EU: Playing Poker with Natural Gas (II)
The prospect of an imminent suspension of Russian deliveries to the EU is growing. Industry representatives draw up contingency plans and demand that private consumption be first reduced.
MOSCOW/BERLIN (Own report) – The prospect of an imminent suspension of EU gas imports from Russia has significantly grown prior to today's EU energy ministers’ meeting, because of Brussels' announcement that it will not accept the latest payment proposal. It stipulates that payment of supplied gas will only be considered as concluded, once the euros paid for the price of the purchase have been exchanged into rubles. This should ensure that Russia is not left holding euro or US dollar deposits that it cannot use due to the sanctions. The EU refuses to accept this because the Russian Central Bank – itself under EU sanctions – would be involved in the exchange process. According to a new study, Germany would have to reduce gas consumption by one-fifth, if Russian supplies were suspended – even under favorable conditions. In addition, Germany's gas traders are obliged to pay billions for years even if they do not accept the gas. Industry representatives demand that reductions not first be made by the industry but by private consumers.
Dispute Over Terms of Payments
The chances of resolving the terms of payments dispute for Russian gas are diminishing. Moscow insists on payments in rubles, since the deposits in US dollars or euros accumulated through transactions with these currencies are subject to western sanctions. Simultaneously, the systematic use of payments in rubles for the natural gas industry strengthens the ruble and weakens somewhat the dominance of the US dollar. Russia is already transacting a growing portion of its trade with China in local currencies and is currently working out a means to adapt its trade with India accordingly. In principle, nearly all of the EU member states are prepared to accept the changed terms of payments, as long as they do not conflict with the sanctions Brussels has imposed on Russia. Only Poland and Bulgaria are categorically refusing to adapt. Russia has, therefore, officially halted all gas deliveries to both countries last week. However, both countries’ contracts were only until the end of this year. Poland hopes to procure supplementary gas, beginning in the fall, through a new pipeline from Norway, and Bulgaria through new pipes from Greece.
Time is Running Out
What is, however, uncertain is whether the planned terms of payment can be reconciled with the EU’s sanctions. Because the EU was against allowing direct payments to be made in rubles, Moscow has proposed a 2-account model: payments would be made to an account at the Gazprombank in US dollars or in euros, and the amount would be transferred in rubles to another account for the payments. If the payment is considered transacted after the initial bank transfer, then there would be no problem from the perspective of the EU Commission; on the other hand, that would mean that a deposit in US dollars and euros would again be at the Gazprombank. Should Moscow insist – as it currently seems it will – that the transfer is only valid, once the rubles are on the second account, this would violate the sanctions, because, according to a “clarification” issued by the EU Commission last Thursday, the exchange into rubles, would be transacted with the assistance of Russia’s Central Bank, which is under EU sanctions.[1] The industry is therefore desperate to find a solution. Germany’s largest gas importer Uniper – with 60 percent of its gas coming from Russia – has its next payments due at the end of May. By then, everything must be settled.
Long-Term Payment Obligations
The debate continues over what can be feared, when the gas deliveries are halted due to a lack of agreement on the terms of payment. Minister of the Economy Robert Habeck’s declarations that Germany had already reduced from around 55 percent to 35 percent the proportion of Russian gas among the total gas imports this year, is being doubted in the industry, given, according to reports, the fact that the amount of Russian gas being routed through the relevant pipelines has not decreased, as is shown in official data from the Federal Network Agency.[2] Besides, it is not clear how the gas importers are supposed to pay for such a drastic changeover in such a short time. A large portion of the German imports are based on long-term contracts, with many ending at the end of the decade. Uniper, in some cases, is even contractually bound to Gazprom until 2036.[3] The contracts also provide for a significant minimum payment – according to concurring reports, of up to 80 percent of the total sum – even if the delivered gas was not accepted. Should substitutes for Russian gas be found, it would de facto amount to paying the double price – with gas prices already astronomical.
Required Reduction: 18 Percent
Regardless, it is clear that a total halt of Russian natural gas deliveries cannot be replaced by alternative suppliers in a short- or intermediate-term. A current study on this question was published by the Institute of Energy Economics (EWI) in Cologne. The authors make several optimistic assumptions. They reckon, for example, with Norway being able to increase its production of liquefied natural gas (LNG), a new LNG terminal being built by October in Eemshaven in the Netherlands, and by the end of the year, one going into operation in Wilhelmshaven, Germany, as well as the next winter being only moderately cold.[4] Should the storage level be kept, at least, at its current stand – EU average of 32 percent – it would mean that a reduction of 18 percent of the current gas consumption forecast must be made within a year, the EWI writes. If one intends to achieve the prescribed storage level of the EU’s current planning – 80 percent by November 1 – then the reduction must begin soon. The 18 percent reduction is a bit more than half of the German industry’s total consumption. Should winter be abnormally cold, the private demand will increase considerably for heating purposes and thereby increase the overall consumption.
“Private First”
According to the current plan, it is actually the industry that must first have its consumption reduced; private households and institutions such as hospitals have special legal protection. In the German industry, the contingency planning has been working at full speed for weeks. However, slumps would still be unavoidable, if there is an interruption of supply. For example, the chemical industry sector, which consumes nearly 15 percent of the gas, announces it would not be able to forego the use of gas as its raw material, but could reduce what is needed for energy – albeit, only in “the low single-digit range.”[5] A plan is being worked out, where single sectors could be shut down, to, at least, not jeopardize the main sector. Whether the lacking products can then be replaced with imports remains uncertain, due to the tense situation on the world markets.[6] In the meantime, demands are beginning to be raised, where the initial reductions not be made by industry, but rather by private consumers. Politicians must “very seriously consider,” says Karl-Ludwig Kley, Chairman of the Board of the Eon energy supplier, whether they should not “reverse the order in the future, and first turn off the private households and then the industry.”[7]
For more on this theme: EU: Playing Poker with Natural Gas.
[1] EU: Rubel-Umtausch bei Gas-Zahlungen ist Sache Russlands. sueddeutsche.de 28.04.2022.
[2] Josh Groeneveld: Laut Habeck hat Deutschland seine Abhängigkeit von russischem Gas deutlich reduziert – ein Blick hinter die Kulissen lässt daran Zweifel aufkommen. businessinsider.de 30.04.2022.
[3] Die Gasversorgung gerät in Gefahr. Frankfurter Allgemeine Zeitung 28.04.2022.
[4] Ohne russisches Gas wird die Versorgung im Sommer eng. Frankfurter Allgemeine Zeitung 30.04.2022.
[5] Für den Gasnotfall eine Krisenliste mit 2500 Unternehmen. Frankfurter Allgemeine Zeitung 26.04.2022.
[6], [7] Möglicher Gaslieferstopp: Wie sich die Industrie auf den Worst Case vorbereitet. handelsblatt.com 28.04.2022.
