Last autumn’s gas price spike – preceding Russia’s invasion of Ukraine – meant that European gas storage levels were unusually low at the start of last winter’s heating season. Over the course of the winter, stocks were dangerously close to dropping to the lowest ever level, but mild weather helped avoid a catastrophic scenario. Fast forward a few months, the energy crisis has worsened with retaliations against Russia for its invasion of Ukraine threatening to spiral into a full-blown gas supply disaster. 

Russia provides more than 40% of European gas needs, a dependence which the European Union (EU) has now vowed to cut by two thirds by the end of this year. 

Although European countries are investing heavily in renewable energy in a bid to cut carbon emissions by at least 55% below 1990 levels by the end of this decade, various EU member states, such as Germany and Slovakia, have thrown their weight behind natural gas as a bridging fuel. The European Commission (EC) has even proposed labelling certain gas-fired power plants as ‘green’ in order to qualify for sustainable financing. These signals show that gas will remain an integral part of Europe’s future energy landscape.

In this context, filling gas storage levels appropriately will remain crucial to shielding gas users from potential supply cuts in the demand-intense winter months. In a typical winter, gas storage facilities provide 25–30% of EU gas demand. The EC has proposed the EU’s gas storage levels be filled to a minimum of 80% by 1 November 2022, with the threshold rising to 90% in subsequent years. In comparison, EU gas storage sites were on average 77% full on 1 November 2021.

‘Europe needs to take swift action to ensure our energy supply for next winter, and to alleviate the pressure of high energy bills on our citizens and businesses,’ says EU Energy Commissioner Kadri Simson.

Gas storage laws

Various EU member states have already made legislative adjustments nationally to comply with the proposal. For example, Germany, which is home to Europe’s highest gas storage capacity, passed a fresh law at the end of March stipulating storage sites be filled 90% by 1 November 2022 and around 40% by February 2023. Other countries, such as France, Italy and Spain, have had mandatory minimum storage levels in place for years. 

‘As SSOs [Storage System Operators] have been [operating] under challenging conditions for several years, most member states have progressively introduced instruments at the national level. This has helped ensure the long-term sustainability of their storage markets while guaranteeing the security of supply and [has] led to various regimes across Europe,’ says a spokeswoman for Gas Infrastructure Europe, the continent’s association for gas infrastructure operators.

Looking at average filling rates over the past four years, the 80% threshold was quite comfortably met by 1 November, with the exception of 2020 which fell just short of that level. ‘It is therefore very likely we will hit this year’s target if we can stay close to any of the previous years’ injection profiles,’ comments Tony Jordan, Senior Partner at energy consultancy Auxilione. ‘One big point of difference, however, is that currently we are seeing summer prices at a higher value than the next winter, which would usually not be a good sign to inject,’ he adds. 

Filling gas storage levels appropriately will remain crucial to shielding gas users from potential supply cuts in the demand-intense winter months – in a typical winter, gas storage facilities provide 25–30% of EU gas demand.

The commercial incentive in storing gas lies in pocketing the profit margin between buying gas in summer, when prices are typically lower, and selling it in winter when higher demand supports gas prices. But the risk of Russian supply interruptions has now lifted this year’s summer prices above the contract for next winter, disincentivising the typical summer-winter spread trade. 

Traders selling gas on the benchmark European TTF gas hub in the Netherlands are currently (19 April 2022) offering August gas at €92.15/MWh, compared with the winter contract being offered at €89.80/MWh. If the summer-winter spread trade continues to be loss-making, governments will need to step in and give financial incentives which the market is lacking.

The EC’s recently passed temporary crisis framework allows EU member states to use state aid to support businesses affected by the Ukraine crisis. The body has also proposed that governments scrap transmission tariffs to inject and withdraw gas from storage sites in the current environment in order to reduce costs. 

