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Energy security becomes an expensive pleasure

27 January 2023

Belogoryev Alexey M. Research and Development Director, Director of the Center for Energy strategic analysis and forecasting

Alexey Belogoryev, Deputy Principal Director on Energy Studies of the Institute for Energy and Finance, commented to the Energy Policy magazine on the economic problems of gas extraction and injection into UGSFs in EU countries in the current price conditions.

As Alexey Belogoryev notes, the economy of gas storage in Europe has always been based on a simple seasonal rule: store gas in the summer, buying it at low prices, and selling it in the winter at high prices. In 2022, this model failed not only in Germany, but also in most European countries, since price dynamics were more or less similar everywhere. Gas owners (they could be independent UGS operators, GTS operators or large energy companies) expected that average prices would be even higher in winter than in July-August, and there were significant prerequisites for this. No one in the summer could have predicted such warm weather conditions in October-November and from mid-December to mid-January, such a rapid decline in demand (on average in the EU - 20% to the five-year average) and that it would be possible to maintain such a stable supply of LNG. At the same time, the accumulation by November of reserves at a level above 95% of the nominal capacity of UGS facilities played a significant role in reducing prices in itself.

“Long-term storage of gas is, first of all, the withdrawal of working capital. But for many gas owners it is more profitable now to keep it until the next heating period, when, according to most forecasts, the average price level will be higher than this winter. In addition, the retention of large gas reserves (above 50%) by the end of the heating season means less need for its injection in April-September, which should reduce summer prices. This is also a direct interest of companies pumping gas into UGSFs. Therefore, gas has been pumped out of UGSFs in recent weeks for two main reasons: due to the physical deficit of the current balance of gas supply and demand in subregional/local markets and the need for gas owners to regain at least part of their working capital,” the expert says.

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