EU: Playing Poker with Natural Gas

“No Payment – No Gas”

The G7 states had already announced on Monday that they would not comply with Russia’s demand to pay only in rubles for future natural gas. The Russian President Vladimir Putin had announced last week that Moscow would only accept rubles. Due to current western sanctions, Russia’s use for euros and US dollars is limited, for the time being. Germany’s Minister of the Economy, Robert Habeck commented that Putin “obviously has his back to the wall, otherwise he would not have made this demand.”[1] Subsequent to the G7, the EU has now officially announced that companies in EU member countries are urgently advised not to pay in rubles: Because the Union takes part in G7 meetings, it goes without saying.[2] For tomorrow, Thursday, it is now expected that Gazprom, the Russian Central Bank, as well as the Russian government will present the modalities for ruble payments to President Putin, which will presumably be communicated to the gas customers in the west. If they, as Berlin and Brussels would like, do not comply, it could lead to an immediate supply freeze. “No payment – no gas,” declared Dmitry Peskov, President Putin’s spokesperson on Monday. This raises the question of how, in Germany, the all too scarce gas supplies will be distributed in the future.

Contingency and Shutdown Plans

Germany’s Federal Network Agency (BNetzA) in Bonn is addressing the question, who, in Germany, should continue to receive natural gas, in case of a Russian gas supply freeze, halting half of the gas imports at-once. The “Gas Emergency Plan” published in September 2019, by the Ministry of Economics, forms the general basis for their assessment. According to this plan, companies producing “most likely to be dispensable products” should not be supplied. On the other hand, private homes, as well as hospitals and fire departments enjoy special protection. In order to give the relatively general rules of the “Gas Emergency Plan” more substance, the Federal Network Agency has been negotiating since March 18 with representatives of the Ministry of Economics, the Federation of German Industries (BDI) and Germany’s Federal Association of Energy and Water Industry (BDEW).[3] One of the objectives is to draw up a shutdown plan for the worst-case scenario. Numerous factors must be taken into consideration – from the significance of enterprises for national and international supply chains to the concrete consequences of a shutdown of natural gas: Some production sites, for example, in the glass and metal sectors, would immediately suffer irreparable damage, if their ovens go out due to a lack of gas.

Shutting Down Operations

The chemical group BASF, a company potentially affected by shutdowns, is the first to speak out. If supply of Russian gas does cease, the BASF plant, at its headquarters in Ludwigshafen – the largest chemical plant in the world – will probably be forced to temporarily cease production, announced the company at the beginning of the week.[4] Then, for example, no more ammonia – an indispensable precursor for fertilizer – can be produced. The current global fertilizer shortage, exacerbated by western sanctions against Russia and Belarus – (german-foreign-policy.com reported,[5]) – would become even more acute with fatal consequences for the world’s food production. The loss of acetylene production in Ludwigshafen would also have serious consequences. Acetylene is needed not only for producing plastics and textile threads, but also for medicine. According to the IG BCE chemical workers` trade union, at BASF’s main production site in Ludwigshafen, alone, nearly 40,000 people are employed. A halt in the supply of natural gas could “cost hundreds of thousands of jobs” in the chemical industry, in a short time, IG BCE Chair Michael Vassiliadis was quoted saying.[6] Other sectors would follow.

“Large-Scale Shutdowns”

If the consequences of a Russian supply freeze would be fatal for Germany’s industry, it would also be strongly felt by the population. This was demonstrated in the scenario of the annually held crisis management exercise LÜKEX, in 2018, with numerous federal, and state authorities as well as federal ministries participating. LÜKEX 2018 tested how to handle a sudden lack of natural gas. The scenario envisaged a drop of 30 percent of the gas deliveries to southern Germany, with German gas storage tanks at 32 percent capacity. By comparison, Russian gas deliveries account for a good 50 percent. The storage tank facilities are currently at less than 25 percent capacity. During the LÜKEX scenario, within a few days, delivery failures began appearing, first in industry, then also in the food branch – for example “in industrial bakeries, livestock farming, and dairy industry.”[7] “Large-scale shutdowns” soon followed, which also affected private households, hospitals, as well as retirement and nursing homes. In the homes, the meals supply was “affected.” Due to cold winter weather, it became necessary to begin “constructing emergency shelters.” Even hospital emergency rooms were only able to function to a limited extent, according to the LÜKEX exercise report.

No Replacement in Sight

It is still unclear, where a rapid replacement for Russian gas is supposed to be found. In industrial circles it is said, that it is impossible to fill the gaps that would be created by a supply freeze. During a recent visit to Norway, Germany’s Minister of the Economy, Robert Habeck, was promised to be able to purchase a meager additional 1.4 billion cubic meters (bcm) this year, and during his visit to Qatar, he was unable to get any significant delivery promise.[8] An agreement the EU concluded with the United States on Friday, stipulates that Washington will try to deliver up to an additional 15 bcm of natural gas in the course of this year. This amount, however will include deliveries that had been earmarked for Japan and South Korea, but which the Biden administration will now redirect to Europe. At the end, Russia was annually delivering a good 150 bcm to the EU. This year, the EU’s usual import volume must be increased. The Union’s gas storage tank facilities are emptier than they have been in a long time. If they are to be filled before the coming winter, considerable amounts of additional gas will be needed.[9]

“Creative Solutions”

Despite all the foreseeable problems, several German economists advise not to be deterred by a possible supply freeze. Although energy prices, as a whole, would probably continue to rise, admits economist Rüdiger Bachmann at the University of Notre Dame in Indiana USA, “consumers (...) would have to decide for themselves whether, in light of the high prices,” they would rather, for example, “drive their cars less or not.”[10] Economist Moritz Schularick, at the University of Bonn, is basically optimistic: “in emergency situations,” predicts Schularick, who was recently awarded the €2.5 million endowed Gottfried-Wilhelm-Leibniz Prize 2022, that “business and citizenry will always be creative and find solutions to replace the lost energy.”[11]

[1] Russland beharrt auf Rubel für Gaslieferungen. tagesspiegel.de 29.03.2022.

[2] Gas-Lieferstopp rückt immer näher. Frankfurter Allgemeine Zeitung 30.03.2022.

[3] Jürgen Flauger, Bert Fröndhoff, Klaus Stratmann, Kathrin Witsch: Bund arbeitet an Abschaltplan für Industrie bei Gas-Lieferstopp. handelsblatt.com 18.03.2022.

[4] Bernd Freytag: Hunderttausend Stellen in Gefahr. Frankfurter Allgemeine Zeitung 29.03.2022.

[5] See also Krieg und Hunger.

[6] Bernd Freytag: Hunderttausend Stellen in Gefahr. Frankfurter Allgemeine Zeitung 29.03.2022.

[7] Auswertungsbericht LÜKEX 18. Gasmangellage in Süddeutschland. Bonn, Juli 2019.

[8], [9] See also “Freezing Against Putin”

[10] „Robert Habeck wird schlecht beraten”. n-tv.de 27.03.2022.

[11] Martin Greive, Julian Olk: Energieembargo gegen Russland: Droht Deutschland der wirtschaftliche Niedergang? handelsblatt.com 22.03.2022.