Germany’s Pivot From Russian Gas Will Be Costly

Yves here. I trust readers will be able to filter out the new Cold War assumptions in the piece to focus on the price of Germany’s plans.  Does anyone have an informed take on how significant the broader economic impact might be?

By Tim Daiss, an oil markets analyst, journalist and author working out of the Asia-Pacific region for 12 years who has covered oil, energy markets and geopolitics for Forbes, Platts, Interfax, NewsBase, Rigzone, and the UK-based Independent (newspaper) as well as providing energy markets analysis for subscription newsletters. Originally published at OilPrice

More problems are mounting for Russia’s oil and gas sector. This time it’s coming from Germany, which until recently usually gave Russia’s energy sector more lead way than the U.S. or other allies.

But now it seems that German Chancellor Angela Merkel has also had enough. On Monday, Bloomberg reported that Merkel’s government is seeking to build a liquefied natural gas (LNG) industry in Germany basically from scratch to reduce the nation’s dependence on supplies arriving by pipeline from Russia and Norway.

Merkel backs “all initiatives supporting further diversification of gas supply — whether from different regions or means of transporting gas,” said German Economy and Energy Ministry spokeswoman Beate Baron.

The move comes as natural gas resources from the UK and the Netherlands are depleting, and Germany is forced to rely more on Russian gas. Merkel’s newly formed coalition has a “coalition contract” that among other policies sets out energy agenda including LNG for the next four years, the Bloomberg reported added.

Germany, for its part, is Europe’s largest gas consumer.  In 2015, the country consumed 7.2 billion cubic feet per day (Bcf/d) of natural gas, according to U.S. Energy Information Administration (EIA) data. According to the German energy research group, AG Energiebilanzen, imports account for about 90 percent of Germany’s total natural gas supply, while most imports come from three countries: Russia (40 percent of total imports in 2015), Norway (21 percent) and the Netherlands (29 percent).

Moreover, German companies are participating in Russia’s controversial Nord Stream 2 pipeline, an expansion of an existing route for gas to flow from Russia to Europe under the Baltic Sea. The U.S., Poland and others have recently condemned the pipeline as a threat to European security.

As Russia becomes increasingly aggressive, even reckless geopolitically, the security threat to not only the EU but to Germany is apparent, causing the country of some 83 million people to do an abrupt energy policy about face.

Germany’s LNG pivot also comes as a geopolitical storm between the U.K. and Russia intensifies over an alleged Moscow-orchestrated nerve-agent attack on British soil against what the BBC called a double spy and his daughter.

British Prime Minister Theresa May retaliated last week by expelling Russian diplomats and seeking alternatives to Russian gas, including LNG produced at its new Arctic plant, the Yamal LNG export project. Addressing the UN Security Council last week, the U.K.’s deputy UN ambassador, Jonathan Allen, accused Russia of breaking its obligations under the Convention on the Prohibition of Chemical Weapons.

The U.S. for its part also condemned the nerve agent attack. U.S. ambassador Nikki Haley said that Washington stood in “absolute solidarity” with Britain, citing the “special relationship” between the two countries and saying that Washington would “always be there” for the UK.

Germany’s Abrupt LNG Pivot

However, until recently many in Germany accused the U.S., notably President Trump, of using U.S.-sourced LNG as a geopolitical weapon to challenge Russia’s decades’ old dominance of European gas markets – an accusation that played perfectly into the hands of Russian energy companies and even Vladimir Putin.

When Trump singed fresh sanctions against Russia’s energy sector in August, Uniper – a German utility and one of Europe’s largest energy firms – said the new sanctions were an American economic move as much as a political one.

“The core reason (for the sanctions) is strategic economic interests, meaning the targeted dominance of the US in energy markets,” Uniper CEO Klaus Schaefer told journalists shortly after Trump signed the sanctions bill. Uniper is one of five companies that have invested in Nord Stream 2.

