European gas nightmare approaching | The time

Russia’s largest gas pipeline to Europe will reopen next week after routine summer maintenance. Unless Putin – as feared – uses his most important economic weapon and keeps the tap closed. What are the short, medium and long term consequences?

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Next week: Every little bit helps for full stocks

From Thursday, gas would flow again between Russia and Germany. Any further disturbance tightens the nerves.

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In the German town of Dippoldiswalde, a town between Dresden and the Czech border, tenants of a large cooperative received a striking announcement last week. From now on, hot showers in their apartments are only possible during defined hours throughout the day. “We have to save gas for the winter,” was the explanation. Vonovia, the country’s largest landlord, lowers the thermostat for its residents to 17 degrees Celsius at night. And in Berlin, the open-air swimming pools are 2 degrees less warm than usual this summer.

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Those seem like crazy interventions in the middle of summer. But every little bit helps with a view to winter, is the reasoning since Germany is in alert phase two out of three for its energy supply. That was announced after Russian state exporter Gazprom cut gas supplies by 60 percent last month, according to Germany in retaliation for Western sanctions. This week, the supply through Nord Stream 1, the main pipeline, has come to a complete standstill, which was planned as maintenance works take place every summer. But the fear is there. Is Vladimir Putin seizing this moment to shut off the tap to Europe’s largest economy?

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The international bidding pushes the gas price up.

Hans van Cleef

ABN AMRO energy specialist

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Thursday is an important meeting. In principle, gas should flow again on the 1,222-kilometre stretch on 21 July. But there is no guarantee that the fickle Moscow regime will keep that promise. Putin may reason that now is an ideal time to deploy his main economic weapon. Russia benefits financially from exporting gas, but any cut hurts Europe as countries under great pressure try to replenish their stocks before heating comes back on.

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According to the EU, gas supplies must be filled to at least 80 percent before winter. Efforts are being made as much as possible to import liquefied gas (LNG) via ships from the US, Qatar and Australia, among others, but the supply is limited. ‘Any tanker that goes to Europe doesn’t go to other, less prosperous countries. This bidding also pushes the gas price up’, says Hans van Cleef, energy specialist at ABN AMRO. Hence the need to intervene on the demand side now. The think tank Bruegel calculated that the EU should reduce the demand for gas by 15 percent.

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All European countries are tightening their emergency plans about those who do not receive energy in the event of shortages. The industry comes into the picture first, the families are protected as long as possible. The European Commission will meet on this next week. It would aim for a financial compensation system for companies that voluntarily sacrifice their energy consumption. And in public buildings, the air conditioning should not go below 25 degrees, and the heating should not go above 19 degrees.

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Next winter: ‘It will undoubtedly be a difficult winter’

If the situation gets out of hand, a European solidarity mechanism comes into effect. It already seems to be cracking.

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Despite all the preparations, tensions will rise as temperatures drop, experts say. “There is no doubt that we have a difficult winter ahead of us. I fear that we have passed the point where we can do something about it’, says Matthias Detremmerie, guest trader and co-founder of the Waregem supplier Elindus.

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Looking at the thermometer is especially frightening, because severe cold spells increase the risk of stocks depleting too quickly and international LNG bidding will push the price even higher. The German energy regulator Bundesnetzagentur calculated seven scenarios for when little or no gas comes through Nord Stream 1. In six scenarios, supplies will be tight, in three scenarios there will be shortages at the end of the winter.

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In our country, which is much less dependent on Russian gas than Germany, physical gas shortages are not the biggest fear, say the government and gas network operator Fluxys. Belgium imports LNG at full capacity and transfers 3.5 times more gas to the Netherlands and Germany than it consumes. The gas storage in Loenhout is currently 65 percent full, which corresponds to eight days of peak consumption. When the stock is completely filled, it can form a buffer of up to 18 days of gas reserves.

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Each additional energy shock makes that recession worse. The question is, how bad will it get?

Carsten Brzeski

Chief Economist ING Germany

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But those assets threaten to amount to little if high gas prices – on the wholesale market natural gas is eight times more expensive than a year ago – continue to go through the roof and shortages in one country infect others. We could end up in a situation where companies under economic pressure decide to shut down and families turn the thermostat down in the hope of reducing their bills.

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If the situation gets out of hand, a European solidarity mechanism comes into effect. Countries in need can then ask other member states to help. As is often the case in times of major crisis, this solidarity will come under heavy pressure. ‘I wonder if it will hold up’, says oil and gas specialist Jilles van den Beukel. ‘The emergency plans of the United Kingdom state that it can close the transit to the Netherlands and Belgium. Hungary has already dropped considering gas tracking. We are entering unknown territory.’

