Russia gas delivery cuts create ‘new situation’ for German chems players, govt looks to coal

Tom Brown

20-Jun-2022

LONDON (ICIS)–Moves by Russia-based gas major Gazprom to limit deliveries to many European countries have created a new situation in Germany, chemicals trade group VCI said on Monday, as the country’s government looks to revive coal power capacity and stockpile supplies.

Several key European energy companies late last week reported expectations of sharply below-expectations gas deliveries from Gazprom, with Germany’s Uniper saying that it expects to receive 40% of its nominated supplies from the supplier.

Italy’s Eni, Austria’s OMV and France’s GRTgaz also reported sharp drops in delivery volumes from Gazprom as Russia’s war in Ukraine continues.

The German government unveiled a raft of measures over the weekend in the hope of building up natural gas supplies before the winter, including increasing the proportion of power derived from coal-fired plants.

The Replacement Power Plant Availability Act is expected to be introduced in the German Bundesrat legislative body on 8 July, and would remain in effect until March 31 2024, with the emergency laws set to allow the reopening of formerly mothballed coal power plants in the country.

The measures were announced by German Federal Economics Minister Robert Habeck, a member of the Green Party, who called the move to fall back on highly-polluting power sources “bitter, but… necessary”.

“The gas storage tanks must be full in winter. That is top priority,” he said.

The German government is also looking to increase gas storage capacity by allocating additional credit lines to national gas trading hub THE to provide liquidity to buy gas and fill storage facilities.

INCENTIVISING INDUSTRY
The government is also looking to incentivise industrial gas consumers to reduce gas, particularly in bottleneck situations, by introducing an auction model that encourages industrial firms to make stocks available to the wider market when the price is high.

““This creates an incentive to reduce consumption in industry so that more is available for storage. This is urgently needed,” Habeck added.

The German government is targeting gas storage levels of 65% of capacity by the start of August, 80% by October and 90% by the start of December.

SECTOR RESPONSE
Trade group VCI endorsed the auction house plan and the other measures announced by the government, adding that the current throttling of Russian supplies via the Nord Stream 1 pipeline is not yet likely to cause substantial disruption for the German chemicals and pharmaceuticals sector.

“Germany must now quickly and pragmatically use all opportunities to save gas where it can be replaced,” said VCI general manager Wolfgang Grosse Entrup. “Above all when switching from gas to coal, it must be possible to use all capacities without discrimination,” he added.

The German chemicals sector has spoken out against the potential of power rationing set out by the government earlier this year, with cornerstone producer BASF warning that if gas deliveries fall below 50% of the norm then it would be forced to shut down its Ludwigshafen complex, which accounts for 4% of the country’s gas consumption.

The company has also set out plans to optimise its European operations in the event of Germany moving to allocate gas supplies, cutting production of products that require heavy consumption to produce.

In the event of cuts, BASF’s ammonia production would be a likely candidate, as the material represents the company’s most substantial gas usage after power production.

The company is evaluating the potential impact of supply cuts on the back of reduced Russian deliveries, according to a spokesperson, which could have implications for production at Ludwigshafen.

“At present, natural gas is supplied to all BASF’s European sites on an as-needed basis,” said the spokesperson.

“If there should be reduced natural gas volumes or even a complete loss of natural gas from Russia, this could also lead to cuts in natural gas volumes for BASF in Ludwigshafen. In this case, the German government would implement the Gas Emergency Plan and the Ludwigshafen site would be subject to the Natural Gas Special Alert Plan,” he added.

EUROPEAN REACTION
Italy is also reportedly considering a state of alert in response to reduced supply to Eni, centring around a set of measures intended to reduce consumption, including rationing gas to certain industrial users, ramping up coal power plant output and seeking to increase order volumes from other suppliers.

Germany derives around 40% of its gas supplies from Russia and the impact for other countries in the region is likely to be substantial but potentially not as disruptive as for the northwest European powerhouse, due to lower overall dependencies and other supply options.

Both Italy and France have a greater range of alternative sources than Germany, according to ICIS gas data, as both boast liquefied natural gas (LNG) terminals and Italy has connections to stocks from Algeria.

French gas operator GRTgaz stated on Friday that supply margins should remain safe despite flows from Germany ceasing on 15 June.

“The Russian gas volumes are not so important for all of these countries, since they do not account for large quantities and some have already identified alternatives,” said ICIS energy analyst Andreas Schroder.

Front page picture: Storage tank at BASF’s flagship site in Ludwigshafen
Source: Ronald Wittek/EPA-EFE/Shutterstock 

Focus article by Tom Brown

(Clarification: recasts BASF Ludwigshafen production details)

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