Brigitte Zypries, Germany’s economy minister, claimed last year that the sanctions violated international law and said that the EU should take action against the U.S. “Of course we don’t want a trade war. But it is important the European Commission now looks into countermeasures,” she said. “The Americans can’t punish German companies because they have business interests in another country.”

Cost Factors Could Impede Pivot

However, any Germany pivot to LNG away from Russian gas will come at a cost. Shipping LNG by one of several suppliers, including Qatar, the U.S. or Angola to name a few, is simply more expensive than Russian piped gas.  While Russia already has an extensive pipeline network in place, LNG is more expensive when transportation, liquefaction and regasification costs are added.

Using a Henry Hub gas price of $2.85/MMBtu as a base, Russian energy giant Gazprom recently estimated that adding processing and transportation costs, the price in Europe would reach $6/MMBtu – a steep markup.

Henry Hub gas prices are currently trading at $2.657/MMBtu. Over the last 52-week period U.S. gas has traded between $2.64/MMBtu and $3.82/MMBtu.

Russian gas sells for around $5/MMBtu in European markets. Moreover, Russian gas exporter Gazprom is also moving away from oil-indexation for gas prices to a European gas hub indexation, which will allow additional price savings and unfortunately for Germany – an incentive to stick with Russian gas, even if it’s geopolitically distasteful.

Meanwhile, Russian Energy Minister Alexander Novak said yesterday that Russia is Europe’s most flexibly and reliable source of energy that is needed.

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  1. Self Affine

    Its a long long way from a political announcement to an industrial reality. Also, the quote:

    Merkel backs “all initiatives supporting further diversification of gas supply” is telling.

    Germany does not want to be caught out in a Russia/US energy squeeze while its pursuing an alternative energy path. Nor does Merkel want to overtly pick sides.

    Plus if you will note, given the momentum of current German/Russian energy initiatives, I rather doubt that this “announcement” will have a lot of traction in the near future.

    The Oilprice site, although very informative is somewhat shrill from day to day (everything is a BIG DEAL).

    1. PlutoniumKun

      Yes, its a telling quote – it can basically be paraphrased as ‘if someone is willing to pay for these facilities, we would be happy to hear that’. There are quite a few stalled projects for LNG terminals in Europe – but they are expensive and even the promise of cheap US LNG won’t unlock them so long as Russia can supply relatively cheap gas. If European governments want more LNG terminals for security reasons then they’ll have to pay for them. Thats not likely to happen, there are far more pressing infrastructural needs.

      1. third time lucky

        Nimby too. Locating an LNG terminal will be a neat trick to pull off in current fractured political environment.

  2. Watt4Bob

    Where to begin?

    Is anyone considering the possibility that the US’s ability to deliver LNG may not exist for long enough to pay the cost of building the infrastructure necessary to use it?

    Is anyone factoring in the damage to our environment, including our fresh water when calculating the cost of poking Russia in the eye?

    At first glance, this whole play appears short-sighted, at least, probably foolish.

    Of course the big oil companies have never gone unrewarded for their fealty to the whims of the MIC, even when any objective analysis finds massive foolishness.

    1. Harry

      Dont worry, Novatek alreaduy delivered a shipment of LNG from the Yamal peninsular to the UK.

      I would bet that Nord Stream will not eliminate the need to export across the Ukraine. Undersea pipelines dont have great capacity. But additional marginal pipeline capacity does reduce the bargaining power of the Ukraine. Im sure LNG capacity does the same.

      1. Synoia

        Undersea pipelines have as much capacity as the diameter of the pipe.

        They have a big enemy.. Anchors.

      2. nervos belli

        Northstream currently has capacity for 55 billion cubic meters afaik. Northstream 2 has the same capacity, so 110 total. Germany on its own currently uses 80.5

        So it’s enough right now, at least for Germany itself.

    2. jsn

      We’re deep into our malinvestment phase where uneconomic industries are being sustained with monetary policy to prop up an unsustainable status quo.

