Ukraine to Showcase Vast Gas Storage to Traders

Ukraine is looking to drum up interest in its vast but under-utilised gas storage capacity, with meetings due to take place with existing and potential new clients over the coming months. The omens are good, as there is a wide summer-winter gas price spread at the Dutch gas hub.

Ukraine boasts around 31bn m³ of gas storage space, most of which is situated in the west. A relic of the Soviet era, this extensive network of underground caverns is under-utilised. The country had under 16.67bn m³ of gas in storage as of February 4. Even at the onset of the winter heating season last October, it only had 21.8bn m³ stored, which marked a record.

Ukraine successfully completed the long-awaited unbundling of its gas transmission network earlier this year, formerly managed by state gas company Naftogaz through its Ukrtransgaz (UTG) subsidiary. But its gas storage facilities remain under the control of UTG.

The facilities are used primarily by Naftogaz, but also commercial counterparties such as traders from central and eastern Europe as well.

According to Sergiy Oleksiyenko, UTG’s acting CEO since March last year, the 2019/2020 season saw record storage from these third parties.

“The number of commercial counterparties using the storage increased two times, and volume of their gas, four times,” Oleksiyenko told NGW.

The overall share of commercial clients increased “substantially,” he said, noting he could not provide exact numbers because of the confidentiality of client data.

UTG wants to see this upwards momentum continue. It held meetings with existing clients on February 6 to highlight the opportunities Ukraine’s gas storage presents, and also plans to stage roadshows to attract new customers, likely starting in March, according to Oleksiyenko.

Regulatory framework

The purpose of these presentations is to showcase the regulatory and legislative changes that have taken place over the past year in Ukraine, that have made storage more attractive.

Customs duty-free storage has been available since 2017, enabling companies to store their gas in Ukraine for up to 1,095 days without paying customs tax. But Oleksiyenko also pointed to the introduction at the start of this year of short-haul tariffs. Under this regime, a significant discount on entry-exit tariffs is applied to short-term transit of gas through Ukraine and delivery to Ukrainian storage. Market conditions are also on Ukraine’s side, the CEO said.

“Summers are now seeing substantial decreases in LNG prices causing imports to increases. It only makes sense to store gas in summer that can be sold in winter,” he told NGW.

“Ukraine is the only country with relatively large storage capacity in the region, and storage and transportation costs based on the current tariff structure make good commercial arguments for traders to make use of the summer-winter spread,” he said. “This is the main focus of the roadshows – to publicise the discuss with clients this new reality in terms of tariffs.”

UTG’s current tariffs are hryvnias 93.3/'000 m³/day (€0.322/MWh) for injection, hryvnias 0.172/'000 m³/day for storage space and 97.2/'000 m/day for withdrawal, excluding VAT. These tariffs are set by the energy regulator, the national energy and utilities regulatory commission.

Ukrtransgaz is in talks with the regulator to shift gradually to an asset base tariff structure, which would set tariffs according to the value of UTG’s assets.

“We believe that customers will be better served by this structure,” he said, explaining that it would motivate the company to optimise storage and improve costs. These tariffs would be revised only every five years, compared with every one year at present, providing greater stability to customers.

While the  benefits of this kind of regulation have been demonstrated in other countries, the “sensitive issue” is what UTG’s valuation would be assessed as under the system, and what rate of return on its existing and future assets would be set to calculate tariffs. The lower the value of the asset, the lower the regulated rate of return and the lower the incentive to keep plant operating; but also the more competitive the tariffs become.

Whether or not cost optimisation could involve the shutdown of some storage capacity, Oleksiyenko did not say. But some of its storage sites, such as the Olyshivske facility in the country’s north, are already relatively unused.

“Some of our storage sites are already out of use. They are old, they don’t add much to the injection and withdrawal rates and they are not efficient,” he explained. “But they are not liquidated yet, they are in a state of limbo.”

Broader liberalisation of the Ukrainian gas market could also encourage greater third-party use of storage. Thanks to reforms, any company can now supply gas to heating utilities and the general population. But in reality, Naftogaz still dominates the market.

Oleksiyenko says the transition to a more competitive market will not happen overnight. “Naftogaz has said it is willing to give up all of its market share to commercial players, but I’m not sure this will happen fast,” he told NGW. “There will be an evolution not revolution regarding the supply of gas to the population.”