Commodity merchants are pumping natural gas into Ukrainian reservoirs, hoping the war doesn’t disrupt potential profits


By Joe Wallace

Aug. 16, 2023

The Wall Street Journal


A daredevil trade is in vogue among commodity merchants: stashing natural gas in caverns beneath the surface of war-torn Ukraine.

The wager could reap hundreds of millions of dollars collectively for traders such as Trafigura Group, Vitol and Gunvor Group, people familiar with the matter said. Others looking to cash in include oil-and-gas giants such as Shell and utilities such as Switzerland’s Axpo.

Traders are getting paid to stockpile power-generation and heating fuel for Europe ahead of the second winter since Russia pitched the continent into an energy crisis. So much gas has flooded in from the rest of the world to replace Russian fuel that prices have fallen more than 80% over the past year. That will make the trade a lucrative one, if all goes well.

The danger isn’t that the gas itself goes up in smoke. It is housed nearly a mile underground in depleted gas reservoirs and aquifers, mostly away from the front line in the west of Ukraine. But traders’ winnings could evaporate if shells strike pipelines or compressor stations and trap the gas in the country.

Another risk is that “the government says ‘I have to confiscate the gas’” if Ukraine’s energy situation worsens, said Martin Pich, trading director at MND, a Czech energy company. “You are looking at the potential profit, versus the losses that you could face in these scenarios.”

Gas flows picked up speed in recent weeks into the Ukrainian caverns, by far the biggest storage sites in Europe. The gas comes from all over the world: some shipped as liquefied natural gas from the U.S. and Nigeria and into Europe’s pipeline network. Other batches arrive directly from massive fields in Norway and the U.K. There is even a remaining trickle of gas from Russia, some of it U-turning in Slovakia and heading back across the border into Ukraine.

Flows accelerated after a series of meetings between European traders and officials from state-owned Ukrainian energy companies. The Gas Transmission System Operator of Ukraine gave a presentation in Vienna in mid-June showing that its pipeline network had spare capacity because of the drop in Russian gas since the invasion, said people briefed on the meeting.

As a result, the state company could redirect gas if any blockages occur, enabling traders to get it out of the country, said Chief Executive Dmytro Lyppa. “We are ready for any scenario,” he said.

Volumes flowing into storage are lower than before the war, reflecting the difficulty traders encountered in insuring fuel in a war zone or persuading banks to lend against it. The European Union has failed, so far, in an attempt to create a state-backed guarantee program. Ukrainian

officials say foreign traders might store 3.5 billion cubic meters by winter, out of an available 10 billion.

That could prove to be a handy buffer, adding almost 4% to the EU’s storage capacity. Europe remains vulnerable, having swapped dependence on Russia’s Gazprom for reliance on the liquefied-natural gas market. Underlining that vulnerability, gas prices rocketed twice this month on the mere threat of a strike at gas plants in Australia.

Stowing fuel in Ukraine is a variation on a classic commodities trade. The play gained fame on Wall Street when Salomon Brothers made a bonanza by stashing crude on tankers on the eve of the First Gulf War in the early 1990s. It requires a big balance sheet, logistical intelligence and, in this instance, an appetite for risk.

It works like this: The EU’s gas stores are so close to brimming over that traders can buy fuel on the cheap now and sell at higher prices in the forward market, for delivery this winter or later.

Recently, they could earn more than 10 euros per megawatt-hour, said Marco Saalfrank, head of merchant trading at Axpo. That is after taking into account storage and transit fees, as well as interest rates and credit charges.

Across 3.5 billion cubic meters, that adds up to more than 340 million euros, or $370 million, in potential profit. The actual figure will differ. Some traders are locking in sales for next summer instead of winter, or not selling forward at all, which amounts to a bet that prices will rise.

The companies involved mostly had extensive dealings in Ukraine before the war. Shell signed a deal to explore shale gas in the country in 2013.

London-based Vitol, the world’s biggest independent oil trader, struck a deal to develop oil-and-gas fields in Ukraine in 2012, while Swiss trader Trafigura had an office in Kyiv. The two traders—fierce competitors—are hunting for new ways to make money after earning billions of dollars in recent years from the upheaval caused by war and the pandemic.

Ukrtransgaz, the storage operator, has checked caverns for bugs, ordered extra patrols of perimeter fences and stocked up on spare parts, said Roman Maliutin, acting director general. The company treats all of the stores as if they were one giant cavern, guaranteeing traders access to fuel even if the site they originally injected it into is damaged. “The probability that all our underground storages will be taken out of the production, will be destroyed, is very low,” Maliutin said.

The more gas in the depleted gas sites, the higher the pressure, easing the withdrawal of fuel to send back to Europe or burn in Ukraine this winter. Ukrtransgaz, a Naftogaz subsidiary, also gets much-needed cash from storage fees, though it has set them at low levels to encourage the influx. Ukraine also exempts the gas from customs duties for three years.

Inflows of gas from Poland, Hungary, Slovakia and Moldova mark a reversal of Ukraine’s historic role as a thoroughfare for Russian gas to Europe. The caverns are a legacy of that trade route. Gazprom drew them down to top up exports to Europe in winter, allowing cities in eastern Ukraine to burn newly arrived Russian fuel from a clutch of arterial pipelines in the coldest months of the year. “Traders are coming to Ukraine without additional insurance, actually bearing this risk as commercial risk, which is a great signal,” said Oleksiy Chernyshov, chief executive of state-owned Naftogaz. He added that Kyiv wouldn’t consider confiscating the fuel.  The caverns, he said, are “the safest place in Ukraine right now.”