      The question is whether the left can coordinate collective action before the right can start WW3. It will be real events somewhere that cause real change: financialized capitalism with its own hand on the money spigot of fiat money is, with reference to itself, a perpetual motion machine.

      It will either be a force of life, or thermodynamics that finally overthrow this machine. The stresses for dramatic external political events are building everywhere.

      1. Nathanael

        You’re correct about the malinvestment phase.

        However, this is where market capitalism excels. As long as there is enough money in the hands of the average person (a major issue), the average person will install solar panels and batteries and heat pumps and buy an EV and say “to hell with you” to the oil, gas, and coal industries.

        1. jsn

          Less money is going to those average folks, but local EV is hopeful. Tons of money goes to supporting facking, which in the absence of QE and the spigot of free money for (mal)investors, would not be economical.

          LNG ports to receive a fuel with what is approaching negative EROEI are pure mal-investment.

          MMT was used to incentivize net positive public goods by Mariner Eccles making the US the richest nation in the world. We’re now seeing the global financial cabal use the same tool to despoil real wealth, monetizing it along with trust wherever it can find either. It is an epic of short-termism that will ultimately destroy the money itself by liquidating the real productive social and economic constellations that support it.

        2. drumlin woodchuckles

          Most of the future ex-middle-class is downscaling by choice or by force. They don’t or won’t have enough money for EV etc. and also the fun stuff consumables to which they would like to remain accustomed. They will have to make an active choice or make a passive default-choice which they will find themselves trapped by when their money runs somewhere between “short” and “out”.

          But till that happens, they still have a choice. The right kind of appeal to rage, hatred and revenge might motivate some of them to forgo their lattes and NPR tote bags in favor of conservation lifestyle investments. For example, how many Pink Pussy Hat Marchers for Not My President! are there in this country? A million? Five million? Ten million? And how many silent sympathisers do they have?

          What if all these people decided to stick it to the Trump by reducing their energy consumption enough to hurt the pro-Trump energy sector? And especially to hurt the fossil carbon industries which Trump supports so strongly?

          I have a beautiful vision. Imagine . . . 50 million pairs of #TheResistance hands wrapped around the neck of Big Koch . . . squeezing it flat, cutting off the flow of revenue to the Big Koch brain centers.

      2. Webstir

        We see what you see. I particularly liked this contribution:
        “The question is whether the left can coordinate collective action before the right can start WW3.”

        Yes, we’re approaching an ecological inflection point. The resource wars have already begun in earnest in the international corporate boardrooms. That capitalism will again eat itself (and in the wars it spawns eat most of the world in the process) is apparent to anyone that hasn’t completely acquiesced to the corporate bullet in their head. I wish I knew how to make it plain to all the people who have drunk too much of the corporate kool-aid.

        Amid the chaos; however, I do feel there is a ray of hope.
        I’m surprised I’m not hearing any discussion (not just on this thread, but anywhere, really) about nuclear fusion. And this is coming from one who has long been want to criticize those propounding the technological myth as humanity’s salvation.
        But for those you like me on this thread (and I know you exist), I encourage you to do a quick “nuclear fusion” news web search. Development is moving ahead at light speed. Honestly, the cynic in me just wants to say it’s all BS. “Bah! Aintgonnahappen” a little voice in me says. But my rational voice is telling me it is gonna happen. Humanity could very possibly free itself from all historic energy constraints in the lifetime of 90% of the people on this thread.
        That’s a game changer.
        What troubles me though is the fact that I’m hearing very little social analysis on the topic. As with most revolutionary concepts, I think it’s like trying to imagine a new color for most people, and so, they don’t. But the idea is revolutionary and the left must imagine it. We must get in front of it from a class perspective. As the event horizon approaches, the left needs to ensure it’s supporting nationalized nuclear fusion.

