Analysis: Velke Kapusany gas backhaul changes face of Russian supply to Europe

London — The initiation of reverse-flow natural gas scheduling at Sloavkian-Ukrainian interconnection Velke Kapusany, one of Europe's key network supply points, has provided a glimpse of how channels of Russian supply could change when it enters the next phase of its transport accord with Ukraine.

Market sources have reported that maximized capacity sales on the Polish Yamal transport into Germany, along with an unwavering Velke Kapusany entry nomination, notwithstanding large auction sales into the Slovakian market and exit capacity sales out of it, have confirmed that Russian gas giant Gazprom Export switched its source of baseload supply from Germany to Slovakia.

The change may be considered by some to be a little premature, since the next phase of the latest transportation agreement with Ukraine would entail a 40 Bcm/year transit into Europe during 2021. Sources noted, however, that the current 110 million cu m/d entry nomination at Velke would amount to 40 Bcm/year if extrapolated across an entire year and that this may not be a coincidence.

Physical entry flows at Velke Kapusany amounted to 66 million cu m/d on Aug. 3, according to Slovakian TSO Eustream, with Russian supply being offset by nominations in the other direction. These reverse-flow nominations are predominantly, if not entirely, made up from Russian-sourced supplies, sources said.

Indeed, in the most recent auctions for monthly transportation capacity, the entire Yamal transport through Poland and into Germany was booked for August delivery, despite Gazprom Export already holding contractual flexibility in Ukraine and Slovakia to raise physical flows. It had also sold in excess of 25 million cu m/d for direct delivery into the Slovakian Virtual Trading Point through its Electronic Sales Platform.

Given that the Velke Kapusany entry has effectively been sustained at its current level since March, sources also considered it highly likely that ESP volumes were being supplied upstream from Yamal, or if they weren't, that Yamal transit is still being used to optimize Gazprom Export's portfolio amid the relatively high-price environment in Central Europe.

Whatever the situation, physical gas flows through the Lanzhot interconnection linking the Czech Republic and Slovakia hit an all-time high of 84 million cu m/d as the day began, with participants starting to join the dots with regard to Gazprom Export's overall strategy.

Exports

A total of 87.88 million cu m/d of August transportation capacity has been sold for export from Slovakia into Ukraine across its two export interconnections: Budince (42.88), and the Velke Kapusany (45) physical import point by means of virtual reverse flows.

As backhaul nominations, reverse flows are dependent on the physical flow going in the other direction. This means that if, for whatever reason, Gazprom Export reduces Velke entries to a level below reverse-flow nominations, they will be curtailed to some extent, although market sources regarded this situation as unlikely.

The net result of the backhaul nominations are that more Russian-sourced gas will be kept contained with Ukraine, albeit belonging to somebody else at that point. It also means that Russian volumes are largely maintained for Velke Kapusany entries for onward transport to Austria and Italy.

Another, perhaps unintended consequence of this strategy, might be the reduced availability of day-ahead gas at all Russian-linked interconnections, whatever the route to market for these volumes might be.

The attraction of the Slovakian export route for shippers is that purchases made in Central Europe can be transported to and subsequently injected into Ukrainian gas storage situated not far from the border.

Ukrainian storage has been touted by many to be the solution to European oversupply this summer. With continental storage quickly filling up, shippers needed an outlet for excess volumes, and have seemingly opted to discharge volumes into Ukraine on a month-ahead basis.

This situation is very likely to sustain for the entirety of the month, given that shippers operate portfolios based around a hedged-monthly position, and intentions have been evident in the opening stages.

However, no additional capacity sales have yet been reported by Eustream for Slovakian entry this Winter, meaning that either those volumes will not find their way back to Europe at all, or that they will simply be scheduled at times of peak demand.

Coupled with the fact that Russia seems currently reluctant, and in the future restricted, in increasing transport through Ukraine and Slovakia, could well mean that Velke Kapusany's best days are now behind it.