatly depend on the weather in March. However, considering current level of the UGS capacity, it is obvious, that there is already a lack of gas needed for covering the peak demand, as long as the low pressure in the underground storage facilities doesn’t allow quick extraction of the necessary volumes of gas”.
This, in turn, results in fluctuating prices. “For example, the price of spot contracts in Baumgarten has already reached $360 per 1,000 cubic metres,” – narrates Grivach. “There is a paradox. Austria lacks gas while signicant part of russian gas supplies returns back to Ukraine as reverse instead of transiting through Slovakia in Baumgarten”.
Expert says, that its price should be at least symbolically lower the price of the Russian gas for Ukraine, which accounts for approximately $330 in the first quarter. Grivach underlines that Europe should either abandon such reverse or ask Gazprom to increase the supply.
Now Gazprom supplies gas to Europe under minimal volumes agreed in contracts. This is to constrain the possibilities of Europe’s gas supply reverse to Ukraine. The monopolist refused to comment it, however earlier the Russian company announced that it intended to increase the gas flows in Europe in 2015 up to 155 – 160 billion cubic meters. According to Federal Customs Service’s statistics, last year’s gas export from Gazprom to Europe and Turkey amounted for 124 billion cubic meters.
Michael Korchemkin, general director of East European Gas Analysis, believes that Europeans are just waiting for more favorable market conditions.
“If oil price holds less than $70 a barrel, gas prices will fall to $250 per 1,000 cubic meters,” – forecasts the expert. “The importers want to save money, that’s why they use the paid gas from UGS.
According to Korchemkin, Gazprom can set new export volume records in spring and summer but this will require the recovery of the Ukrainian gas transit. Following the last year’s results transit supplies of the Russian gas through Ukraine decreased by 27,8% and accounted for 62,2 billion cubic meters.
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