        1. Lambert Strether

          Scientists Are One Step Closer To Nuclear Fusion

          Laser-driven controlled fusion experiments are typically done with multi-hundred-million-dollar lasers housed in stadium-sized buildings. Such experiments are usually geared toward harnessing fusion for clean energy applications.

          In contrast, Rocca’s team of students, research scientists and collaborators, work with an ultra-fast, high-powered tabletop laser they built from scratch. They use their fast, pulsed laser to irradiate a target of invisible wires and instantly create extremely hot, dense plasmas – with conditions approaching those inside the sun. These plasmas drive fusion reactions, giving off helium and flashes of energetic neutrons….

          Making fusion neutrons efficiently, at a small scale, could lead to advances in neutron-based imaging, and neutron probes to gain insight on the structure and properties of materials. The results also contribute to understanding interactions of ultra-intense laser light with matter.

          It’s interesting to see fusion being explored for neutron production instead of electrons for power. The situation noted the energy content of the neutrons while the energy of the electrons went unmentioned and perhaps not actually unmeasured. One does wonder if the experiment did in fact measure the all energy, because some if not a lot of the funding is from the U.S Air Force. One might think there is more here than is reported.

          Of great note is that the target is an extremely innovative creation. With results that soar over those we’ve seen from the really huge National Ignition Facility, there is likely some intense thought being given to just what this idea and others might make a difference to the Ignition Facility’s work.

          One has to think that someday soon something is going to crack and there will be a net power result from some group. It would have been nice to get the calculation on what the input and total energy output were at CSU. Or maybe it’s a secret.

          “Someday soon something is going to crack.” So we have a timing issue. And early is wrong….

          (The original from Nature, “Micro-scale fusion in dense relativistic nanowire array plasmas.” I love it when you talk scientific to me…).

  3. Jeff

    I read the statement as that Germany is looking for a replacement of its Dutch and Norwegian gas sources. As Germany does not want to depend for 100% of its gas from Russia, they do need to look for alternatives.
    It is just smart policy not to depend from a single source, for whatever purpose.

    1. Synoia

      Germany is looking for a replacement of its Dutch and Norwegian gas sources

      Look no further than the White House, Executive Branch, Congress and the Senate.

      How many dwelling could that supply (and I’m thinking $ not hot air).

  4. Ignacio

    Two keys for natural gas markets: i) the cost of transport is very high and there is a linear relationship between distance and transport costs ii) both the client and the supplier would like stable long-term contracts to secure investments and supply. There is always interdependence if you want durable supply.

    Constructing some LNG facilities, besides the cost factors mentioned above won’t reduce such interdependence by much given that Russia provides 40% of current consumption. Also, Russia migth seek providing NG to fast growing asian markets. I think that Germany is trying to diversify just because Norway, Netherlands, and its own production are declining. I also think that this means that fracking gas in Europe is not seen as an alternative.

    I wouldn’t say that Germany will “pivot” from russian gas, that is giving too much weigth to potential LNG supplies.

    1. Ignacio

      I forgot to mention the second pipeline through the baltics. I think Merkel announcement didn’t say anything about it. That is also telling

    2. PlutoniumKun

      Another point is that if the issue is security, it would most likely be more cost effective to build up a buffer in underground storage facilities than building new LNG terminals.