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In Germany in particular, there are fears of far-reaching economic consequences. Several studies speak of an impact on growth of 2 to 10 percent. “If everything stays the same, we expect a mild recession due to the effect of high energy prices on households and businesses,” said Carsten Brzeski, ING Germany’s chief economist. “Every extra shock makes that recession worse. The question is: how bad?’ Deutsche Bank released a report this week announcing a recession that could shrink from 1 to 5 percent, depending on the extent to which gas supplies are cut.

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Brzeski fears failing energy companies that cannot pass on the rapidly rising prices. At the same time, the industry is suffering from disrupted supply lines due to the pandemic. ‘Add an energy shock to that and you get companies in the value chain that start to falter. Germany is the main trading partner of many European countries. When the horror scenario takes place, no one can calmly sing it out.’ Robert Habeck, the German vice chancellor, already spoke of a possible Lehman Brothers moment in the energy market. The implosion of that investment bank in 2008 caused a chain reaction in the financial sector.

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If large industrial companies are obliged to switch off during rationing, a cascade effect threatens, say specialists. If that takes a long time, the indirect effects will weigh heavily, depending on which production is at risk. The production of fertilizer consumes energy, but if it stops, there is an effect on agriculture and food prices. ‘That can quickly become a snowball effect,’ says Van Cleef. “I have no idea where that ends. These companies, of course, have contracts with their customers. Who is responsible and where does the claim lie If they do not comply with those contracts? If it takes a long time, we will have to face the consequences for a long time.’

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In addition to economic chaos, a gas crisis can also become a life-threatening situation if in some parts of Europe the gas does not get where it needs to be. When Russia largely turned off the gas tap to Ukraine in January 2009, several regions in Eastern Europe and the Balkans were left without natural gas. Temperatures then dropped to 25 degrees below zero, resulting in fatalities.

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After next winter: ‘Expensive gas is the new normal’

Gas prices remain high in the long term and European competitiveness is at risk. But there may be a silver lining.

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What after winter? Although it announces itself as a time of crisis, it is an illusion to think that the suffering is over with the first rays of the sun in the spring. The exercise to replenish the stocks as best as possible then starts again.

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That this is a long-term problem is visible in the energy markets. Due to the shortage, prices for gas supplies in the coming years will be four times higher than in less turbulent times. ‘In the beginning, the gas crisis seemed short-lived, with a high peak and then normalization. But the curve is spread wide. Until 2024 and 2025, prices will be a lot higher than before the war. You can speak of a new normal’, says Detremmerie.

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It is expected that, thanks to the expansion of LNG import capacity and contracts with the United States, Qatar and Azerbaijan, Europe will be better able to absorb the loss of Russian gas winter after winter. The gas network operator Fluxys is considering the construction of a second pipeline for transit from Zeebrugge to Germany.

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What will the gas market look like then? Today we beg for LNG, but in the long run we want to get rid of gas. That is a difficult issue.

Jilles Van den Beukel

Oil and gas specialist

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Several countries are investing in floating LNG platforms to import more liquid gas. But there is great uncertainty above such large-scale investments in extra gas capacity. ‘If you build terminals now, they will be there in three or four years’, says Van den Beukel. ‘But what does the gas market look like then? Today we beg for LNG, but in the long run we want to get rid of gas. That is a difficult issue.’

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In the report announcing a recession for the end of this year, Deutsche Bank also looks further ahead. The message is bleak. The decoupling of cheap Russian gas will lead to years of energy transition, in which the competitive position of the important German industry will falter.

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The economists see the gas crisis as a game changer for Germany as an economic location. German industry is vertically integrated, from the production of basic raw materials to the production of finished goods for global customers. But the high energy prices are putting enormous pressure on energy-intensive companies at the beginning of that value chain, such as basic chemicals or metal production. That threatens to have a detrimental effect on competitiveness. ‘The supply of Russian gas was the basis for our competitive industry. If that goes away, the biggest economic crisis since the end of the Second World War is imminent,” said Martin Brudermüller, boss of the chemical group BASF.

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‘This war and its consequences will cost us prosperity’, says Carsten Brzeski of ING. ‘Europe will lose competitiveness as a bloc. Hopefully at some point we will make the transition, which can give us a new impetus. But we are only at the beginning. The years we need will hurt. Gas will continue to be necessary during the transition.’

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Some see a possible silver lining to the precarious situation: a much greater collective awareness about our energy consumption. This means that the attention for sustainability that governments have been demanding for a long time will increase, as will the support. Whether that can lead to a spurt in more clean energy depends on technical factors’, says Van Cleef. “There is a clear political will to become fully independent from Russia. That road has been taken, even if the war is over tomorrow.’

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