Ukraine’s gas storage system

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Ukraine’s gas market is changing fast. This transformation will impact the price and services offered to ordinary consumers, the development of domestic production and the country’s future energy landscape.

A joint project by the Kyiv Post and the Federation of Employers of the Oil and Gas Industry addresses these and other issues with the help of some of the best experts in the field – to determine what the future of Ukrainian energy will look like.

An asset for all of Europe

Winter is around the corner and hundreds of millions of Europeans are turning the temperature up. Making sure the heating works, a seemingly mundane task, requires a massive, international logistical exercise – with gas storage systems at its very heart.

Storage systems are the tools that allow to accumulate reserves to cover the winter months, but also provide insurance against potential surges in demand.

This point was painfully driven home in 2018, when the “Beast from the East”, a massive storm, hit the British Isles and drove gas prices to multi-decade highs. Britain’s Centrica had closed the country’s largest gas storage facility a year earlier, forcing a shift to pricy, last-minute liquified natural gas supplies from Qatar when the storms hit.

When the mercury drops and consumption goes up, tens of billions of cubic meters (bcm) of gas are needed to keep up with increased demand. But production cannot just be ramped up or down at the blink of an eye.

This puts Ukraine, with its vast storage capacity, into a unique position to be Europe’s reserves hub – as long the country builds on the latest transformations and modernizes its infrastructure.

A spokesperson for Vitol’s gas and power business development team, one of the key gas traders in EU, emphasizes: “Ukrainian GTS and UGS have a strategically attractive position in the European gas market with good access to interconnection points across Poland, Slovakia, and Hungary”.

A first year of independence

On January 1, 2020, Ukraine’s energy system made a great leap forward with the unbundling of its transmission system operator (TSO). This long-awaited step allowed Ukraine to comply with Europe’s Third Energy Package – a collection of laws aimed at increasing the efficiency of the energy market and creating a competitive single market for gas and electricity in the European Union.

Following the TSO unbundling, SSO of Ukraine focused on developing its gas storage business. The company is finishing its maiden gas injection season as an independent storage operator, demonstrating significant achievements.

SSO of Ukraine EU standards and persuade both local and international customers interested in storing their gas in Ukraine. The effective TSO unbundling and increased transparency of the Ukrainian gas market have made Ukraine’s underground facilities more attractive for the global players.

The results have been in line with the initial goals of the unbundling – the creation of new and competitive products for market players, most notably international ones.

Indeed, Ukraine now offers a customs warehouse mode – which provides storage for up to 3 years without incurring customs duties – as well as short-haul transmission, which entails gas transmission from cross-border entry points to the storage facilities themselves.

This is the first year that Ukraine’s gas storage system has been working as an independent operator. And the first injection season was successful. The highest level of gas stock and its third part is done by non-resident customers

Sergiy Pereloma

Europe’s huge underground asset

Ukraine’s vast storage facilities are not just an asset for the country itself, but rather for the entire continent.

The storage system is the world’s third biggest by capacity – behind only the United States and Russia – can store over 30 bcm. Not only is it the largest storage system in Europe, just by itself Ukraine accounts for more than a fifth of Europe’s total capacity.

This not only ensures the country’s energy security but also enables to offer storage capacity to EU customers – and Europe is certainly benefitting from that capacity.

At present, the underground storage is around 90% full, around 28.3 bcm, over a third of which or 10 bcm comes from customers coming from 21 countries, including the United States, Great Britain and France.

Impressively, this represents an almost fourfold increase compared to 2019, when foreign companies stored 2.5 bcm of their gas in Ukraine.

International interest has mostly been driven by a combination of compelling commercial offering, and particular conditions. As energy prices dropped this spring – driven down by a warmer winter and a coronavirus-induced economic slowdown – Europe’s storage capacity reached record highs.

Indeed, as of April 18, 2020, the continent’s storage facilities were 58% full – the highest ever recorded level for mid-April, according to Gas Infrastructure Europe, an industry association. Meanwhile, with gas volumes also historically high, Ukraine became an appealing place to keep additional reserves, with close to 15 bcm of capacity at the time.

But favourable conditions are only part of the story. “We made a lot of effort to become attractive and clear to our clients,” noted Sergiy Pereloma, Acting General Director of SSO of Ukraine.

As part of its improved list of services, the operator now publishes free capacity available for injection or withdrawal on a daily basis and applies best practice KYC (Know your customer) compliance procedures.

Combination of customs warehouse mode and short-haul transmission, which are mentioned above, enabled SSO of Ukraine to exploit the situation on the European gas market.

A spokesperson for Vitol’s is confident that Ukrainian UGS have seen success in 2020 due to internal changes (coming closed to the EU rules etc) as well as commercially attractive conditions: «the benefit of investment in the development of Ukrainian storage facilities and the introduction of short haul tariffs have created significant advantages for the SSO of Ukraine”.

Modernization needed

All signs point to a growing demand for Ukraine's facilities in coming years. Ukrainian payers are interested in storing reserves to secure gas supplies for households (and hedge against sharp market turns in price), while traders can use them both for storage and to wait for better market conditions – allowing them to see gas at a higher price.

Modernization is also a good way to avoid closures of facilities, noted Pereloma. In response to a question of Alice Casagni, deputy editor of the European Spot Gas Markets – ICIS, who noted that Ukraine’s facilities had seen great popularity over the summer but wondered if there were any planned closures – Pereloma answered:

This investment plan aims to cover compressor stations, telemechanics and communications systems, gas metering stations, as well as the storage facilities themselves.

But to be successful in the long-term, Ukraine also needs to invest in the modernization of the gas storage facilities. This is currently in SSO of Ukraine plans, as the company aims to reconstruct or upgrade various facilities – in 2020-2023, the company will invest UAN 5.8 billion to develop its facilities (a figure to rise up to 13.5 billion once investments all the way through 2029 are included).

“We want to work with the same capacity as we have today – and to update and modernize,” he emphasized, adding that as an independent operator SSO of Ukraine was not the owner of the assets and could not, from a regulatory perspective, bring them offline.

Part of the program includes measuring equipment, which will help Ukraine shift from cubic meters to heating usage, added Volodymyr Rudko, Chief Engineer of SSO of Ukraine. “Upgrading the underground storages will increase the confidence of our European partners,” he concluded.

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