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.