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Business Last Updated: Jun 13, 2022 - 10:01:03 AM

The Natural Gas Continues to Flow
By Claus Hecking, Isabell Hülsen, Michael Sauga und Gerald Traufetter, Spiegel, 10.06.2022
Jun 12, 2022 - 10:23:03 AM

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The EU promised to quickly wean itself off of Russian natural gas. But the European Commission in Brussels is far behind its stated goals – with potentially serious


Klaus Müller is fond of delivering good news. The head of Germany's Federal Network Agency tweets daily about the current situation on the gas market – and lately, the numbers have only been going up. In mid-March, German fuel storage facilities were only 24 percent full. They were at 30 percent by Easter and 41 percent in mid-May. And last week, Müller's numbers signaled for the first time that more than half of the maximum levels had been reached. "Gas supply in Germany remains stable," the official proudly reported.

The situation is also easing in other European countries. On average, gas storage facilities are now at more than half of capacity. Furthermore, many in Brussels currently believe that the European Union will have made itself sufficiently independent of Russian gas by the end of the year that member states will be ready if Moscow decides to cut supplies in winter.

That may sound like "mission accomplished," but, in fact, the mood is better than the actual situation, because it is also Russian gas that is helping to fill those storage facilities. The Moscow state gas monopolist Gazprom has indeed stopped its deliveries to Poland, Bulgaria, Finland, Denmark and the Netherlands. However, it continues to supply its most important customers, including Germany's Uniper and Italy's Eni.

According to recent data from the Brussels-based think tank Bruegel, around 1.6 billion cubic meters of gas per week was flowing westward, primarily through the Nord Stream 1 pipeline in Germany. As such, Russia remains the third most important gas supplier for Europeans. Around one-fifth of the natural gas consumed and stored here comes from Putin's empire. Currently, Europe's largest supplier of natural gas in Norway.

The numbers are problematic in two different ways. First, they show that Europe's gas purchases continue to fill the Kremlin's war chest. Second, they also run counter to EU Vice President Frans Timmermans' promise to reduce purchases from Russia by two-thirds by the end of the year. Contrary to what has been stated publicly, the priority for European politicians and officials appears to be restocking storage facilities ahead of winter. "We're not looking at where the gas is coming from," says one insider. Even Poland, which broke off all relations with Gazprom, continues to import Russian fossil fuels – via Germany.

The EU will be able to reduce its gas imports from Russia by half, at best, by the end of the year – and that's if things go well, predicts Jens Geier, head of the center-left Socialists and Democrats party group in European Parliament. "The European Commission has set ambitious goals, but it has so far largely left open how they will be achieved," says the parliamentarian. He says that Brussels plans have had more of an "persuading character."

The situation is similar for energy conservation. The Commission has left the implementation of the objectives largely to the EU member states. And when it comes to laws that Brussels has promised to pass, the deliberations take months. Realistically, many regulations won't be codified until early next year at the earliest.

For example, Brussels is taking its time in converting industrial processes from gas to hydrogen. The Commission has launched dozens of joint European projects and received applications from companies, but they still haven't been approved. "The Commission urgently needs to follow up here," implores energy expert Geier.

The replacement of Russian gas with liquefied natural gas is also proving problematic. The EU has signed several new contracts with liquefied gas suppliers in the United States, North Africa and Central Asia, and there is talk of "imports at record levels." But the EU has been overwhelmed by the task of figuring out how to distribute the delivered fuel volumes across the continent.

Spain, for example, is connected by pipeline to North Africa and has six fully equipped coastal terminals where liquefied natural gas could be delivered from around the world. But only small quantities can flow from the Iberian Peninsula to Northern Europe, partly because France has been blocking the construction of a pipeline across the Pyrenees Mountains for years. To this day, the government in Paris refuses to grant its approval for the project.

Efforts to conserve energy have been similarly restrained. So far, only a few governments have followed the advice from EU headquarters to launch corresponding advertising campaigns and support programs. Instead, they are seeking to relieve the financial burden on households and companies in the form of tax cuts, rebates or subsidies. "Often, this is enormously damaging," warns Bruegel expert Georg Zachmann. "Measures that distort prices increase consumption and flush extra profits into the coffers of suppliers," he says. Worse yet, the programs cost a lot of money that will later be lacking in budgets for the expansion of renewable energies.

The German Economics and Technology Ministry did launch an energy-saving campaign this week aimed at educating citizens to be more efficient, particularly when it comes to heating. But there are other, possibly more effective ideas. Economist Veronika Grimm, a member of the Council of Economic Experts, which advises the German government, has proposed paying people a premium if they reduce their gas consumption by a certain percentage. "Putting a premium in the shop window provides a high incentive and works reliably in Germany," Grimm says.

So far, though, the idea has largely fallen on deaf ears in Germany's government coalition in Berlin. But Grimm is convinced of it: He believes the state could even stand to gain financially from the idea. If gas prices continue to rise in the autumn, the coalition will discuss new relief measures for consumers. "But if the people are financially motivated to save gas, then they take some of the burden off themselves."

But experts fear that with each additional percentage that storage facilities are filled, the government's ambition to prepare as best as possible for the eventuality of a supply shortfall will diminish. At the same time, the danger will not have been averted: Even if Putin doesn't stop the flow of gas completely, he could reduce the amount over the summer months.

The Federal Network Agency and representatives of industry and politics continue to work on procedures for distribution in the event of an emergency and gas scarcity. The authority asked around 2,500 companies to report their gas consumption and information about their products by mid-May. Soon, they will begin regularly feeding their data into an online platform.

To prevent having to ration and motivate companies to save gas as a precautionary measure, the BDI industry association had suggested an auction procedure several weeks ago that could work in the same way as Germany's phaseout of coal power. Companies that give up a certain amount of gas in exchange for compensation would post their compensation requirement in a kind of marketplace. Companies that ask for the least money would be awarded the deal.

Federal Network Agency head Müller has also spoken out publicly in favor of such an auction model. At the working level, however, the idea hasn’t taken off. Now, though, a working group has at least been tasked with developing a plan. So far, there hasn't been a clear signal from Robert Habeck's Economy Ministry as to whether the government is even willing to implement the idea – and provide the money.

But there is an important conundrum that hasn’t yet been solved: What can be done to prevent companies whose products are particularly important for many others in the customer chain from submitting their gas volumes for auction?

Officials in the Economics Ministry point out that an auction system can't seriously be introduced until there is a sufficient data available on companies' gas consumption. But proponents counter that companies that manufacture important products can also charge high prices for them – which, in turn, would reduce the risk that they would cut back on manufacturing in order to collect government bonuses for conserving gas.

The German government is apparently counting on large industrial customers to reduce their gas use anyway because of the rising prices, provided their production facilities aren't damaged as a result. "We're already seeing large customers voluntarily cutting back on their consumption," says the CEO of a major gas supplier.

In view of the complexity of the matter, more than a few experts advocate taking the gas-fired power plants off the grid over the summer as a precautionary measure and letting the coal-fired power plants continue to operate instead. This would free up relevant quantities of gas for storage in the reservoirs. But the German government only wants to pursue that route in the event of an acute shortage. After all, Economy Minister Habeck is from the Green Party – and it would be a tough sell to his constituents were he to turn to coal out of fear of a gas shortage.

Source:Ocnus.net 2022

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