Prices hike as Ukraine blocks Russian oil flow to Europe

KEY CONCEPTS

• The Gas TSO of Ukraine (GTSOU) declared force majeure on Tuesday, the first such statement since the Russian invasion, citing unpredictable conditions that hinder contract fulfillment.
• From Wednesday, it would not accept entry through its Sokhranivka entry point, which transports Russian gas to Europe.
• According to stats, European natural gas prices were up more than 6.4 percent by 9:15 a.m. London time on Wednesday.

European natural gas prices soared after Ukraine’s state-owned grid operator blocked Russian supplies via a crucial entry point.

The Ukrainian Gas TSO declared force majeure on Tuesday, the first such statement since Russia invaded Ukraine on February 24. Force majeure refers to unanticipated events that preclude the performance of a contract. From Wednesday, it will not receive flows through its Sokhranivka entry point, transporting Russian gas to Europe.

The operator has also halted gas transmission through its Novopskov border compressor station, which transports nearly a third of Russia’s gas (up to 32.6 million cubic meters per day) to Europe.

According to stats, European natural gas prices were up more than 6.4 percent by 9:15 a.m. London time on Wednesday. The Sokhranivka gas metering station and Novopskov are in Russian-controlled territory in eastern Ukraine, and GTSOU blamed the disruption on “the invaders’ acts.”

“Several GTS facilities are temporarily controlled by Russian forces and the occupation administration due to the Russian Federation’s military activity against Ukraine,” GTSOU stated in a statement.

“At this time, GTSOU cannot exercise operational and technological control over the CS ‘Novopskov’ and other assets in these regions.” Furthermore, occupying troops’ meddling in technical procedures and changes in the modes of operation of GTS facilities, including unlawful gas offtakes from gas transit flows, jeopardized the stability and safety of Ukraine’s overall gas transportation system.”

By rerouting gas to the Sudzha connecting point, which is located in Ukrainian-controlled territory, the operator claimed it would still be able to meet its transit commitments to European partners.
GTSOU added that the company said “The firm frequently warned Gazprom about gas transit dangers caused by Russian-controlled occupying troops’ operations, emphasizing the need of halting involvement in the operation of the infrastructure, but these requests were disregarded.”

According to the Associated Press, Gazprom spokesperson said Ukraine’s request would be “technologically impossible” and that the business sees no justification for the decision.

In the absence of a European energy embargo, a senior EM sovereign analyst at BlueBay Asset Management, said in an email Wednesday that he was surprised that Ukraine had not interrupted gas and energy transportation earlier.

“Since Russia is attacking Ukrainian gasoline installations and supply, this may be a Ukrainian reaction,” he continued. With Russia responsible for around 40% of all EU natural gas imports, the possibility of Russia shutting off natural gas exports to Europe has pushed the European Union to step up its hunt for alternative suppliers.

Economists and traders have warned that a full-fledged energy blackout may have disastrous consequences for pricing and inflation, with an experienced natural gas trader giving his word in April that such a move might result in “catastrophic pricing” this winter.