Gas prices in Europe surpasse $800 per 1,000 cubic meters: What does it mean for Ukraine?

Author : Olena Holubeva

Source : 112 Ukraine

The price of natural gas in Europe has renewed a record, exceeding $ 800 per 1,000 cubic meters
10:01, 15 September 2021

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Since the beginning of the year, blue fuel has risen in price by 200%, and this is not the limit. Following the European ones, gas prices in Ukraine have almost doubled since spring. Now they reach 0,8 USD / cu. m. and although Ukrainians for individual needs are protected from rising prices by annual contracts, heating tariffs in the country may rise this winter. Kyiv gave the right to set tariffs on a far-off basis to local authorities, and those simply do not have the money to subsidize the difference in prices.

Related: Ukraine agrees with Gazprom on 45 bullion cubic meters of gas transit after 2024

Why the rise in gas prices in Europe will continue

The rise in energy prices in Europe amply demonstrated that the well-being of even the richest countries in the world continues to depend on fossil fuels. European Central Bank President Christine Lagarde has named energy markets as one of the main drivers of inflation in Europe. Since August, the spot price for blue fuel in the EU has jumped by 40%. Since the beginning of the year, the growth was 200%. During today's trading, the record price has been updated, exceeding $ 800 per 1,000 cubic meters.

Analysts say with confidence that the current rise in prices is not yet the limit. Underground gas storage facilities in Europe are less than 70% full, which is 16% less than the average for the last five years. And this is at a time when no more than a month remains before the heating season and the start of active selection. The main volumes of LNG, liquefied gas, which in a different scenario could "bring down" prices, are bought up by Asian countries. Gas prices there are even higher than in Europe.

Related: Nord Stream 2: Merkel in Warsaw reaffirmed support for Ukraine's role as gas transit country

Experts say that the further situation will be sensitively correlated with thermometer readings. The stronger the freeze, the higher the prices. US State Department senior energy adviser Amos Hochstein has already warned that Europe could face gas shortages this winter. In practice, this means that we will have to forget about low prices for natural gas for the time being.

It is possible that prices in Europe could stabilize after the launch of Nord Stream 2, but it will definitely not start working until the certification process is completed. In the meantime, Gazprom is in no hurry to increase the volume of pumping through the Ukrainian GTS. "Given the significant demand for gas in Europe, we have constantly offered and continue to offer additional capacity - 15 million cubic meters per day and intermittent 63 million cubic meters per day. However, the Russian side refuses to increase gas supplies to the EU. After the accident at the plant in Novy Urengoy, the Yamal gas pipeline worked unstably and with low capacity, which also does not help to ease the situation and reduce or stabilize gas prices in Europe.

Ukraine’s gas prices

Ukraine traditionally imports about a third of the total annual gas demand and is guided by import parity. Note that even the price of rent for mining companies in the country is tied to parity - the price of gas at European hubs. But the big problem is that there is no single price for gas that everyone would be guided by - price indicative - in Ukraine. And this is a big problem.

"If you ask how much gas costs in Ukraine, I can tell you five or six indicators from which we can proceed when calculating: state-regulated price, import parity price, price of direct contracts, the price at which gas is bought by the operator of the gas transmission system," the executive director of the Association of Gas Production Companies Artem Petrenko notes.

Market participants have repeatedly complained that the bulk of gas in Ukraine is sold "by phone or in chats." This is an opaque and incomprehensible process to the uninitiated.

According to ExPro Consulting, Ukraine has not yet caught up with Europe in terms of prices. On our market, gas is traded on average at 110 USD cheaper. But this is a crazy increase in comparison with 400 USD per 1,000 cubic meters in May – an increase of more than two times/

Annual contracts for the population

Most of the population consuming gas on the burner and for autonomous heating of premises is still relatively protected by annual contracts, to which they were automatically transferred. The average price under such contracts is up to 0,34 USD per cubic meter, excluding delivery. Low prices of 0,6 USD are offered by gas sales companies "Your Gas Sales", working with trader "Ye Energia" (received from Naftogaz the largest contract with a preferential price), and "Naftogaz" -  0,3 USD / cubic meter.

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Those unfortunate enough to be clients of these companies have to pay a lot more. For example, the price tag of the annual contract from the Chernivtsi, Zhytomyr and Kherson energy supply companies reaches 0,49 USD per cubic meter.

Related: Accumulated gas reserves in underground storage facilities reached 19 bcm,- Naftogaz CEO

Heat workers can still raise tariffs

The heat situation this year is much more complicated. Previously, residents of high-rise buildings paid for heat in their apartments much less than the owners of private houses that heat them with gas, for which the free market began even before the heating season of last year. But starting from May 20 of this year, Naftogaz's obligation to sell gas to thermal workers at a reduced price was also canceled. With current gas prices in Ukraine 20-22 UAH per cubic meter, they would have to increase tariffs for heat at least 2-3 times, Deputy Executive Director of the Association of Ukrainian Cities Yaroslav Raboshuk told.

To soften the increase, Naftogaz offered TKE enterprises to buy gas from it on preferential terms. The Association of Cities says that the large thermal workers, despite the favorable picture drawn by the Naftogaz, have not yet signed draconian agreements (100% prepayment is required, fines are stipulated) with it.

Related: State Department warns of gas shortages threat in Europe this winter due to Russia’s actions - Financial Times

A meeting was held at the Association last week, and all the heads of the cities who took part in it were deeply moved. An appeal to the government has been approved so that there are normal contracts that can be fulfilled with the NJSC for the supply of natural gas. And also the heads of the cities ask that appropriate compensators be used if we take a political position - not to raise tariffs. "Those compensators that are already involved (the work of the commissions), in theory, will close the problems of the past years - from 2015 to 2021. But the thermal workers are concerned about the issue of not getting out of the 2021/2022 season with new debts. pressure and the requirement not to raise tariffs - the question should be clearly answered, who in this case will pay for it?

Related: Gas price in Europe exceeds $800

Kyivteploenergo announced an increase in heat tariffs by 30-40%, but it is in no hurry to introduce the tariff. The municipal company is suing Ukrgasvydobuvannya, demanding to conclude a direct contract for the purchase and sale of domestically produced gas. Kyivteploenergo is seeking through the court the opportunity to conclude an agreement for 0,15 USD / cu m of gas, which, if successful, will allow not only not to increase, but also to lower the tariff. Heat generating companies throughout Ukraine are actively watching the trial, as they expect to create a precedent, following which they will be able to achieve a similar right.

In the most difficult situation, today are houses that have abandoned centralized heating and installed their own adjoining houses or boiler rooms on the roof. They refused to equate their users with the population and transfer them to annual contracts with a fixed price. The owners are forced to purchase gas for boiler houses at market prices, which is why residents of the houses attached to them are already paying 10 USD per cubic meter of hot water (for comparison, Kyivteploenergo has 3,3 USD / cubic meter), Tetiana Boyko, coordinator of housing and utilities and energy programs of the Opora public network, told The authorities are aware of the problem, but so far they are not doing anything to solve it.

Related: Price on gas for Ukrainian population to remain unchanged until May 2022, - PM

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