BASF naphtha supply from Russia ‘easy’ to replace in case of supply disruption – CFO

MADRID (ICIS)–Around 20-30% of BASF’s naphtha supply comes from Russia but in case of supply disruption it would be “easy” to quickly find alternative suppliers, the CFO at the German chemicals major said on Friday.

Hans-Ulrich Engel said BASF’s operations in Europe do not depend on Russian gas supply, which could be jeopardised by the war in Ukraine.

On Friday, the Russian attack on the country entered its second day, with troops reportedly approaching Ukraine’s capital Kyiv and millions sheltering overnight as Russian air strikes resumed in the early hours.

Engel and BASF’s CEO, Martin Brudermuller, were speaking to reporters from the producer’s headquarters in Ludwigshafen, Germany, after it published fourth-quarter and full-year financial results earlier in the day.

The press conference was dominated by questions about the Russia-Ukraine conflict and BASF’s majority stake in oil and gas joint venture Wintershall DEA, as the company has in Russian flows a key supplier for its oil and gas consumption.

“It’s really hard to get back to business-as-usual today. Yesterday marked the end of peace in Europe … We are dismayed and we are very concerned following developments,” said Brudermuller to open the press conference.

NAPHTHA SUPPLY ALTERNATIVES
But it was time to get back to business, and with a larger-scale conflict in Ukraine looming, the most pressing business for BASF would be to find an alternative supply of naphtha, for which the company is highly dependent on Russia, in case of supply interruptions.

Naphtha is a key chemical building block used in several petrochemicals downstream markets, used to feed steam crackers in the manufacture of both olefins (ethylene, propylene, butadiene) and aromatics (benzene, toluene, xylene).

“We have naphtha supplies from Russia, which is a basic precursor [for our operations], around 20-30% comes from there, but it is quite easy to find an alternative here,” said Engel.

Germany is one of the EU’s countries most exposed to Russian supply of natural gas, however, and it is a key feedstock for production of electricity in the country.

Engel conceded that finding alternatives to Russian gas would not be as easy as BASF’s own supplies of naphtha, although he preferred to see a silver lining in both liquified natural gas (LNG) exports into the EU and the seasonal factor.

“BASF doesn’t receive any oil and gas directly [from Russia]. For Ludwigshafen, for example, we have two major west European suppliers, which definitely get some gas supplies from Russia – how much, I can’t tell,” said Engel.

“In northwest Europe, around a third of gas supplies come from Russia, depending on the year, and it would be quite difficult to find alternatives to replace volumes from Russia with LNG.

“But let me mention something else: right now, we have 20% of gas in northwest Europe coming from Russia, lower than the historic average, and 20% from LNG, much higher than the average,” said Engel.

Earlier this week, Germany halted approvals for the pipeline Nord Stream 2, which planned to take Russian gas undersea via the Baltic directly to Germany, which finally gave in to intense pressure from the US as events in Ukraine were unfolding.

The other major route for Russian gas to reach Europe crosses Ukrainian territory; despite the Russian invasion and martial law implemented by the Ukrainian government, supplies through the pipeline remain uninterrupted.

The US also announced this week Nord Stream 2 would be subject to its sanctions against Russia.

However, a deterioration of the situation in Ukraine would indirectly impact BASF – like every single consumer in Europe – via higher natural gas prices.

For months at the end of 2021, strong demand and short supply pushed natural gas prices in Europe to record highs; they moderated the upward trajectory in January, but in February and especially this week prices are again at highs.

In fact, BASF disclosed on Friday it had taken a hit of €800m during the fourth quarter on the back of high natural gas prices; for 2021, the hit stood at €1.5bn.

“In the days to come, until we know the overall developments, we’ll see erratic developments in natural gas prices in Europe, bear with me but we can’t speculate. We know where prices are at now, and we know the will go up as long as we are living in such a tense situation we have to expect increases,” said Engel.

“It’s the end of February, we are approaching the spring and, considering [residential] heating takes up around 45% of natural gas demand, heating will not require that much gas in the spring and that will relieve the situation a little bit.”

TOO EARLY TO CHANGE FORECASTS
All in all, a deterioration of sentiment in Europe would depress consumer behaviour, said both Engel and Brudermuller, although they stopped short of giving new forecasts from those published earlier in the day for crude oil prices or global GDP growth in 2022.

BASF still expects Brent crude oil prices, the international reference, to average $75/bbl this year.

Brent shot up this week as Russia launched its attack in Ukraine; by European morning trading on Friday, Brent stood at $101.59/bbl, up $2.51/bbl compared to the prior close.

The company expects global GDP growth to stand at 3.8% in 2022, year on year, while industrial production and chemical production would grow by 3.8% and 3.5%, respectively.

Engel said: “Of course, we did [these forecasts] at the end of 2021, and revaluated them in February. $75/bbl [average price for 2022] is still an adequate forecast for the entire year. Prices this morning remained over $100/bbl, and there is a considerable risk.”

To sum it up, Brudermuller concluded: “Until yesterday, we had a strong business looking forward.”

NOT THE TIME TO TALK IPO
Engel refused on Friday to answert questions related to the long-planned initial public offering (IPO) on the stock exchange of Wintershall DEA.

“The IPO is the correct path forward. It has to fit in the right market environment but, bear with me, in the day after the invasion of Ukraine it doesn’t make sense to speculate about the IPO. It is not adequate today and I won’t do that,” said Engel.

Front page picture: BASF’s CEO and CFO speaking to reporters earlier on Friday in Ludwigshafen, Germany
Source: BASF

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