Market forces undermine Czech gas security goals

Photo: Czech Radio - Radio Prague

Security of supply of natural gas is one of the Czech Republic’s and EU’s main energy priorities. But a recent conference in Prague has shown up some worrying signals about how market forces might be undermining that target.

Photo: Czech Radio - Radio Prague
Gas security of supply is a major issue after the 2009 cuts in Russian supplies of gas to Europe. The move mostly affected Southern and Central Europe where many countries are almost 100 percent reliant on Russian exporter Gazprom.

Never again was the response of various countries and the EU and they pored over the building blocks needed for greater gas security. The first obvious one is to diversify supplies of gas so that not all of it is sourced from Russia. Then the supply channels, or pipelines, can be diversified or increased so that the shutdown of one pipeline does not automatically mean an end of deliveries. And finally, gas storage can be increased so that reserve capacity can perhaps tide over a country through the worst winter months.

Major Russian Gas pipelines to Europe,  source: Samuel Bailey,  CC BY 3.0
The Czech Republic, compared to many EU countries, is in a comfortable position. Traditionally, around three quarters of Czech gas comes from Russia and much of the rest from Norway. The picture there is evolving with much higher purchases by traders on spot markets. The main supply route has been the east-west flow of gas through the Druzba pipeline, transiting Ukraine and Slovakia. And as regards gas storage, the Czech Republic has one of the highest levels of capacity in the region.

That’s the theory. But the reality appears a little less rosy for the Czech Republic. Most of new pipelines talked about to diversify European supply, such as Nabucco, and tap gas fields in the Caspian region or further afield have not happened. Meanwhile, Russia talks about ending gas supplies through Ukraine and boosting the existing Nord Stream pipeline under the Baltic. The last two moves together would represent bad news for the Czech Republic.

LNG storage tank,  photo: Falcanary,  Public Domain
One new source of supply has emerged in the Liquefied Natural Gas (LNG) terminal in Poland which opened this year. But representatives of Czech gas pipeline owner and operator NET4GAS announced at the Žofin Forum gas conference this week that the company is still mulling whether to go ahead with the investment in the STORK II and Morava pipelines which are an essential part of the north-south pipeline link that could bring this LNG gas to the Czech Republic. The project has more of a political than practical business character and that is the main reason for the hesitation, they added.

Looking at gas storage too, the signals from the conference were hardly upbeat either. The simple fact is that while the Czech Republic boasts an enviable amount of gas storage capacity, the companies offering it warn that the business is now loss making. One manager of the Czech Republic’s second biggest gas storage company, MND, says gas storage is this year in the red and the short term signals are not good.

Photo: NREL,  Public Domain
The traditional storage model is that gas companies bought their gas with long term contracts and large amounts were stocked up in storage for the peak demand in the winter. Now, traders and companies have largely abandoned long-term gas purchase and storage contracts and buy on spot markets. The remaining long term contracts are keeping the storage business afloat for now but storage capacity is already up for sale in Germany and hardly any new capacity is being built.

The scenario thus appears to be one of those ironic ones where market forces are undermining political goals. The gas companies say it’s for the politicians to start coming up with some answers.