German Gas Utilities: Prepared for an Embargo?

Several municipal utilities are sounding the alarm: They fear a gas shortage if there is an embargo against Russia. The problem: the local suppliers depend on the gas traders.

Fear of a gas crisis is raging in many German town halls. Essen’s Lord Mayor Thomas Kufen (CDU) recently observed with great concern that the German gas storage facilities were relatively low. In a letter, he called on the North Rhine-Westphalia Ministry of Economics to work towards security of supply.

Stadtwerke Essen are preparing for emergency scenarios

Even before the Ukraine war, Stadtwerke Essen warned of a national gas shortage. The local supplier is therefore technically preparing for scenarios in which little or no Russian gas is supplied. A spokesman explained that you play through what would happen if the pressure in the gas network dropped.

Russian natural gas is still flowing to Europe and Germany – even more in the last few days. “We are currently seeing a strong increase,” confirmed energy analyst Andreas Schroeder from the market research institute ICIS tagesschau.de. He explained a week ago that almost twice as much natural gas is now coming from Russia via the delivery point via the Ukraine to Slovakia as it was two days ago.

But the longer the Ukraine war lasts and the stricter the sanctions against Russia, the greater the risk of a gas embargo. In retaliation against the sanctions, Russia could turn off the gas supply to Europe. However, it would also be possible for the EU to stop gas trading with Russia for political reasons.

No cold apartments until summer

Municipal utilities, energy companies and associations assert that stopping Russian gas imports would not have any dramatic consequences for consumers in the short term – at least until the summer. “The gas storage facilities are so full at the moment that we don’t have to fear an embargo,” says Marie-Luise Wolff, CEO of the Darmstadt-based utility Entega. “We can still get there until the summer, no apartment will remain cold.”

“We do not currently expect the war in Ukraine to have any direct impact on the energy supply in Frankfurt or on our customers,” said a spokeswoman for the Frankfurt utility Mainova. The Mannheim-based utility MVV also sees no reason to panic at the moment. “The people of Mannheim don’t need to worry about their gas supply at the moment.”

Trembling before the next winter

But it could become a problem next winter. “The imports will not be fully offset by then,” warns energy analyst Schroeder. He fears rationing next winter. In the event of a longer interruption or failure in the supply of Russian natural gas, the federal government’s gas emergency plan would take effect. Then so-called protected end consumers, i.e. private households, hospitals and so on, would be given priority – at the expense of industry.

“Should delivery quantities fail to materialize and not be replaced by other routes, load shedding will first be carried out in industry in order to be able to supply households and other protected customer groups with gas,” explains Timm Kehler, head of the “Zukunft Gas” industry association. The gas shortage would then be particularly noticeable in the industrial centers of Bavaria and Baden-Württemberg.

How do gas suppliers prepare for the extreme case of a gas embargo? Do you have a plan B? “The municipal utilities in Germany are working intensively on all possible scenarios and are also developing emergency plans in the event that gas deliveries from Russia fail to materialize,” explains a spokesman for the Association of Municipal Enterprises (VKU). A gas stop would primarily affect the heat supply.

The first municipal utilities are developing precautionary measures

However, many companies are taking precautionary measures to prepare for next winter, emphasizes Entega boss Wolff. Entega has changed its shopping behavior and in the past few days has procured everything it needs for the entire year. “We also ordered oil so that we could switch from gas to oil in our gas-fired combined heat and power plants if necessary,” she says in the “Frankfurter Allgemeine Zeitung”.

Like research by tagesschau.de revealed, many municipal utilities do not yet have any comprehensive alternative plans in the drawer. The Mainova refers to a precautionary and low-risk procurement, which dampens the price fluctuations on the stock exchanges. Some of the quantities required in a delivery year are bought several years in advance and the price is fixed.

Gas traders are at the crux of the matter

Ultimately, however, the municipal utilities and suppliers are very limited when it comes to purchasing gas and other energy sources. Because they are dependent on the big gas traders here, they admit. The long-distance gas companies such as Wingas, VNG, Uniper and EWE supply the public utilities and regional suppliers with gas. Municipal utilities could only discuss with the upstream network operator whether gas would still flow physically if no more gas came from Russia, says energy expert Heiko Lohmann.

The big gas traders themselves explain that in some cases they don’t even know where the gas comes from. A company spokesman explained that there are no proofs of origin for the quantities of origin that the energy company e.on obtains on the trading venues via the stock exchange or via wholesale partners. The municipal authorities confirm this. Since the procurement of gas on the international trading markets takes place to a large extent over several stages with different upstream suppliers or without direct reference to the seller via the energy exchange, “in many cases it is practically impossible to determine whether the natural gas is of Russian origin,” says the municipal utility -Association VKU.

LNG as a short-term alternative

In the medium and long term, gas traders are trying to reduce their dependency on Russian natural gas and are increasingly relying on liquefied natural gas (LNG). “In the short term, there will be significantly more LNG ships,” observed Andreas Schroeder, energy analyst at ICIS. The Uniper Group, which generates a third of its business in Russia, has recently expanded its LNG trade.

“Our colleagues from the trading department are working intensively on alternative sources of supply to substitute Russian natural gas,” explains a spokesman for Oldenburger EWE, to whose natural gas network around 600,000 households are connected. More than two thirds of them are no longer dependent on Russian natural gas, they purchase L gas from Dutch and German production.

Nevertheless, several German long-distance gas companies are still finding it difficult to change their strategy. They have entered into long-term supply contracts of ten to 15 years with Russian gas producers. “They cannot simply be terminated,” says ICIS analyst Schröder.

Only politics can alleviate the emergency

If there were a Russian gas embargo, Europe would have to reduce demand by at least 400 TWh, i.e. by 10 to 15 percent, according to calculations by the Brussels think tank Bruegel. Then LNG imports would have to be massively increased. In addition, a government package of measures would be necessary. “Political decision-makers should make political agreements to secure additional LNG volumes,” writes energy expert Hans-Wilhelm Schiffer. A task force could coordinate purchases and prevent companies from outbidding each other. Should Russia flood the market, companies would likely be reluctant to buy enough gas to compensate for a disruption in Russian supplies. The EU should financially protect companies that store gas.

Russian oil and coal imports easier to offset

According to Schiffer, it would be much easier to compensate for a loss of Russian oil and coal supplies. “With strategic oil stocks, a complete loss of all imports could be compensated for for three months.” In addition, it would be necessary to expand the supply of oil on the world market. In the case of hard coal, increases in production in important producing countries such as Australia, the USA, Indonesia, South Africa and Colombia would also be possible in the short term and, in view of the high prices, also attractive for them, says expert Schiffer.