Ukraine's gas stocks can meet four months of demand

Mon Mar 3, 2014 10:14am EST

* 80 pct of Ukraine's storage sites are in its far west

* Healthy stocks, improved pipelines protect EU from potential supply cut

By Henning Gloystein

LONDON, March 3 (Reuters) - Ukraine's natural gas stocks can meet four months of demand should Russia cut supplies and most of reserves are in its west and far away from any potential Russian intervention, industry sources said.

Ukraine meets around half of its gas demand through imports from Russia, and it is also an important transit route for Russian gas to the European Union.

Moscow has in the past cut supplies to Ukraine when negotiating prices with Kiev, causing shortages in Ukraine and central Europe.

Russia's Gazprom said on Monday that gas transit to Europe via Ukraine was normal, but it warned that it might increase prices for Kiev after the first quarter, raising concerns that gas could be used for political leverage in the crisis.

To prepare for a potential disruption, Ukraine's gas transit monopoly Ukrtransgas has been increasing its gas imports from Russia in recent days, increasing its stocks which now stand at four months worth of supplies, several industry sources said.

Of Ukraine's 33 billion cubic metres (bcm) storage capacity, Gas Infrastructure Europe (GiE) data shows that around 80 percent is in its far west, so even in the case of a Russian intervention in Ukraine's predominantly Russian east, most storage assets would likely remain safe from seizure.

Analysts also say that a continuation of gas supplies was in the interest of all parties.

"Until a real war, I think that all sides (Russia, Europe and all parties in Ukraine) have a vested interest in flowing gas from Russia to Europe," said Thierry Bros, senior gas analyst at French bank Societe General.

"Russia needs the money from gas sales, Europe is 26 percent dependant on Russia for its gas consumption, and Ukraine need the money from the transit fees," he added.

In 2013 Russia exported 161.5 bcm of gas to Europe (European Union and Turkey), 86.1 bcm of it via Ukraine, although this volume has been declining as Russia seeks alternative routes to Europe, such as the Nord Stream pipeline through the Baltic Sea into Germany, or the Yamal pipeline that goes through Belarus and Poland, also into Germany.

Ukraine itself imported 28 bcm of gas for its own use from Russia in 2013, accounting for about half of its annual consumption of about 55 bcm.

SUPPLY RISK STILL LOOMS

In western Europe, a mild winter and improved infrastructure mean Europe is less reliant on Russian natural gas pumped through Ukraine than in past years, easing worries that the escalating crisis in Ukraine could hurt supplies.

Despite the improved situation, analysts warned that a renewed disruption would hit Europe hard.

"Risks for Europe exist always, that is why it should pursue even more diversification projects further and develop liquefied natural gas (LNG) markets and new connectors in central and southeastern European regions," said Anna Bulakh of the International Centre for Defence Studies.

"While Ukrainian gas is less important to Europe than it was half-a-decade ago, European gas markets still stand to strengthen considerably if Ukraine's transit is interrupted," Bernstein Research said on Monday in a research note.

Benchmark European gas prices already rose to a monthly high by the tension in Ukraine, although the mild winter means that overall price levels remain much lower than this time last year, when extreme cold pushed up demand across Europe and cause a supply shortage.