Europe risks winter cold with little control over hoarded gas

(Bloomberg) — Europe has worked hard to fill natural gas reserves for the winter, but the inconvenient truth is that national governments have little or no control over those supplies.

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According to data compiled by Bloomberg, only around 10% of the gas in Italy’s storage facilities in the Netherlands is under the direct control of public officials through national strategic reserves.

The rest is in the hands of international trading companies, energy services and industry groups, and companies are free to sell to the highest bidder, even if it’s in another country. That means a cold spell in Germany could spark a gas race among its neighbors and strain Europe’s solidarity in the process.

The region’s gas network is supposed to work by allowing supplies to flow between markets. As long as there is enough fuel in the system, it should balance out. But it didn’t work in a scenario like the current crisis.

“The practicalities of the system have never really been tested before,” said Graham Freedman, an analyst at consultancy Wood Mackenzie. “A lot will depend on how severe this winter is.”

If it’s cold, stocks could drop below 10% by the end of March, according to Freedman. This could trigger another rush for supplies before next winter.

While Europe lacks transparent data on who owns the stored gas, most of it is owned by utilities, including state-owned companies, which will have to withdraw fuel to supply households and manufacturers, according to people familiar with the case.

A smaller amount is in the hands of trading companies like Glencore Plc and Vitol Group, whose main interest is to maximize the value of their portfolios. They are relatively minor players due to the high costs involved and the new regulations have added more barriers, said the people, who asked not to be identified because the information is private. Glencore, Vitol and Trafigura Group declined to comment.

“Physical gas storage can be part of a broader asset-backed strategy” for private trading firms, said Alun Davies, senior director of European power and gas at S&P Global, adding that traders Pure fuels generally provide liquidity rather than absorbing resources into large fuel reserves.

Worries over winter supplies have gripped the region for months, spurring efforts to hoard gas – reserves are now near full and above the five-year average.

But to avoid supply risks, governments could seek to declare a state of emergency. In such a case, the German Federal Network Agency – like other national authorities – says it would have the power to order whether the gas remains stored or is withdrawn. A crackdown could leave neighbors alone to deal with shortages.

Germany is dependent on the others because its storage only covers 25% of annual demand. Poland is also on fragile ground. The fifth most populous country in the European Union with 38 million inhabitants has a lower capacity than Slovakia, which has only 5.5 million inhabitants.

If the system works, prices rise where demand is more acute, and as flows shift to higher-priced markets, rates in countries where gas reserves are depleted should rise accordingly, according to Niek van Kouteren, a senior trader at Dutch Energy. company PZEM NV.

“Let’s see how efficient the market is,” he said.

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Price distortions are likely in the coming months with drastically reduced supplies from Russia, which covered 40% of demand last year. This raises the prospect of gas flowing from market to market, with freezing temperatures in larger markets like Germany and Poland potentially squeezing out supplies from Italy, Austria or the -Down.

Despite Europe’s largest storage capacity, Germany has historically dipped into Austria’s reserves to help Europe’s biggest economy run factories and heat homes – nearly half of it is burning fuel. gas for heating.

Austria tends to operate as a supplier in winter, with more than two-thirds of its storage capacity typically available to other countries. The Czech Republic and Hungary also have more capacity than needed for domestic use.

“Europe stands together,” German Chancellor Olaf Scholz said Thursday during a speech to parliament in Berlin. “As a country, we have assured with the measures of the last weeks and months that we can say with confidence: Together we will get through this winter.”

The risk of private ownership of stored gas was evident in July when Uniper SE, Germany’s biggest buyer of Russian gas, pulled supplies from storage to serve customers after Russia cut deliveries.

This move ran counter to the government’s desire to fill reserves and pressure Scholz’s administration to give the company more money. Uniper is currently being nationalized.

Governments are also stepping up efforts to contain disruption this winter by regulating withdrawals and building up reserves. Germany has passed legislation that sets targets for gas storage. It has already reached the 95% target for November 1 and imposes a level of 40% by February 1. Facility operators risk penalties if they fail to do so.

Scholz’s government also granted 15 billion euros ($14.7 billion) to Trading Hub Europe, the company that manages the German gas market, to buy fuel for storage. The group bought about 60 terawatt hours of gas, or about 25% of Germany’s storage capacity, which could be considered state-controlled.

“The German government is now sitting on a huge amount of gas to use when needed during the winter,” said Sebastian Bleschke, chief executive of national gas storage association Ines. “But most of the country’s stocks are in the markets and could go anywhere.”

Governments expect cross-border flows to remain an essential part of the European energy market. “There is no concern” about the risks of gas withdrawal from Italian storage sites and use by other countries, said a spokesperson for the Italian Ministry of Ecological Transition.

But the crisis has prompted a closer look at storage, and some countries have expressed the need to increase capacity to cope with future crises. The 2023-24 winter “could be worse than the current one,” said Claudio Descalzi, chief executive of Italian energy giant Eni SpA.

“It is right to jointly fill part of the capacity of European gas storage facilities next year,” Scholz told lawmakers ahead of an EU summit in Brussels. “With the Trading Hub Europe model, we have shown how this can be done.”

–With help from Petra Sorge.

(Updates with comments from the German Chancellor)

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