War Zone Treasury
Ukraine is to become a gas storage facility for the EU
By Hannes Vogel
06/21/2023, 2:24 p.m
The gas storage facilities in the EU are almost full. That’s why Brussels now wants to create a strategic gas reserve in Ukraine – even if bombs and rockets are flying there. Because Europe’s energy supply will face another endurance test in the coming year at the latest.
Until recently, hardly anyone would have thought that the European public would one day be interested in this collection of pipes and pumps, which is hidden in the forest about 100 kilometers east of the Polish border, near the small Ukrainian village of Bilche. But what is slumbering hundreds of meters underground in an empty gas field could soon become the EU’s treasury: Europe’s largest gas storage facility, 17 billion cubic meters in size. For comparison: Germany’s largest storage facility holds almost 4 billion cubic meters.
The EU countries are currently in an unusual situation: the gas market is not lacking but oversupply, especially of LPG. The storage facilities in this country are now so full that there will soon be no more space. According to Bloomberg, the investments could reach their limits as early as September. Brussels therefore has a plan to prepare itself for a possible gas crisis in winter: to store it in Ukraine, in the middle of the war zone.
Because while the local storage facilities are already around 74 percent full according to the Association of European Gas Transmission Operators (ENTSOG), and in Germany even around 79 percent, there is still plenty of room in the Ukraine. Here the fill level is just under 20 percent. The state-owned Ukrainian gas company Naftogaz operates a total of 12 underground storage facilities like the one in Bilche. According to the Gas Infrastructure Europe (GIE) industry association, the country has the largest storage capacities in all of Europe with 320 terawatt hours – significantly larger than the storage facilities in Germany (250 terawatt hours), Italy (195 terawatt hours), the Netherlands (142 terawatt hours) or France (131 terawatt hours).
Treasury in the middle of a war zone
Naftogaz intends to make a third of this available to EU countries. This would increase Europe’s storage capacity by almost ten percent. Due to Ukraine’s historical role as a transit country for Russian gas, the storage facilities are logistically well connected and easily accessible from the EU. In addition, Naftogaz offers a low fixed price for storage.
But because insurance companies are currently giving Ukraine a wide berth in view of the war, gas traders have so far stayed away. Because even if 80 percent of the storage facilities are kilometers deep underground and on the western border with Poland, where relatively few Russian rockets, cruise missiles and drones hit: A gas storage facility in an active war zone remains a high-risk target.
State risk guarantees are therefore crucial. According to the “Financial Times”, the EU Commission is already holding talks with banks such as the European Bank for Reconstruction and Development (EBRD). The FT quoted a commission official as saying that it is talking to governments and financial institutions to achieve “adequate insurance coverage” and “lower risk premiums related to the situation in Ukraine”.
The crash test for the gas market is coming in 2024
The deposits in Ukraine would be a welcome strategic reserve for the winter. Because even if the filling levels are already higher than ever: unusually low temperatures, higher demand in the Far East or delivery problems in the USA or Qatar could quickly make the supply situation critical again. “In my opinion, we’re not done yet,” Economics Minister Robert Habeck warned last week. Researchers from Columbia University recently warned: “The underutilized and rapidly available storage capacities” in Ukraine represent a “unique opportunity for Europe to postpone its current – but temporary – gas surplus into the winter and further into the future”.
After the end of the coming heating season, there are even greater risks for the gas supply. Because the transit agreement between Ukraine and Russia on the transit of gas to Europe expires at the end of 2024. It is theoretically conceivable that it will be extended again. But in the current state of war between Moscow and Kiev, that seems almost impossible.
From the beginning of 2025 at the latest, no more Russian gas should flow to Europe via Ukraine – and the EU will then have to supply itself without the Kremlin. And at the same time guarantee the security of supply for the Eastern European countries that are still dependent on Moscow’s drip. An additional security buffer could help – even if it is stored in Ukraine.
It will also have to be completely repositioned by then. The billions in gas transit fees have so far been one of Kiev’s most important sources of income – and will very likely disappear from 2025. The use of Ukrainian storage facilities by European gas traders could replace part of the income and help stabilize the Ukrainian state budget. The pipes and pumps in the forests of Bilche are therefore of vital interest to both Brussels and Kiev – and are likely to inevitably deepen relations between the EU and Ukraine.