Market participants expect limited demand for a new five-year gas storage product that Latvian operator Conexus will begin offering later this year.
Conexus will offer a five-year product for its 25TWh Incukalns storage site for the first time ever on 11 February. This five-year offering will be in addition to the one-year bundled product already previously offered by Conexus, along with the storage transfer and interruptible capacity products. The two-year capacity product has now been discontinued and will no longer be offered, however.
All market participants surveyed by Argus expect weak demand for the five-year product, mostly because of unfavourable summer-winter spreads and traders' lack of willingness to commit to bookings that far ahead. Several respondents highlighted that only a limited pool of firms would be interested in planning their activities five years out. Most traders "do not look to the so distant future in the gas storage business", one said. "Not so many market players are ready to tie themselves to local gas markets for five storage cycles in a row," another said.
Several respondents criticised the product's rules, with one noting that it could even lead to storage utilisation falling, "considering the fines for inventory transfer between storage seasons". Traders would try to "squeeze out the pipeline/LNG supply potential, rather than over-injecting", they added. Another said they were concerned that the share of the overall storage capacity allocated to the five-year product was "too high" and would make it possible for some market participants to "hijack this very much needed capacity in a similar way" to what happens at the Latvian-Lithuanian border point of Kiemenai. Several traders have expressed frustration that annual capacity at Kiemenai has been fully booked but only a small part is at times used, blocking other shippers from accessing the capacity and resulting in low utilisation rates.
Another trader highlighted the product's limitation of only allowing a user to transfer up to 50pc of the total booked capacity from one storage cycle to the next without having to pay additional fees.
The previous set of capacity products has been "tested for years and proven to be working", another market participant said, arguing that "imperfect but certain conditions are better than uncertain ones".
One trader pointed out that a lack of interest in the five-year product could increase demand for the traditional one and two-year products, increasing the premium at these auctions further. Two other traders pointed out that given prevailing inverted summer-winter spreads, there is little financial incentive to book any capacity products, let alone make a five-year commitment. Ultimately, the "behaviour of local players is and will continue to be influenced by the closest summer-winter spread and the difference between this spread and the one-year storage tariff, not by long-term storage capacity of injection/withdrawal limits," one concluded.
