Ukraine sees role in EU gas market for its surplus storage capacity: Naftogaz

London — The surplus gas storage capacity in Ukraine could be used in the future by players in central and eastern Europe to help with the region's gas supply security, while at the same time providing the Ukrainian gas network operator with increased revenues, the CEO of state-owned Naftogaz, Andriy Kobolev, said late Thursday.

Ukraine has vast gas storage capacity of more than 31 Bcm -- most of which is located in the west of the country near the border with EU countries -- but sites are underutilized.

Stocks were built to around 21.7 Bcm by the start of the current withdrawal season in November in anticipation of potential disruption to Russian transit -- significantly higher than in previous years.

"Our gas storage capacity is excessive for Ukrainian consumers," Kobolev said during a webcast panel discussion at the World Economic Forum in Davos, Switzerland.

"At least 10 Bcm of gas additionally can be stored in Ukraine to the benefit of European consumers. Countries -- such as Poland -- could then enjoy an additional element of energy security by keeping gas in Ukraine's storage sites and then using it for security of supply," Kobolev said.

Transit accord

The possibility of expanding the role of Ukraine's gas storage sites was made possible by the signing of a new five-year gas transit agreement with Russia's Gazprom on December 30, which saw the removal of "legacy bottlenecks" imposed on the country in its previous transit deal with Gazprom.

"The new contract allowed us to remove legacy bottlenecks that existed in relationships between the Ukrainian TSO and respective TSOs in European countries -- Poland, Slovakia, Hungary and Romania," Kobolev said.

With the obstacles removed, "all standard services and standard interaction modes currently available in Europe will be available at the border of Ukraine and other EU countries."

"That will allow for the Ukrainian market to play a more important role in the EU gas market," Kobolev said.

He added that when the Ukrainian regulator approves the use of short-haul tariffs for gas storage in Ukraine, the sites would become commercially viable.

Kobolev said he also expected wide summer-winter gas spreads to continue in Europe given the oversupply on the market -- making the use of Ukraine's storage sites even more attractive to traders.

"We expect the situation that took place last summer will continue in the mid-term -- the excessive supply of LNG to the European market will drive prices lower, creating a significant margin between summer and winter prices," Kobolev said.

"And that margin can be captured by those who will use Ukrainian storage sites."

The current TTF Winter 20-Summer 20 spread is more than Eur4/MWh, according to S&P Global Platts assessments, while the spread was almost double that in the summer of 2019.

Transit volumes

Kobolev also said that gas transit through Ukraine can happen "not only from east-west, but also from south-north."

This, he said, means Hungary, Poland and Slovakia can exchange gas flows using the Ukrainian gas transmission system.

"All that combined will be beneficial for Ukraine as that's how the Ukrainian gas transmission system will make money," he said.

Kobolev conceded that Ukraine will transit lower Russian volumes via its network under the new agreement with Gazprom, which provides for 65 Bcm of transit in 2020 and 40 Bcm/year in 2021-2024.

But, he said, Gazprom could send more gas via Ukraine if it needed to.

"There is an option for [Gazprom] to book additional capacity if they need to during periods when they need it, so the volumes can be bigger," he said.

A Naftogaz spokesperson added Friday that under the new transit deal, Gazprom agreed to "ship-or-pay" terms for the flat delivery of the 65 Bcm in 2020 -- meaning it agreed to pay for 178 million cu m/d of transit via Ukraine whether it uses it or not.

"As of today, they have not exceeded those volumes, though they might wish to do so later. Other (higher) tariffs plus Naftogaz's margin will apply for the exceeding volumes," the spokesperson said.

Reverse flows

Naftogaz also hopes to see the start of virtual reverse flow with Slovakia soon, meaning Ukraine can swap gas with European customers and avoid the cost of transporting Russian gas into Europe and then importing it back.

Virtual reverse flow will become "a much more important element for us," Kobolev said.

"These swaps should become available and result in decreased costs on the Ukrainian side and increased use of the storage facilities," he said.

Ukraine has now started importing gas from Poland via backhauling, or virtual reverse, for the first time, Serhiy Makohon, the head of gas grid operator GTSOU, said Friday.

The imports are currently running at 2 million cu m/d, but the capacity is 9 million cu m/d.

"Ukrainian traders are actively using this opportunity," Makohon said. "This means we can import up to 3.3 Bcm/year from Poland via virtual reverse."

Ukraine itself does not buy Russian gas directly having suspended imports in November 2015. Instead, it relies on its own production and European imports to meet demand.

Last year, the combination of 20.7 Bcm of production and 14.2 Bcm of European imports easily met consumption of 26.4 Bcm, with the rest put into storage.