  5. The Rev Kev

    I could be that Germany is buckling under the pressure of attacks as the US is threatening to sanction European firms involved in the Russian/EU Nord Stream 2 project ( which if true, would mean that the EU would have to ask the permission of Washington in dealings with any countries not to Washington’s liking.
    The Poles have already built a LNG gas delivery terminal so you would think that Germany would just pipe it in from there unless Germany wanted to build their own terminal so that they would not have to pay Poland any fees as Poland is one of the counties opposing Nord Stream 2. Poland has already received at least one LNP shipment from the US but the price of the delivery is a state secret apparently.
    The Russians could always turn around and sell their cheaper gas to China so no big loss to them. Thing is, it will take a decade to build a fleet of tankers to carry the gas that Germany needs annually as these ships would just be going back and forth like clockwork. Who pays for that? Germany would also need years just to build the LNP port facility to receive these shipments. I believe too that the US export terminal is in the Gulf so tough luck if a hurricane shut down that terminal at any time. Remember, this winter the Russians had to ship two tankers of gas to the US because of shortages so how reliable could a US supply be?
    Add up the costs of building the port facility, a fleet of tankers and the infrastructure to deal with it all, then top up with the gas not only being more expensive than the Russian gas but also less reliable and the Germans will have to take a knife to their budget to pay for it all. Trump would have a fit if it was their defense budget so that means the social budget. Good luck with that. One last factor of which I have even less knowledge of is the US gas supply. I believe that it comes from shale deposits aka fracking but I know that these wells deplete rapidly so if true, would suggest that US gas as a supply source may be self limiting over time. I don’t think that the economics work out here for Germany somehow.

    1. California Bob

      re: “… the gas not only being more expensive than the Russian gas but also less reliable …”

      Don’t the Rooskies threaten to choke or cut off the natgas supply anytime the Europeans protest Russian revanchist actions?

      1. The Rev Kev

        Nope. The Russians are pretty reliable about contracts. If there are shortages, It is because of something like the Ukrainians siphoning gas out of the pipelines going to Europe until the Europeans tell them to knock it off.

  6. Julia Versau

    When I read: “As X becomes increasingly aggressive, even reckless geopolitically,” frankly Russia was not the first country that came to mind.

  7. kgw

    Pure propaganda… likely written by the Christians-In-Action. Germany , kill itself? Not likely. Astronomical costs.

  8. nervos belli

    It’s not a pivot. The only important thing is North Stream 2: if the US or the transatlantic lobby manages to kill that, then there is a pivot. Otherwise, it’s business as usual.
    North sea gas is drying up, however we get 40-50% of our gas from there

    So unless one wants to be ~90% dependent on russian gas, there has to be some alternatives to keep the russians honest. Only realistic way is LNG. So Germany has to build the infrastructure for it to have a credible bargaining position. The marketshare of russian gas will increase over the next few years in any way.

  9. Self Affine

    Also, I would like to add that the German Press isn’t treating this like some sort of revelation.

    As everywhere else, if a politician wants to get a little patriotic push on their side, they hold a speech touting “energy independence”. Germany is no different in that regard and Merkel needs to appear a bit more nationalistic right now.

    Current headlines are all about social issues like immigration, Facebook data breaches, internal politics, etc. No one is obsessing about LNG facilities or things like Brexit.

  10. rd

    LNG ports on the Mediterranean also make sense as ships could traverse the Suez Canal or the the Atlantic to get there.

    1. visitor

      There are major offshore gas fields in the Mediterranean — on the coast of Cyprus and all the way offshore from Syria to Egypt. Their exploitation is still largely pending resolution of local crises (Turkey vs EU re Cyprus, Israel vs Palestine and Lebanon, in Syria because of war). Once those fields come on line, the need for special-purpose ports to bring in LNG from afar to Europe no longer makes much economic sense.

      Besides, Algeria continues to provide gas (and oil) to the EU.

  11. Louis Fyne

    nuclear fission. germany already buys a lot of french nuke electricity. might as well cut out the middleman.

    not holding my breath. never going to happen though. as even bringing up nuclear fission is third rail of environmentalism

    1. PlutoniumKun

      Germany is a major shareholder in the EPR reactor, but isn’t building any because its proven far too expensive, much more expensive than domestic renewables.

      Its untrue to say that Germany buys a lot of French nuclear energy, imports from France are minor at a net of around 4 terawatt hours a year, similar to the amount of wind energy Germany buys from Denmark. Its dwarfed by the huge renewable sector in Germany which produces over 200 TWh per annum. Germany is actually a net exporter of energy to France in most summers as the inland nuclear plants often go off-line due to water shortages.

