EEurope had Endured one winter since Russia’s invasion of Ukraine in 2022. But while gas prices had returned to earth, they were certain to rise in the colder months ahead. So if commodity traders bought at rock-bottom prices in the summer, they could bid future deliveries at much higher prices on the futures market. To make the deal work, all they needed was a place to store the product. The EU‘s underground capacity was almost full; parking the gas in tankers at sea would have been expensive. Their solution was unorthodox: pump 3 billion cubic meters of natural gas to Ukraine.
Storing hydrocarbons in a war zone may seem unwise. Last spring, analysts even assumed that companies would need government-guaranteed war insurance to risk such a trade. But by June the difference between summer and winter prices had become so large that the gamble seemed worth it. Ukraine’s generous customs regime for short-term storage, combined with the promise that gas would not be requisitioned under martial law, provided an additional incentive for traders. The resulting trade helped the EU‘s reserves have been full all winter, suppressing gas prices across the continent. It also generated healthy profits for the companies involved. Akos Losz of Columbia University estimates that traders made up to $300 million from the piece.
Now the trade looks like a test run for Europe’s future energy strategy. Ukraine is home to the continent’s second largest gas storage capacity after Russia, with a total of almost 33 billion cubic meters. It has more storage space than major economies such as Germany, which has about 24 billion cubic meters, dwarfing that of neighboring Poland by a factor of ten. Because these facilities were largely developed as part of the Soviet Union’s energy infrastructure, they far exceed Ukraine’s domestic needs. Both EU and the Ukrainian government is eager to put them to work. Denys Shmyhal, Ukraine’s prime minister, has said he wants to make his country the “gas safe” of Europe. Naftogaz, a state-owned energy company, has offered up to half of its storage space to European energy companies. Traders are now poised to repeat last year’s trading with higher volumes this spring, starting with an earlier date.
The companies involved in the trade have kept quiet, partly for security reasons. Trafigura, a commodities giant, is the only one whose involvement has been confirmed, but Naftogaz reports that more than 100 European companies have used its warehouses. According to Natasha Fielding of Argus Media, an energy information company, this includes “large energy companies with trading desks and smaller, local utilities in Eastern Europe”. According to her, the latter could benefit most from the scheme. Countries such as Moldova and Slovakia not only do not have significant storage capacity of their own, but also remain heavily dependent on Russian gas, which continues to be supplied via Ukraine under a long-term transit agreement that expires in December.
Although Europe’s energy problems have become less acute, storage offers protection against future disruptions. Ukraine is also looking to the future. The country still receives up to $1.5 billion a year from Russian companies, which use its pipelines to supply gas under the existing transit agreement. Once that agreement expires, the government plans to make up part of the shortfall with storage fees paid by Western companies. There is another consideration for Ukraine’s leaders. The more they can integrate their country’s energy industry with European markets, the more they will invest EU will be in their defense. At a time when support from their allies seems shaky, that’s worth quite a bit. ■
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