Europe in a high-cost race to replenish its gas stocks

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LONDON/OSLO – Europe has started topping up depleted gas tanks to shore up supplies for the winter and hedge against possible disruptions to flows from Russia, but a skyrocketing market means the move could cost some 40 billion euros more than at last year’s prices.

Russia’s invasion of Ukraine has put a huge question mark over the stability of supply for economies and consumers in the region, with benchmark prices almost 300% higher than before. a year.

Russia typically supplies around 40% of EU gas but is now retaliating against EU sanctions – starting to cut supply and making it harder for member states to fill storage sites and ensure consumers can continue to heat their homes this winter if the gas taps in Moscow go out. .

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“Winter will be difficult without Russian gas. The key is to fill storage as much as possible over the summer,” Guy Smith, director of natural gas and LNG trading at Vattenfall, told Reuters.

The European Commission said immediate supply emergencies would take priority over filling storage, with the targets not applying if it declared an EU-wide or regional gas supply emergency. meaning that storage levels would be inadequate.

The possibility of major supply cuts increases, with Bulgaria and Poland already cut off from Russian gas and Ukraine cutting off Russian gas through a major transit point in Russian-controlled territory.

Some subsidiaries of major gas seller Gazprom Germania, which was placed under the supervision of Germany’s energy regulator earlier this year, are no longer receiving gas, while Russia’s Gazprom has said it will no longer be able to export gas via Poland via Yamal-Europe. pipeline.

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Stored gas typically accounts for around a quarter of the fuel used in Europe during the winter when demand is high.

As of May 10, European gas stocks were nearly 38% full, down from 26% on March 21, according to data from European Gas Infrastructure.

The European Commission has called on gas storage operators to fill sites to at least 80% by November 1 this year, but some gas-dependent member states have gone even further, Germany and Italy requiring storage to be 90% full by November 1.

Reaching these targets will not be cheap, with high prices meaning the amount of gas to be purchased will cost around 4 times what it would have cost at this time last year.

“Taking the end of April as a starting point, the total injections from the beginning of May to the end of October are to reach 52.5 billion cubic meters, which will cost approximately 58 billion euros (60.37 billion dollars) on the basis of ‘a price of around 105 euros/MWh,’ said Leon Izbicki, partner, European natural gas at Energy Aspects.

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The same amount of gas would have cost around €14 billion based on prices of around €25 per megawatt hour in May 2021. The higher costs mean governments will likely have to step in to provide incentives to ensure that stores are full, Izbicki said. .

“We have seen governments pave the way for such financial instruments, for example with the new German gas storage law…and the Italian gas storage decree with provisions for a contract for difference,” he said. he declared.

Filling Germany’s gas storage stocks alone would cost around 25 billion euros, RWE said.

Germany, Europe’s largest gas user, currently has inventories of around 39%, down from 26% on March 21.

“Storage levels have recovered quite well…there is a lot of caution being exercised by many counterparties to ensure they have enough inventory on hand. But they actually incur costs by filling up as fast as they can,” said Smith of Vattenfall.

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Vattenfall has a storage site in Germany near the Dutch border.

In the past, gas prices have generally been cheaper in the summer months than expected in the winter, providing an incentive to store gas when demand is low in the summer, with the prospect of selling at a much higher price. when demand peaks in winter. .

SUMMER GAS PREMIUM

Last year however, with prices surging as demand returned after COVID-19 restrictions were lifted, summer prices were higher than winter futures prices, leaving the market behind, making gas storage unprofitable and leaving European gas stocks more than five years old. low of the year last winter.

Quick prices this summer have for the most part continued to be higher than futures prices for the winter so far this year.

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Ongoing fears over Russian supply have kept near-term prices high, meaning governments need to step in to offer incentives to ensure storage sites are full.

German law allows Trading Hub Europe (THE), a gas market hub overseen by the country’s energy regulator, to use storage facilities that are empty or below stipulated fill levels to store its own purchases.

Current high gas prices and weak incentive to store gas could cause gas shippers to wait for government purchases to take effect, said Michael Kohl, managing director of RWE Gas Storage West.

“Maybe some traders think, let’s wait and see. Maybe if the government intervenes, why should I reserve at least as much storage capacity as before?” he said during a debate at the Flame conference in early May.

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Italy, which has inventories about 41% full, approved a contract for difference mechanism offering shippers price protection on the gas they buy to inject into storage, has struggled to attract gas in long-term storage auctions.

“We have seen evidence of low participation in storage auctions, with repeated low participation, for example in the Stogit gas storage capacity auction in Italy due to the current offset on the curve,” Izbicki said. ($1 = 0.9607 euros)

(Reporting by Susanna Twidale and Nora Buli, additional reporting by Stephen Jewkes in Milan, editing by Veronica Brown and David Evans)

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