Germany: Dependence on Russia brings energy shock

For years, the United States has been warning Germany that it would create a dangerous energy dependence on Russia, the source of more than half of its fossil fuel imports. Now that the war in Ukraine has led Berlin to the same conclusion, the government is realizing it may be too late to change course, according to a Bloomberg report.

Europe’s largest economy is facing the prospect that the bulk of its gas and coal supplies could be cut off, dismantling its industrial base and causing economic turmoil. Companies such as Uniper and chemical giant BASF are particularly exposed, and with gas reserves low, the problems will spread quickly to industries and households already suffering from ever-increasing bills.

“If either the Europeans no longer want to buy gas or Russia cuts them off, it would be a major shock,” said David Folkerts-Landau, chief economist at Deutsche Bank, in an interview with Bloomberg Television. the week. “You will have a very serious recession.”

The government of Chancellor Olaf Solz said the country’s gas needs would be met by next winter. But Europe’s gas reserves are less than a third full and well below average for this time of year. To make up for lost Russian gas, Germany will need deliveries from the entire global fleet of 600 liquefied natural gas (LNG) tankers, according to the Central Union of German Chambers of Commerce and Industry (DIHK).

At present, Moscow has given no indication that it can cut off supplies, while Germany opposes sanctions or political pressure that would trigger a full energy embargo. But already, Berlin is in a state of crisis.

The German government has approved an emergency payment of 1.5 billion euros to provide liquefied natural gas. At current prices, this gas quality lasts for about a week, according to Bloomberg estimates, and LNG is usually at least 10% more expensive than supplies from Russia.

“I say this with great sadness and without a smile on my face: Germany depends on Russian energy imports,” Robert Habeck, Germany’s vice chancellor and economy minister, said this week.

In the event of a supply disruption, Uniper would probably be one of the first companies to feel the effects. The Düsseldorf-based utility company has more than half of its long-term gas contracts with Russia and faces a bleak future if those supplies are cut off. Extreme price changes have forced it to borrow billions of euros. Meanwhile, its investment in the Nord Stream 2 pipeline to Russia is likely to be lost.

“The situation on the Russian-Ukrainian border leaves us deeply disturbed,” said Klaus-Dieter Maubach, chief executive officer, a day before the start of President Vladimir Putin’s invasion.

German oil and gas company Wintershall also saw a decline in the value of a € 1 billion investment in the controversial Nord Stream 2 project, which had long plagued the United States but was nearing completion. that the government stopped certifying.

The first Nord Stream pipeline, which bypasses Ukraine to connect Germany directly to Russian gas fields, was inaugurated by former Chancellor Angela Merkel in 2011, calling it a “remarkable achievement”.

Solz also announced plans to speed up the construction of the country’s first liquefied natural gas terminals, but that will take years. In the short term, the government has released a plan to deal with the crisis, which includes creating coal reserves for power plants and forcing gas companies to maintain minimum storage levels. Almost a third of this capacity is controlled by Russia’s Gazprom, which is a further indication of Germany’s dependence.

The end result is a shift to renewable energy, which will also take time and money. Germany has already given up on using nuclear energy after the Fukushima reactor was destroyed a decade ago, and its last three reactors are set to close this year.

Insurance companies Euler Hermes and Allianz estimate that in order for the European Union to become independent from Russian energy, investments of 170 billion euros per year would be required. Habeck proposed legislation this week that would nearly triple the rate at which wind and solar were added.

“What has been consciously built over the last 10, 15 years – that is, to become more dependent on Russian energy – can not, of course, be completely changed in a matter of days or three months,” Habeck said after meeting with businessmen on Thursday. to discuss the current crisis. “We will and must remain open to energy imports from Russia.”

The reason for concern is clear. Russia supplies more than half of Germany’s gas, half of its coal and about a third of its oil. Bloomberg estimates that replacing Russian gas would require an additional 82 liquefied natural gas tankers a month, more than the February production of Qatar, one of the world’s leading producers.

Interrupting deliveries from Russia is not a drawn-out scenario, as gas provides the government with only a quarter of its revenue compared to oil, according to Bloomberg analyst Stefan Ulrich.

“Industrial production in Germany would be greatly affected by such a development,” said Volker Treyer, head of DIHK’s foreign trade council, adding that compensating for the loss of Russian gas in the short term was “reaching the impossible.”

A shortage of gas could push BASF to shut down some plants, hurting the supply of materials used in cars, fertilizers and medicines across Europe. Some companies are starting to ask about alternative fuels in the event of a gas outage, according to Wolfgang Hahn, owner of Energy Consulting GmbH, which advises hundreds of companies in Germany.

“This is the biggest energy crisis that people in Europe have faced since World War II,” Hahn said. “The 1970s were just a price crisis. This crisis is even more serious.”