Ukraine on the verge of gas crisis and price hikes for industry

Businesses warn of rising costs and loss of competitiveness amid new tariffs

On January 1, 2025, the National Commission for State Regulation in the Spheres of Energy and Utilities (NEURC) authorized a four-fold increase in the tariff for gas transportation services, which caused sharp criticism and negative reaction from industrial consumers.

Business representatives warn of a significant increase in costs and loss of competitiveness on the back of the new tariffs.

In February, the gas market is feverish again – now because of record low reserves in underground gas storage facilities. Ukrainian underground gas storage facilities are now less than 9% full. Such low reserves have never been in the history of Ukraine.

Experts warn: in the context of military risks, gas shortages and rising prices at European hubs, the situation may lead to a new round of crisis and a sharp increase in the cost of gas for industry.

Formally, these factors look like the main reasons. But if you look closely at Naftogaz’s recent actions, it becomes obvious that they are the ones that have largely provoked the current problems in the market.

The situation with gas in the country

According to the industry publication ExPro, last year’s gas production amounted to 19.1 billion cubic meters, which is 2.3% or 422 million cubic meters more than in 2023 (18.7 billion cubic meters). The leaders of production in 2024 were Naftogaz companies Ukrgasvydobuvannya (14.5bn cub. m.) and Ukrnafta (1.2bn cub. m.), which account for 82% of the total gas production in the country. Private companies produced 3.4 billion cubic meters last year.

On paper, judging by the production figures, there is gas in Ukraine, but in fact there is none. According to the Association of European Operators of Underground Gas Storages (GSE), as of February 12, the occupancy rate of Ukrainian underground gas storages was only 8.9%. According to the former head of the Ukrainian GTS Operator, Serhiy Makohon, such low reserves in our underground gas storage facilities have never existed before.

Under such conditions, the government had to indirectly recognize the problem of gas shortage. In late January, Energy Minister German Galushchenko said that Ukraine needs at least 1 billion cubic meters of additional gas by the end of 2025, and possibly more, which will depend on its volume at the end of the heating season, taking into account enemy shelling of the gas infrastructure.

In early February, the Naftogaz bought more than 100m cub. m. of imported gas, and on the 11th Ukrtranshaz, which is part of Naftohaz group, announced an emergency purchase of another 100m cub. m. with deliveries in February-March. It is estimated that Naftohaz will have to buy up to 600m cub. m. of gas by the end of March.

Causes of gas shortages

The gas deficit was formed gradually. At the end of 2024, with marketable gas production of 18.1 billion cubic meters and consumption of 20.6 billion cubic meters, the deficit of 2.5 billion cubic meters was covered by 3/4 at the expense of gas withdrawal from UGS (1.8 billion cubic meters) accumulated in previous periods, which improved the financial result of Naftogaz, but did not contribute to strengthening energy security in war conditions.

“I don’t want to make apocalyptic forecasts, but the situation looks difficult. But now we have a gas deficit, which according to various estimates is 1-2 billion cubic meters per year. In previous years, we were gradually withdrawing the gas accumulated before the war from storage facilities, but now this resource is exhausted, and we will return to gas imports,” says Denys Sakva, senior analyst at Dragon Capital investment company.

Now the problem of gas shortage is actually officially recognized. There are several reasons for this situation:

1. Deficiencies of Naftogaz’s market strategy. Last year, Naftogaz decided to occupy the niche of commercial consumers and to quickly build up its customer base started selling up to 200 million cubic meters per month to business customers during the heating season at a price 25% lower than the market price. To increase the number of customers, Naftogaz used up to 0.5 billion cubic meters of gas purchased on the domestic market in 2024 and simultaneously imported at high prices. As a result, Naftogaz upset the balance in the whole country, failed to liquidate the “holes” in time and is already forced to look for imported gas at any price on an emergency basis.

2. Rising gas prices in Europe. The increase in quotations on the EU spot gas market was caused by the cessation of Russian gas transit through Ukraine from the beginning of 2025, concerns about the rapid decline in gas storage reserves (as of February 12, 2025, they were 47.2% full compared to 67% on the same day in 2024) and the expectation of tension in the off-season period of stockpiling due to supply uncertainty. Already, summer gas futures are trading at a significant premium.

