July ’21 gas prices rise as Gazprom opts not to book additional Ukraine capacity

LONDON (ICIS)–Russian producer Gazprom has opted not to book additional interruptible capacity via Ukraine for July despite maintenance works on alternative Russian routes scheduled for July.

The Ukrainian gas grid operator GTSO had offered 63.7 million cubic metres (mcm)/day of July interruptible capacity at the Sudzha interconnection point with Russia on the Hungary-based RBP auctions platform.

The result of the auction was published on the Hungarian RBP platform on Tuesday at 12:00 CET. The indication that no interruptible capacity had been booked sparked an immediate price rally.

ICIS trade data showed that the Dutch gas TTF July ’21 contract rose to €33.66/MWh following the announcement. The contract ticked lower immediately afterwards and was trading at €33.30/MWh by 12:20 CET. This compares with Monday when the ICIS TTF July ’21 contract was assessed at €32.25/MWh.

The German July ’21 Baseload price was also pushed up in early afternoon, trading at €83.85/MWh, an €.1.50/MWh gain on the previous day’s closing level.

The price was largely lifted by the rise in gas prices as well as emission values which increased to €55.95/tCO2e by 14:30 CET, nearing its highest ever settlement.

Some traders were expecting Gazprom to book extra interruptible capacity via Ukraine as the Nord Stream 1 pipeline that links Russia to Germany will undergo maintenance between 13-23 July 2021.

Gazprom also announced on 28 June that flows via the Yamal pipeline via Belarus and Poland would also be suspended between 6-10 July as the pipeline would undergo maintenance.

Meanwhile, maintenance on the TurkStream pipeline which carries Russian gas to Turkey and south-eastern Europe which was scheduled for 12-27 July has been postponed until the new gas year 2021/22.

UKRAINE CAPACITY

Under its long-term contract with Ukraine, Gazprom is expected to transit 40 billion cubic metres of gas annually between 2021 and 2024, which amounts to 109.6mcm/day over this period. It may use two points on the Ukraine-Russia border, Sudzha and Sokhranivka, to ship the gas into Europe through Ukraine. This year, Gazprom has been shipping around 72mcm/day at Sudzha and another 37.6mcm/day at Sokhranivka.

Gazprom has also booked around 15mcm/day of additional monthly firm capacity at Sudzha this year, except in January when it booked and paid for 41.6mcm/day.

Since April, GTSO has offered additional interruptible monthly capacity of 63.7mcm/day but Gazprom has opted not to book any, ramping up flows to record levels via its existing Nord Stream 1 pipeline linking Russia to Germany via the Baltic Sea.

Some companies suggested GTSO could have offered firm, rather than interruptible capacity.

GTSO had offered 41.6mcmd/day of firm capacity at the Sudzha border point in January. Although Gazprom booked and paid for this capacity, it only used 15mcm/day during that month.

In mid-April 2021 Gazprom booked all the 15mcm/day of May capacity at the Sudzha border point.

This allowed GTSO to offer an additional 63.7 mcm/day of interruptible capacity for that month.

Furthermore, under existing regulations, a gas grid operator cannot offer higher firm capacities without the consent of adjacent TSO, which in this case is Gazprom itself.

If an operator allocates higher firm capacity and this cannot be used because the other operator failed to grant consent, the allocating TSO may be liable to pay penalties.

Some market sources have also suggested that transit via Ukraine was more expensive than via Nord Stream 1.

Gazprom currently pays $16.01/1000m3 (€0.446/MWh) for Sudzha capacity, irrespective whether it is firm or interruptible.

It is more expensive than the entry price paid for gas imported from neighbouring European countries – Hungary, Poland and Slovakia – but that is simply dictated by the fact that the latter is an altogether different product.

Russia pays for long-haul transit which exceeds 1,200km while EU countries pay for short-haul, which stretches only several hundred kilometres.

Even so, Gazprom has been maximising its profits in recent months, making exceptionally attractive margins.

Gazprom’s costs to produce and transit gas to Europe is now less than $4.00/MMBTu, which means Gazprom’s current margins are somewhere around $6.00/MMBTu, if assuming hub prices of around $10.00/MMBTu. Gazprom’s margins may have small variations depending on whether the company exports gas via Ukraine, Nord Stream 1 or the Yamal pipeline across Belarus and Poland.