‘The push for member states to devise alternative measures to encourage gas storage injection will be key for a sustainable mechanism that won’t be forcing traders and market participants to comply at additional costs to them,’ says Serge Mozadila Kiala, Head of Risk Management and Trading at The Monarch Partnership. 

The Dutch government, for example, has analysed how it could incentivise the filling of the Netherlands’ gas storage sites, the EU’s third largest after Germany and Italy. It has now announced it will compensate traders for the price difference between the gas purchased at storage and the gas sold in winter. ‘This allows the government to hedge the price risk to a certain extent,’ it said in a statement. It has set aside €623mn for this, a sum which it plans to recoup through levies on those gas users benefitting from ample gas storage.

In neighbouring Germany, the newly passed gas storage legislation also gives Trading Hub Europe (THE), Germany’s gas trading hub, powers to use state funds to purchase additional gas to fill storage in an emergency situation. ‘Market parties and companies need to be compensated for the risks they are taking in filling gas storages at the moment,’ says Lucia van Geuns, Strategic Energy Advisor at The Hague Centre for Strategic Studies. 

Gazprom keeps storage tanks empty

The EU’s struggle with Russian gas dependence is epitomised at a depleted gas field in north-west Holland – the Bergermeer gas storage, which is Europe’s largest open access gas storage site. Around 40% of Bergermeer’s 46 TWh storage capacity is booked by Russia’s Gazprom in exchange for the company providing the storage site’s cushion gas until 2045 to maintain appropriate pressure levels. 

The Russian gas giant made very little use of its capacity at Bergermeer last year, which meant that the site’s filling levels were low throughout winter and caught the Dutch government’s attention. Minister Jetten told Dutch parliament that it was ‘at the very least highly doubtful whether Gazprom will exercise its [storage] rights in the coming months’. The Russian state company has applied the same strategy at other gas storage sites in Austria and non-EU states where it owns capacity rights. 

The Dutch government has tasked state-owned oil and gas body EBN with ensuring that the Bergermeer facility is filled to 70% of capacity if market parties fail to do so.

In response, the EC has included a new mandatory certification scheme for gas storage infrastructure owners in its gas storage regulation proposal. Any operators not certified under the scheme will have to give up ownership and those wishing to close down facilities will now need authorisation from the national regulator.

Grijpskerk gas storage facility in the Netherlands

Photo: Gas Infrastructure Europe

Who will pay?

An additional hurdle which Europe is facing is establishing a fair system to spread the costs of incentivising traders to fill gas storage among EU member states. Some of the gas stored in facilities in one country will be exported into the European gas network, therefore allowing other countries to benefit from gas being stored elsewhere. The Dutch Minister for Climate and Energy Policy has estimated filling the Netherlands’ gas facilities appropriately before next winter could cost €6–7bn.

‘It will be difficult to compel a member state to sell storage to another country if the first member state claims it has the first right to use it for its own consumers,’ comments Leigh Hancher, Professor of European Energy Law at the Florence School of Regulation. 

The Dutch, Austrian and Hungarian governments have voiced concerns that they may have to bear a disproportionate amount of European gas storage costs linked to the EC’s 80% filling threshold by 1 November. The EC stipulates that any country purchasing gas stored in another country will have to comply with the usual obligations, or governments can put in place alternative mechanisms in order to share the costs evenly.

Russian gas for storage

As the continent is looking to reduce dependence on Russian energy, in reality gas consumers need Russian gas not least to replenish stocks ahead of next winter. The Oxford Institute for Energy Studies (OIES) estimates that relying on LNG imports, increased pipeline gas from Azerbaijan, North Africa and Norway, and higher biomethane production, as suggested by the EC in its seven-point plan to reduce dependence on Russia, is unlikely to provide enough alternative supplies to Gazprom’s gas.  

‘The medium-term impact of the efforts to reduce gas imports from Russia will likely be continued higher prices and higher volumes of European LNG imports throughout the 2020s than may otherwise have been the case,’ say the OIES analysts.