EU-Ukraine Energy Nexus: A Storage Solution Amidst Capacity Crunch

Author: Ricardo Goulart                                                                                                                                                                 15 November 2024

The impending gas storage capacity crisis in the European Union (EU) has brought Ukraine into the spotlight as an alternative hub for storing excess gas reserves. This unfolding scenario not only underscores Ukraine's strategic significance but also has broad economic and energy security implications for the EU. This report examines the economic rationale behind this pivot, compares the gas storage infrastructures, and explores the impact on energy prices and security within the EU. 

Economic Implications: 

The near-capacity scenario in the EU has led to a strategic turn towards Ukraine's gas storage facilities. Ukraine’s state-owned energy company, Naftogaz, has offered over 10 bcm of its around 30 bcm capacity to foreign entities, primarily in the country’s west. The transition has seen an uptick in the number of non-Ukrainian companies injecting gas into Ukraine, growing from four in 2021 to 19 in 2022. Moreover, the alignment of Ukraine's regulatory framework with the EU in 2020 has reduced tariffs and customs, lowering the warehousing costs for EU-based traders. 

Ukraine's Gas Storage Infrastructure and Capacity: 

Ukraine boasts the largest gas storage capacity in Europe, with facilities that can store up to 31 billion cubic meters (bcm) of gas, constructed during the Soviet era to support Russian gas deliveries to European markets. The EU, on the other hand, can store around 1,040 TeraWatt hours (TWh) of gas. Ukraine's gas storage capacity, largely underutilized in recent years, represents just under 80% of all gas storage capacity outside the EU and about 21% of all of Europe’s storage capacity. In contrast, the EU has a significant gas storage capacity of 161 bcm, with Germany having the largest individual storage capacity followed by Italy​​. 

Impact on Energy Prices and Energy Security: 

The strategic use of Ukraine's gas storage facilities comes at a time when the EU’s natural gas reserves are almost completely depleted, and its energy corporations are storing extra gas in Ukraine in anticipation of the winter season's high demand. The EU and member states have introduced several emergency measures, including binding EU-wide targets to fill gas storage 80% before winter. By reducing electricity demand by 5% at peak times, the EU aims to reduce gas use for power by around 4% over the winter and reduce pressure on prices. The move towards utilizing Ukraine's underused gas storage capacity also helps in maintaining a steady supply of gas, thereby contributing to energy security within the EU​​. 

Conclusion: 

The EU’s strategic pivot to utilize Ukraine’s gas storage facilities underpins a pragmatic approach to averting a gas storage capacity crunch and ensuring energy security. It also highlights the burgeoning EU-Ukraine energy nexus, which is poised to play a pivotal role in stabilizing energy prices and ensuring a steady gas supply during peak demand periods. The economic, infrastructural, and energy security aspects of this pivot elucidate the multi-faceted benefits and the potential for a long-term collaborative framework between the EU and Ukraine in the energy domain.