My best guess is that, when the maintenance works on the Nord Stream 1 pipelines are completed, which ought to be in a few days, Russian (natural) gas will resume flowing to Germany, albeit at the sharply reduced levels seen before the maintenance cut-off. For Putin to make the most of his advantage, the best time to turn off the taps is probably early winter — but who, outside the Kremlin, really knows what his thinking is?
On the other hand, one possible conclusion to draw from this story in the Wall Street Journal is that the gas will not be turned back on. The timing of the letter it refers to is nothing if not suggestive.
On Monday, utility Uniper SE, Germany’s biggest buyer of Russian gas, said it had received a letter from Russia’s state-owned Gazprom PJSC that claims force majeure—a legal declaration that exempts the company from fulfilling contractual obligations due to circumstances outside its control—to justify past and current shortfalls in gas deliveries.
Uniper said it had rejected the claim as unjustified. Gazprom didn’t immediately respond to a request for comment.
I wrote about Uniper here.
The writers of the Journal piece (Bojan Pancevski and Jenny Strasburg) also note the hub role played by Germany in the European gas market. That’s one problem, but so is the effect that a complete shutdown of Russian gas supplies to Germany may have on industrial production in that country, and by extension, on production elsewhere on the continent. A fresh round of supply-chain disruptions may be on the horizon.
Pancevski and Strasburg:
Germany is highly dependent on Russian gas, and it also acts as a transit hub for gas headed to Austria, the Czech Republic and Ukraine. German industry also makes raw materials and components, from glass to plastics and other chemicals, that are crucial to other manufacturers across Europe and beyond. . . .
European manufacturers in gas-hungry industries have been switching to alternative fuels like oil and coal where possible, and stockpiling chemicals and other crucial ingredients ahead of winter, when gas is in higher demand, according to business and trade officials. But those steps will go only so far. Industry executives and economists say a gas shortage severe enough to force rationing in any one European country—especially in Germany, the bloc’s largest economy—would inevitably be felt across the continent.
Such an event would disrupt pan-European supply chains, particularly in the petrochemical sector, which depends on gas and petroleum as a raw material, said Günther Oettinger, a former EU energy commissioner and German politician. The production of steel, copper and ceramics would also be severely affected. German legislation gives households and institutions such as hospitals priority for gas supplies, making it more likely that industry would be first to face rationing in case of a shortage. Given how tightly integrated the continent’s economy is, such a move would quickly ripple outward.
“The whole EU stands to suffer if any single economy enters into a sharp and long-lasting recession,” as a result of an interruption in gas supplies, German insurer Allianz SE wrote in a recent report. . . .
More than 60% of chemicals imported by Germany, not including pharmaceuticals, comes from other EU countries, according to the German Chemical Industry Association, or VCI, which includes many of the country’s largest chemicals and pharmaceutical companies. Germany, in turn, sends the majority of its chemical exports to industrial customers within the EU.
Plastics and other materials made in the Netherlands can rely on German-produced ammonia or acetylene, a compound used in welding and as a chemical building block for batteries, cables and other products. Those and other plastics can travel across another border for molding, or to go into the making of automobile seats, drug packaging, electronics or construction materials, trade-group officials say.
Acetylene also has medical uses. Chemical-industry groups and companies are gaming out how European officials will give priority to natural gas for production deemed crucial to making lifesaving drugs, or for fertilizers that maximize crop yields—a key consideration at a time of rampant food price inflation.
The Financial Times has more on what might lie ahead for Germany (my emphasis added):
Petr Cingr is in no doubt about the fate that awaits his chemicals company if Russia cuts off all gas supplies to Germany.
“We have to stop [production] immediately, from 100 to zero,” said the chief executive of SKW Stickstoffwerke Piesteritz, the country’s largest ammonia producer and a key European supplier of fertilisers and exhaust fluids for diesel engines. . . .
Should flows cease completely, most economists expect the eurozone’s economic powerhouse to experience a severe fall in output. No gas this winter would, according to analysts at Swiss bank UBS, trigger a “deep recession” with almost 6 per cent wiped off GDP by the end of next year. The Bundesbank has warned that knock-on effects on global supply chains would “increase the original shock effect to two-and-a-half times the size”.
Six percent? Maybe. It’s a higher estimate than some I have seen, but I suspect that at this point any forecasts have to be treated with extreme care. Unknown unknowns and all that. And, again to repeat my comment from the other day, the idea that a collapse in GDP on anything approaching this sort of scale could be weathered without severe political trouble is illusory. And, as for the implications for support for Ukraine, well, it’s not hard to guess.
Among other industries mentioned in the FT article are steel. No biggie, then.
And the problem is not only uncertainty of supply, but also the not unconnected issue of price:
It is not just a total shut-off that is worrying companies. European benchmark natural gas prices have soared eightfold over the past 18 months, rising from about €20 a megawatt hour to above €160 a megawatt hour. The price doubled in the past month alone, leading many companies to warn that they could not continue to operate at that rate.
“We are financing the war,” said Cingr, who added that his own costs were now more than 40 times as high.
That price was already destroying demand for SKW’s fertiliser products by between 50 and 70 per cent, he added. Farmers were baulking at the increased costs, with some accessing illegal imports from Russian fertiliser producers smuggled into the EU via Serbia. The company would, he said, only be able to keep factories running for a few more weeks.
If you are looking for a straw in the wind, I’d note Cingr’s comment about “financing the war.”
And markets are not expecting prices to come down any time soon.