ICIS view: Ukraine should model Britain when gas runs short

The last week has seen the natural gas hubs of Europe stretched to their limits, assuming high prices are a fair measure of market tightness.

At Britain’s NBP, brokered within-day deals hit their highest prices since ICIS (nee Heren) began assessing the market back in the 1990s. The gas deficit warning issued by operator National Grid ultimately led to the system marginal price dealing just short of €192/MWh, breaking a record that had stood since 1997.

Extremely high prices traded throughout Europe’s other gas markets too. In the Netherlands operator GTS dealt an hourly TTF balancing contract for almost €546/MWh. Quickly the winter’s other major event, the explosion at Baumgarten during the closure of Forties that led the PSV to soar to €80/MWh, seemed relatively insignificant.

But after three days of attention primarily focused on northwest Europe, the week’s finale was left to Russia and Ukraine.

Few would have predicted that following a four-year legal battle, Gazprom would seek to cut its supply and transit ties with its Ukrainian counterpart and not deliver gas to Naftogaz ahead of the highest demand day of the year.

Gazprom was quick to assure its EU-based buyers their contracts would all be honoured and that no disruptions to them would occur. Other than on the prompt markets of the hubs to Ukraine’s immediate west – where Naftogaz was forced to go shopping to cover its missing Gazprom-gas – hub prices largely did not react.

While Britain’s gas deficit warning and Ukraine’s supply disruption are by no means fully comparable, there are basic similarities in a gas market struggling to cope when demand is high and supply is low.

Yet there the parallels end. For while Britain’s NBP – with its 25-year history and maturity – used the market to respond, the fledgling Ukrainian hub reverted to form.

While a trove of transparency data in Britain allowed any hub-watcher to gauge the system’s strain and provided the right signals for market participants to respond, there was – and continues to be – a distinct lack of information concerning the Ukrainian market.

To be clear, Ukrtransgaz does now provide some flow and production data, but with a two-day lag. National Grid by comparison updates some of its throughput data every few minutes.

Yet, if Ukraine would like EU market participants to actually become more active in their hub and potentially move their title transfer points to nodes such as Sudzha on the Russian border, then this near-black box of information must be overhauled.

It was clear to the British market shortly after the start of its gas day that the system was extremely tight and by issuing the warning National Grid was able to utilise certain market-based tools to deal with the situation.

In Ukraine, with no day-ahead or within-day supply/demand data available to demonstrate how the grid was coping with the loss of an expected 18 million cubic metres (mcm)/day, participants and observers alike were instead left only with emotive statements from Naftogaz, Ukrtransgaz and the ministry to guide them. No market participant wins in this situation. And consumers certainly do not.

In Britain, eye-wateringly high prices and the optionality for demand-side response meant the market did what it was designed to do: secure supply. National Grid and the participants in the market dealt with the squeeze and no one in the general population was inhibited.

In Ukraine, with its lack of transparency prohibiting market-based signals from shifting into gear, the energy ministry issued an order for gas-fired power plants to switch to fuel oil and for municipal institutions to close.

By directly impacting the general population with the forced closures of educational establishments the Ukrainian authorities leveraged what should have been a gas market event, into a national crisis.

Quite what demand should have been, or indeed became, remains unclear. Inferred demand – as no actual figure is published – suggests daily consumption peaked at almost 200mcm.

Storage site withdrawals peaked a day earlier at 116mcm, and on Sunday notionally held 31% of capacity. Yet here too insufficient data blurs the picture. Ukrainian data on stores include cushion volumes, masking the actual availability of flexible, commercial, supply.

A Ukrainian daily balancing market cannot come soon enough, coupled with the relevant powers for the grid operator – and not the ministry – to first provide the right incentives to deal with such events. As the market matures, competition grows and as price data becomes more transparent too, then security of supply is more likely to be protected and any future supply-demand mismatches mitigated.

But unless the Ukrainian gas market’s operation is de-politicised none of these developments will truly bring a liquid hub on the EU’s eastern flank. And if that is the case, the EU’s more active participants are particularly unlikely to want to take trade the market or take receipt of their Gazprom volumes at the hub. tom.marzec-manser@icis.com