European gas traders avoid storage in Ukraine after Russian attacks

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European traders this summer are tapping only a fraction of Ukraine’s vast natural gas reserves, following Russian attacks that have increased risks, depriving the war-torn country of limited revenue.

Ukraine has Europe’s largest underground storage and last year gave EU companies valuable space to park their excess gas ahead of winter.

But after a Russian offensive in the spring attacked Ukraine’s energy infrastructure, including pumping facilities for gas storage, European volumes in June and July fell to just a tenth of what was stored in the same period last year.

“Persistent Russian attacks on Ukrainian deposits increase the risk of gas storage,” said Marco Saalfrank, head of trading for continental Europe at energy group Axpo.

Gas storage facilities in the EU can hold a maximum of around 100 billion cubic meters of natural gas, compared to annual bulk demand of between 350 and 500 billion cubic meters, depending on weather and other conditions.

Ukraine provided about 10 billion cubic meters of additional storage capacity last year, and European entities stored more than 2 billion cubic meters ahead of the winter months as the country offered incentives such as cheap storage tariffs.

But there has been little injection this year, even with EU storage units 86% full – the highest level this year, according to Gas Infrastructure Europe.

European companies shipped just 15.4 million cubic meters and 51.9 million cubic meters in June and July, compared with 102.7 million cubic meters and 586.6 million cubic meters in those months last year, the data showed from Argus.

While actual gas tanks are located deep underground, keeping them safe from shocks, damage to the above-ground facilities used to pump the gas out of storage is a material risk that traders worry about.

“The main problem is not the loss of gas, but the inability to withdraw it when wanted and needed,” Axpo’s Saalfrank said.

State energy company Naftogaz said “several attacks” had taken place in March and April on above-ground infrastructure and that repairs had been carried out. “There are no problems, we are operating as usual” in terms of gas injection and withdrawal, said Oleksiy Chernyshov, CEO of Naftogaz.

Ukraine wants European traders to keep using its gas infrastructure, in part because it brings valuable revenue to its war-torn economy. However, “unless there is an additional incentive to park gas in Ukraine, it’s hard to see” how European traders will come back, said Natasha Fielding, head of European gas prices at Argus.

Last year, the EU held talks with banks about providing insurance to cover the risks, but these have since disappeared.

A senior EU official said the increased attacks made such considerations difficult. Ukraine could earn about 200 million euros from European traders storing gas, but the counter-guarantee should reach 1 billion euros, the official said.

“If you want to support Ukraine, just give them 1 billion euros,” the official said.

Last year’s profitable price differentials have also disappeared.

The accumulation of gas in Ukraine’s warehouses accelerates in the summer months, when gas prices are cheap compared to other seasons. Traders then sell it when prices rise for a profit, usually in the winter months when heating demand increases demand for natural gas.

Last year, the difference was often more than 20 euros per megawatt hour during the summer, but this year it was only around 5 euros/MWh, according to Argus, a price reporting agency.

“The price differentials are not attractive enough to justify the risk of injecting gas into a war zone,” Axpo’s Saalfrank said.