  12. James McFadden

    “Germany’s LNG pivot also comes as a geopolitical storm between the U.K. and Russia intensifies over an alleged Moscow-orchestrated nerve-agent attack on British soil against what the BBC called a double spy and his daughter.”

    When one thinks about the geopolitical repercussions of this nerve gas attack on $$ for USA LNG, the control of energy supplies to the EU by the USA and its middle east puppets, the quickly identified fingerprint and emotionally charged finger pointing, a complex technical topic to which the general public has general knowledge and therefore must rely on “authorities”, the high level of media attention for a relatively minor character, and the ongoing attempts to vilify and isolate Russia – one has to wonder if this is just another CIA false flag event similar to Iraq WMDs and the Syrian chemical weapons attacks – another false flag that will eventually fall apart after it has served its purpose. Examined in the light of past and ongoing CIA atrocities (Renditions and torture in Abu Ghraib and Gitmo, droning, MKULTRA, Operation Mongoose, Phoenix Program, Iran-Contra, numerous assassinations and coups — just to name a few), it seems quite in line with what I would expect from this criminal organization. Not that we can really know the truth at this time, but those who dutifully believe the corporate media on this topic might want to open a skeptical eye. There are likely cover stories within cover stories – much like cover stories one finds in the Wormwood documentary.

  13. Tobin Paz

    This news along with Trudeau’s support for Kinder Morgan Canada’s Trans Mountain oil/tar sands pipeline expansion should make it clear that the Paris Accords were a cruel joke on humanity. We will keep extracting every single last drop of recoverable oil until we run out of energy to continue or we nuke ourselves.

  14. Nathanael

    So, it’s easy enough for Germany to pivot away from gas… *if* they switch to heating with electricity. However, Merkel refuses to push this. Because Merkel.

    1. Synoia

      So, it’s easy enough for Germany to pivot away from gas… *if* they switch to heating with electricity.

      err – and where, pray, does the electricity come from?

      Hint: Magic, sparkle fairy dust is not an energy source.

      1. Comradefrana

        “err – and where, pray, does the electricity come from?”

        Currently, from 87% not from natural gas. (link)

  15. RBHoughton

    Mrs Merkel’s fear is palpable. She sees the overwhelming mineral wealth of Siberia being developed and its significance for the rest of the world and she’s willing to tax her own people with doubled energy costs of creating a non-Russian gas industry. I think that’s nationalism not capitalism.

    The Poles are playing another game. They are importing fracked US gas by ship to a port on the German border from whence they can readily, if very expensively, ship it to German customers. This appears to be Poland scoring brownie points with USA where a river of money has been poured into fracking with little to show the financiers in return.

    German companies are building Nord Stream 2 pipeline and they stand to be devalued by this new uneconomic policy. Formerly the country bought energy from the lowest bidder now national wealth will be diverted into fracking the northern plains with all the environmental danger to food crops and residents that has been reported elsewhere. It looks like ‘lose lose’ for Germany but it may keep the country in the good books of ‘you know who.’

  16. Thuto

    This is just political posturing by Merkel. From posturing to reality is a long way, and Merkel as a trained scientist should know the folly of trying to leap over distances your flying apparatus(i.e. meeting Germany’s energy needs in a sustainable, cost effective manner) wasn’t designed to achieve. Like an airplane skirting the very edges of the flight safety envelope, her statements suggest someone treading dangerously close to skirting the edges of reliable energy supply envelope for Germany. The less said about the author’s channeling of Boris Johnson re: Russia’s threat to European security the better.

  17. IronForge

    Russia’s Geopolitics aggressive and reckless…

    Lost me there. What’s next, China’s Shanghai Energy Exchange to labeled as a Black Market Ponzi Scheme?

  18. TedHunter

    I wonder if synthetic methane aka Power2Gas will ever become a topic in Berlin. This is a mature technology, ironically the main issue seems to be a lack of clean CO2. Audi and Dena already have a pilot project. Link: here. But there’s been little else.

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