Germany’s switch to diesel from gas comes at a cost

By Javier Blas

Across Germany, officials have spent the final months of the war mulling how to respond if Russian President Putin cuts off natural gas supplies. And many, from small companies to mammoth enterprises, have come to the same solution: turn to oil.

In Munich, the municipal utility has converted two gas boilers to run on diesel. Further east, in the German Alps, the agricultural cooperative Berchtesgadener Land has sent two milk truck drivers to learn how to operate an oil delivery rig, should they need to buy. In the North, the Veltins brewery near Düsseldorf has stockpiled five weeks’ worth of oil to prepare for an emergency switch from gas.

In some cases, this involves burning oil in boilers and steam generators that previously “burned” natural gas. In others, diesel generators will run to avoid power outages.

Berlin is quietly encouraging the shift. Wiegand-Glas, which makes glass bottles, was able to collect the paperwork needed to prepare its furnaces to run on heating oil instead of gas, for example. “I have promised to reduce the bureaucracy when converting the systems to the absolute minimum,” said Minister Anja Siegesmund, Minister for the Environment.

Privately, oil traders say they receive inquiries from German businesses that have either never bought fuel oil or diesel in the past, or have abandoned the practice for many years, even decades.

Take Covestro, a chemical company that produces construction materials for plastics. For years, it relied on natural gas. However, earlier this week it told investors during its Q2 results presentation that it had “initiated various measures to reduce its gas requirements in Germany in the short term, such as by switching to oil-based steam generators”.

The incentive to reduce natural gas consumption is huge as Putin has cut supplies to Germany via the Nord Stream 1 pipeline. times the decade average until 2020 and is equivalent to around $350 per barrel of oil. Meanwhile, Brent is at $100 a barrel. Hans Ulrich Engel, BASF’s chief financial officer, did the math earlier this month: based on prices at the time, “it may be cheaper to use, for example, heating oil to generate steam than to use the very expensive natural gas “, he stated.

The consequences are twofold. German industry, long accustomed to operating on cheap Russian energy supplies, may be able to reduce its dependence on gas more than originally expected without having to shut down entirely. Demand for German gas is already well below the five-year average at this time. Morgan Stanley estimates that German industrial gas consumption fell 24% in July from the same month in 2021. If the trend continues, European gas prices may not rise in line with concerns, even if Putin completely shuts down exports later this year. The worst case scenario, with TTF prices rising above 300 or even 400 euros, may be avoided. But the aftermath could be a surge in German oil demand this winter, far more than anything currently estimated, potentially boosting global oil prices.

The magnitude of the potential for oil consumption growth is hotly debated, with optimists and pessimists giving good reasons for optimism and pessimism. In the past year, oil bulls expected a significant increase in demand from oil-fired power plants, which never happened. But consultancy Energy Aspects estimates that if all of Europe’s power plants were to run on oil this year, it would add 340,000 barrels a day to the continent’s demand. To put that in context, the number is larger than the 200,000 bpd increase in European oil demand expected by the International Energy Agency for 2023.

In addition, these numbers do not take into account the potential boom in the use of diesel-fired generators and the use of heating oil and fuel oil in industrial boilers and wind turbines. With little data on how many businesses have retrofitted their boilers to run on oil, and how many others have purchased emergency generators, any estimate is more guesswork than prediction. However, some oil traders and consultants are talking about a further 200,000 barrels per day in Germany and neighboring countries.

However, the shift from gas to oil has huge hurdles. BASF, the German chemical group, exemplifies these difficulties. In a presentation to investors last week, the company said preparations to replace natural gas with heating oil, for example, were “progressing well”, echoing what other German firms have said in the past few weeks. But this included a big caveat in a small footnote: “Sufficient availability of heating oil is a prerequisite.”

If businesses in Europe’s largest economy switch to oil from gas at the same time this winter, it could potentially swap one problem for another (a gas shortage with a tighter market for diesel).

For now, European diesel has stabilized at $1,000 a tonne, down from a record high of $1,500 in early March, days after Russia’s invasion of Ukraine. However, the market will have to deal with the upcoming ban on Russian refined products, which will come into full force in early February and reduce diesel supply in Europe, just when markets are expected to peak.

Diesel is the engine of the world economy. Since the beginning of the crisis, it has been the “hottest” refined product, even if it is often overshadowed by US gasoline prices. As German industry is expected to wean itself off Russian gas in the coming months, diesel prices may begin to dominate the headlines, for all the wrong reasons.