GAS LNG 10 October, 2019 8:30 am   

Poland and Ukraine may profit from US LNG together

Ukraine is getting ready for the heating season and bracing itself for issues with gas deliveries from Russia. In the future Kiev and Warsaw may profit from re-exporting LNG and selling it across the EU. The Fifth Ukrainian Gas Forum in Kiev under our portal’s patronage has launched – writes Wojciech Jakóbik, editor in chief.

A gas crisis is the base scenario

The trilateral talks between the EC, Russia and Ukraine about future gas deliveries via Ukraine are to be held on 28 October. It is to be expected that Gazprom will try to delay them until the launch of Nord Stream 2, a pipeline that in theory would allow the company to deliver gas to the EU bypassing Ukraine. is covering this race against time, which will last at least until the end of the year when a long-term or a temporary contract will be signed. It remains to be seen whether the deal will guarantee permanent deliveries via Ukraine.

Our portal has been told by Naftogaz that the company has stored 20.5 bcm of gas, which is an increase by 4.2 bcm in comparison to the previous year. “Based on our calculations, this is sufficient to supply Ukrainian consumers even if Russia interrupts transit in 1Q2020. We have also secured supply of additional physical volumes in 1Q which will be delivered even if Russian gas is not shipped to the EU via Ukraine,” ensured Aliona Osmolovska, Naftogaz’s spokesperson. The company believes issues with gas supply will be a “base scenario” and assumes that significant amounts of gas in European storages accumulated by Gazprom and Russian traders are an indication that the plan will be implemented. “The same people have taps in their hands and excessive inventories of gas in European storages. We are concerned that their temptation to force a gas crisis and cash out might be too high,” Osmolovska explained.

Store in the summer to sell in the winter

On the other hand, there is a contract which on paper would allow Naftogaz to restart deliveries from Gazprom. Naftogaz’s spokesperson reminds that independent importers in Ukraine are allowed to act however they want, whereas her company has signed an agreement that requires it to buy 4 bcm of natural gas from Russia a year at the price of a gas hub in Germany. However, despite the fact that in February 2018 Naftogaz issued a prepayment, in March it turned out the gas had not been delivered. Gazprom explained it was caused by the “Beast from the East” cold spell. “No matter if it was a political decision by Russia’s leadership or not, Gazprom failed on its contractual obligations,” the spokesperson summed up. In her opinion to return to the Ukrainian market, Gazprom will have to compete against other suppliers and work to rebuild its reputation.

In the meantime the situation on the Ukrainian market has significantly changed. Poland’s PGNiG booked gas storage capacities. Naftogaz refused to comment on individual suppliers, but is “proud to see more foreign companies storing gas in Ukraine’s UGSs.” Thanks to buying cheap in 2019 and selling at higher prices in the 2019/2020 winter season the company will profit. “This summer Europe enjoyed an influx of cheap LNG. Exchange futures indicate that in the coming winter market gas prices may be 40-50% higher than in the summer. If this market pattern repeats itself in the coming few years, Ukraine and Poland have an exceptional opportunity to help Europeans pay less for gas in winter,” she explained. She was referring to LNG deliveries from Poland stored in Ukraine in the summer and then sold in the winter. “The joint project would include LNG shipped via Polish system to Ukrainian storages in the summer and then sold in the EU in the winter. Ukraine’s infrastructure is ready to accept as much as 5.3 bcm of gas a year from Poland starting from 1 January 2020. However, there is a bottleneck at the Tworzen-Pogorska Wola section of Polish transmission system; the project is expected to complete in 2021. Also, the Polish side might wish to expand the capacity of its LNG terminal, since some of gas shipped to Swinoujscie is needed to cover Polish consumption,” Osmolovska clarified, referring to the issue we have previously discussed on our portal.

“Ukraine is ready to offer up to 10 bcm of spare storage capacity to create the summer reserve for sale to the EU in winter,” explained our interlocutor. If the situation in Ukraine stabilizes and if the market situation remains favorable, i.e. the LNG prices in Europe continue to drop in the summer and go up in the winter, the gas cooperation between the two countries and the usage of gas storage facilities in Ukraine, may result in increased LNG sales from the terminal in Swinoujscie not only to Ukraine, but also to EU clients interested in the discount made possible by the summer price drop. This allows Poland to ignore the fact that its facilities can store up to 2.7 bcm of gas making them useless in such a market strategy, as they are mostly utilized to store gas in case of supply problems.

Poland-Ukraine-USA deal and a gas hub

It seems that the Poland-Ukraine-USA deal on LNG deliveries may lead to the implementation of a different project that Kiev and Warsaw had hoped for in the past, i.e. the establishment of a gas hub where Poland will buy gas via the Northern Gate projects and Ukraine’s storage and transmission infrastructure. If Gazprom fails to destabilize Ukraine, which to a large degree depends on the EU’s level of engagement in the trilateral talks and discussions on the future of Nord Stream 2, the plan may be successful. It remains to be seen whether Europeans will want to use Ukraine’s storage capacity. Kiev is still hoping the West will bankroll its investments in infrastructure.