“Starting February 7, the cost of gas at European hubs crossed the $600 per 1,000 cubic meters mark. In the following days the price approached $650 and as of February 13 the resource costs $596-628 per 1000 cubic meters. For comparison, during the same period last year it cost on average $300 per 1000 cubic meters. The last time the gas price above $600 was fixed in February 2023,” says Artem Petrenko, Executive Director of the Association of Gas Producing Companies of Ukraine.

3. Failure to foresee the situation. The aggressor began to strike gas production facilities in the summer of 2024. Since that time, and especially during the heating season, Naftogaz should have foreseen any scenarios. All potential problems would have been solved by timely imports. Last summer NJSC could buy imported gas at $300-350 per 1000 cubic meters. However, Naftogaz constantly stated that it had no plans to import gas and would pass the 2024/2025 season without imports. At the same time, there were funds for imports: the NJSC spent about UAH 13 billion just to buy gas from private gas producers. Now imports will cost $600+ per 1000 cubic meters.

4. Large-scale missile strikes. An additional reason for the increase in gas shortages and the need for imports was the frequent massive missile attacks on gas production facilities. Their consequences partially limit domestic gas production indefinitely.

Consequences for the economy and the industry

Naftogaz’s blunders and shortcomings will inevitably lead to the following:

1. Overpayment of hundreds of millions of hryvnias. Naftogaz will pay much more due to emergency purchases of imported gas at high prices during the peak of the heating season. According to Serhiy Makogon’s estimates, Naftogaz did not create 13.2 billion cubic meters of gas reserves in UGS and actually underpumped 900 million cubic meters, which would have helped a lot now. The purchase of these missing 900 million cubic meters at the current price level will result in an overpayment of $315 million.

2. limiting the prospects of domestic gas production. Naftogaz does not agree to buy gas from Ukrainian gas producers at the market price, so private gas producers are forced to sell gas to NAK at an artificially low price against the background of the export ban. All this leads to stagnation of gas production.

3. High uncertainty with UGS filling for the season 2025/2026. All European countries will be stocking up heavily on blue fuel throughout the period before the start of the new heating season, so quotations on the EU market will remain high, and Ukraine will need significantly more funds to fill gas storage facilities for the new season.

“So far, we do not see any significant preconditions that gas will become cheaper. On the contrary, the increase in demand in spring and summer, when countries will actively pump into UGS and compete for the resource, will create additional pressure and may lead to an even greater jump,” emphasizes Artem Petrenko.

According to Sergei Makogon, by November it is necessary to create a new gas reserve of at least 14 billion cubic meters, and for this own production will not be enough and it will be necessary to import 2-3 billion cubic meters.

4. Rising domestic gas prices.

“Since gas exports are now banned, our gas has been trading 20-30% below European prices. I think that we will return to import parity – this is the import price plus the cost of delivery, and Naftogaz will buy back gas volumes from private gas producers as much as possible. In any case, there will be a trend towards the growth of domestic prices,” Denis Sakva emphasizes.

5. Increase in the costs of industrial consumers.

“Any growth of steelmaking cost components will have a negative impact on the operation of steelmaking enterprises. Especially strong impact of gas price growth is expected on the work of Zaporizhstal, where, due to the specifics of production, gas consumption is much higher than at other enterprises”, says Oleksandr Kalenkov, President of ‘Ukrmetprom’.

According to Artem Petrenko, to the price of gas at European hubs should be added the cost of delivery to Ukraine – about €50 for each 1000 cubic meters. Plus VAT, as the resource will be sold on the domestic market to end consumers, which is 20 percent of the price.

There will be no more cheap energy resources

Currently, there are about 2.8 billion cubic meters of available gas in Ukraine’s UGS facilities, and under certain circumstances, this may not be enough to get through the heating season. The risk of repeated missile strikes on the gas infrastructure also remains high, which threatens to worsen the gas supply situation.

Amid clear decline in domestic production, only imports will save us in the event of force majeure! If in the near future frosts hit, during which Ukraine can burn up to 150 million cubic meters per day at the peak of consumption, then the issue of limiting consumers – industrial and municipal enterprises, as well as reducing the capacity of CHPPs may become an issue.

Ukrainian businesses have long been not only paying market prices for gas and electricity, but also until recently cross-subsidizing tariffs for households. Large-scale blackouts in 2022-2024 have made the population realize the importance of uninterrupted electricity supply and its real cost. In addition, tariffs for electricity for this category of consumers were increased last year. It is obvious that cheap gas and electricity will no longer be available in Ukraine either for the population or for business, for which there are many objective reasons.