In pursuit of the Netherlands: Will Ukraine establish a gas hub, and what is needed for that?
Is Europe ready to shift to alternative energy supply routes?
Creating a gas hub in Ukraine is one of the most debated topics related to the prospects of developing the domestic energy market and its integration with the European market.
Mind was looking into how much time might be needed to organise its functioning in the Ukrainian context, what problems hinder the implementation of such plans, and its overall role in gas trading.
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What is a gas hub? A hub is a point of wholesale trading of natural gas involving a significant number of market participants. It can be based on a specific physical object of gas infrastructure (such as a storage facility or a pipeline intersection) or exist as a virtual trading point.
At hubs, agreements can be made for both physical gas supply and transactions with derivative financial instruments (such as futures and options). Trading can take place over various periods, ranging from a day to several years.
Why are gas hubs necessary? By aiming to attract as many participants as possible, hubs stimulate competition, resulting in lower wholesale prices. According to the European Commission, the Netherlands, with its highly liquid TTF hub, records some of the lowest wholesale gas prices.
Why does Ukraine need a gas hub? The prerequisites for creating a gas hub in Ukraine include the presence of underground gas storage facilities, a developed gas transportation infrastructure, a favourable geographic location, and sufficient natural gas resources.
According to experts' estimates, if the Ukrainian gas hub starts operating in 2025, by 2030 the price of natural gas in Ukraine will correspond to the formula "European hub prices minus transportation costs." This means it will take about five years to achieve its liquidity.
The functioning of the Ukrainian gas hub will open new opportunities for the recovery and strengthening of the national economy. Primarily, this will be achieved by establishing a fair price for natural gas for all consumer categories, preserving the volume of transit operations for the gas transportation system, attracting investments in Ukrainian gas extraction, and boosting overall business activity.
What needs to be done for such a hub to work? The creation of a gas hub is impossible without a competitive gas market.
The International Energy Agency, of which Ukraine became an associate member in July 2022, identifies several conditions for its development.
Institutional requirements:
- Reduction of state regulation: from direct control to market monitoring and an independent antitrust regulator.
- Separation of natural gas extraction, transportation, and supply.
- Market deregulation of wholesale trading.
Structural requirements:
- Sufficient capacity of the gas transportation system and free and non-discriminatory access to it.
- The sufficient number of producers and traders in the gas market.
- Involvement of financial institutions to facilitate settlements and cover operational and financial risks, as well as for direct participation in natural gas resale.
What is currently hindering the progress? Due to the war, the gas market in Ukraine operates with limitations. Stakeholders, in particular, note the strengthening of state influence. The government has prohibited the export of domestically produced gas and increased the role of Naftogaz of Ukraine in the segments of gas supply to industrial consumers and households.
"It is difficult to be a hub for Europe if only think about yourself. However, Ukraine can become part of the regional Central European hub and, together with Slovakia, Hungary, Poland, Moldova, and Romania, create conditions that will enhance the opportunities for infrastructure utilisation," says Pawel Stanczak, Director for Development and Transformation at GTS Operator of Ukraine.
Stanczak believes that having developed infrastructure is not enough to create a gas hub; transparent procedures and market conditions are also necessary. "This means that permits or prohibitions cannot be changed overnight. No market likes that. If service customers see a more expensive offer but in a market where rules are not changed during the gas year, they will use it and forget about Ukraine," he emphasises.
When will the EU join this project? The interest of Europeans in cooperating with Ukraine in the gas market exists, but it is contingent on the conclusion of the war. Moreover, it concerns long-term cooperation, not only regarding natural gas but also biomethane and hydrogen.
However, tension among participants in the gas market, governments, and regulators is also increasing in European Union countries. The reason behind this is the gas crisis that began during the coronavirus pandemic and was exacerbated by russian aggression.
Last year, a series of high-profile emergency measures were taken to overcome the crisis, including the market correction mechanism, storage obligations, demand reduction targets, and joint gas procurement.
"The emergency EU gas market measures implemented in 2022 at the height of the energy crisis should now be phased out given improved market conditions. Despite the market being a bit tighter – then there does not seem to be an argument to retain these emergency measures," said Doug Wood, Gas Committee Chair at European Federation of Energy Traders (EFET).
He also expressed scepticism about the joint gas procurement platform organised by the European Commission. "We have concerns if it cements a dominant position in certain markets if the national champion becomes the central buyer," Wood said.
*The article incorporates materials from the presentation "Development of an Efficient Gas Market in Ukraine. Creation of a Ukrainian Gas Hub" (Naftogaz of Ukraine, Sergiy Minin, Leonid Nestor).