Europe’s Swollen Gas Reserves Guard Against Repeat of ’06 Crisis

Photographer: Vincent Mundy/Bloomberg

An employee adjusts a valve wheel at the Bilche-Volytsko-Uherske underground gas storage site, operated by Ukrtransgaz, a unit of Ukraine's state energy company NAK Naftogaz Ukrainy, in Lviv, Ukraine. Close

An employee adjusts a valve wheel at the Bilche-Volytsko-Uherske underground gas... Read More

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Photographer: Vincent Mundy/Bloomberg

An employee adjusts a valve wheel at the Bilche-Volytsko-Uherske underground gas storage site, operated by Ukrtransgaz, a unit of Ukraine's state energy company NAK Naftogaz Ukrainy, in Lviv, Ukraine.

The European Union’s biggest gas inventories in three years are cushioning the region from Russian supply disruptions and helping avoid a repeat of previous crises when prices rose as much as fourfold.

OAO Gazprom (GAZP), Russia’s state-run gas company, cut supplies to Ukraine yesterday after a deadline for debt payment expired. The move echoed similar disputes that disrupted shipments to Europe during freezing weather in 2006 and 2009. Europe, dependent on Russian gas piped through Ukraine for about 15 percent of its needs, has tried since May 2 to broker a deal to maintain flows. European gas prices, which rallied the most since March yesterday, erased gains today.

Storage in the 28 member states was 65 percent full as of yesterday, the highest for this time of year since 2011, according to Brussels-based lobby group Gas Infrastructure Europe. U.K. prices, a regional benchmark, probably won’t gain more than 5.6 percent, assuming the cut lasts two weeks or less, Trevor Sikorski, an analyst at Energy Aspects Ltd., a consulting firm to the industry in London, said yesterday.

More on the Crisis in Ukraine:

“It doesn’t mean much yet for Europe because it’s the middle of the summer, gas supplies are relatively high,” Daragh McDowell, the senior Russia analyst at Maplecroft Ltd. in Bath, England, said yesterday by phone. “It’s not at the point where it’s really setting alarm bells in Europe.”

U.K. Market

U.K. front-month gas fell as much as 5.8 percent to 40.15 pence a therm ($6.81 per million British thermal units) today on the ICE Futures Europe exchange, before paring losses after a fire broke out on a gas transit pipeline in Ukraine. It’s too early to tell how that will affect exports, Gazprom spokesman Sergei Kupriyanov said today.

Prices closed 1.8 percent higher yesterday after jumping 8.8 percent intraday, the biggest gain since March 3, the first trading day after Russian President Vladimir Putin got approval from lawmakers to send troops into Ukraine’s Crimea region.

“We initially had a knee-jerk reaction in prices that was limited by the fact that European gas storage overall is quite high,” Harry Tchilinguirian, head of commodity markets strategy at BNP Paribas SA in London, said yesterday by e-mail. “Russia is still supplying gas through Ukraine to meet demand from European countries. As long as this remains the case, and these supplies do not become diverted to Ukraine, any further price reaction is likely to remain contained.”

Ukraine failed to pay a debt of more than $4.4 billion for Russian deliveries in November, December, April and May, Moscow-based Gazprom said yesterday. Russia cut flows to Ukraine and is providing only gas destined for the EU, Andriy Kobolyev, chief executive officer of energy company Naftogaz Ukrainy, said yesterday at a government meeting in Kiev.

No Options

“The positive side of the situation is that we have this conflict during the summer,” Kobolyev said in an interview on Bloomberg Television today. “There’s no other option for us on the table. If we do not resolve the issue right now, the Russians will do the same in December.”

Flows to at least 20 European countries were affected for almost two weeks in 2009 after talks between Russia and Ukraine collapsed. Gazprom accused Ukraine of siphoning off gas meant for the EU, a charge the nation denied. Storage sites in Ukraine were 42 percent full yesterday, according to GIE data. Ukraine can go “quite long” without signing another deal for gas supplies with Russia, Naftogaz’s Kobolyev said.

“Ukraine has enough gas in storage to draw for its own use for a few months, but will also have to conserve gas to supply eastern regions in particular, where they have less storage capacity,” Andrew Neff, an analyst at IHS Inc., said by e-mail yesterday. “Inevitably Gazprom will claim that Ukraine is taking gas from transit that is intended for European customers, and we’ve seen how this plays out before.”

Ukraine Storage

Current levels of about 14 billion cubic meters (494.2 billion cubic feet) in Ukraine’s storage will be sufficient to supply the country until the end of the year without imports from Russia, Alexey Grivach, deputy director of National Energy Security Fund, which advises international and national energy companies in Russia, said yesterday in an interview in Moscow.

Ukraine consumes 1.6 billion to 1.8 billion cubic meters a month in the non-heating season, and the country’s own production is 1.7 billion, he said. Demand jumps to as much as 7 billion a month in the winter, Grivach said.

“Ukraine domestic production and reverse supply from the European Union is sufficient to supply the summer demand but that is not going to be sufficient to fill the Ukrainian gas storage,” Laszlo Varro, head of the gas, coal and power division at the IEA, said today in an interview in Paris. “The current situation is not sustainable for Ukraine. The lasting solution is a contract-based, proper commercial relationship for Russian gas imports to Ukraine.”

Reversing Flows

Europe can also supply Ukraine by reversing flows to east from west. RWE AG (RWE), Germany’s second-biggest utility, started supplying Ukraine from Poland in April and volumes are still being delivered on the border between the two nations, said Michael Murphy, a spokesman at the company. Gas can also flow from other countries including Hungary and from Slovakia.

“It’s possible that all imports necessary to supply Ukrainian consumers can be replaced from Europe,” Kobolyev said. “It will be quite a complicated job if we do not find sufficient supplies in Europe. That’s why it’s crucial for us to resolve this situation.”

2005 Dispute

U.K. gas prices rose from 26.29 pence in June 2005 to as high as 116.3 pence in November that year on ICE as the dispute over prices between Russia and Ukraine dragged on. Russia cut supplies on Jan. 1, 2006.

Unlike in previous disputes, Europe can now avoid Ukraine and get some of its supplies via the Nord Stream pipeline connecting Russia and Germany through a link under the Baltic Sea. Gazprom said June 13 it was ready to increase flows through that route in case of disruptions.

Rebels who say they want to join Russia are clashing in eastern Ukraine with government forces, and 49 people died when the insurgents shot down a military plane on June 14. Russia has moved about 16,000 troops to Ukraine’s eastern frontier and has another 22,000 in Crimea, the Black Sea peninsula annexed by Putin, Andriy Parubiy, Ukraine’s National Security Council chief, told reporters in Kiev yesterday.

“The very limited price reaction shows confidence that the interruption in flows will be a short one,” Michael Hsueh, a London-based analyst at Deutsche Bank AG, said by e-mail yesterday. “Clearly, whether or not this turns out to be true is still to be decided, and the downing of the Ukrainian aircraft does not make things easier. I think all parties involved have a lot at stake.”

To contact the reporters on this story: Isis Almeida in London at ialmeida3@bloomberg.net; Anna Shiryaevskaya in London at ashiryaevska@bloomberg.net

To contact the editors responsible for this story: Lars Paulsson at lpaulsson@bloomberg.net Rob Verdonck, James Herron

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