German state in dilemma over gas storage holdings

The German government faces a dilemma over what to do with the gas that it bought unhedged and stored underground last summer, with far-reaching consequences for the wholesale gas market.

In a move that wound back years of market reform, German gas market area manager THE, on behalf of the government, bought and injected into storage about 50TWh of gas last summer. This was a last-resort measure under new legislation that introduced mandatory gas filling targets in the country, to increase security of supply in the wake of Russia's invasion of Ukraine. THE stored the gas at five sites, most of which were previously used by Russian state-controlled Gazprom (see table).

At the time, THE was allowed to buy gas only on the spot market. This meant the German state purchased gas when it was more expensive than ever before without offsetting sales of gas for delivery during the winter, which would have locked in a price for the gas and removed the risk of its value falling before it was eventually withdrawn.

Now, Germany and the wider region is more than halfway through a much calmer winter than was feared — thanks to mild weather, considerable gas demand reductions and ample LNG supply availability. Waning supply concerns have resulted in gas prices tumbling since late December, contrasting with the successive price spikes in the summer (see prices graph).

The recent price drop means any gas that THE withdraws now would be worth significantly less than what the market area manager paid to inject it. And this substantial trading loss will be passed on to German customers through a gas storage levy introduced for this purpose.

THE made a net loss of more than €9.3bn from carrying out the country's mandatory gas filling rules as of the end of last year. It may have spent about €7.8bn to buy 50TWh of gas, based on the average Argus Germany VTP everyday price of €155.09/MWh from 4 June-31 October and assuming flat deliveries to storage.

The government earned only $146mn through withdrawals in October-December, during which time combined gross withdrawals at the five sites filled by THE were 2.51TWh.

Based on the German everyday price on 1-12 January and forward contracts delivering over the rest of the first quarter as of the close of 11 January, if THE sold all the remaining gas on the spot market, it would earn €3.3bn. This would be a theoretical loss of more than €4.4bn, considering the estimated cost of purchasing the gas.

And this is before considering that by selling all of its stored gas in a market that does not need it — storage inventories across the region are high, consumption is well below normal for winter and supply from sources other than Russia is ample — THE would drive down the spot price much further (see stocks graph).

State as a long-term gas trader?

If the German government decides to postpone selling its stored gas, this might entrench its role as a significant player in the wholesale gas market.

Asked by Argus this week what it plans to do, THE avoided specifics but shed some light on its predicament. "Precautionary measures with a view to the 2023-24 winter appear sensible and necessary to a certain extent," so not all the gas procured by THE will be withdrawn, the market area manager said. THE will "react dynamically" to gas market developments in co-ordination with the state and regulator Bnetza and "adapt the withdrawal strategy if necessary", it said.

THE said it uses spot and forward products for sale using trading platforms Enmacc and EEX.

If the government holds on to a significant volume of gas in storage beyond the end of winter, this raises the question as to when it will be able to extricate itself from the wholesale market. Transmission system operators are not supposed to play an active role in gas trading given the conflict of interest between their trading position and their control over other firms' access to infrastructure, which is the reason for the EU's unbundling rules.

And by holding back on selling its stored gas, the state would be depriving itself of revenues in the short term. This might force THE to significantly raise its gas storage levy, which was set at €0.59/MWh for the first half of this year.

By Natasha Fielding

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