Germany’s SKW Piesteritz mulls force majeure in event of gas shortages, price hikes

Will Beacham

30-Jun-2022

LONDON (ICIS)–Ammonia and urea producer SKW Piesteritz will consider implementing a force majeure if natural gas supplies are cut and prices increased as Germany grapples with plunging availability from Russia, the company confirmed to ICIS.

Chemicals producers and entire industrial value chains in Germany face a winter of potential gas rationing if Russia continues to curtail supplies, which fell by 60% during June.

Germany is particularly reliant on Russian gas – from 50% of supplies last year to around 35% now – and its chemical sector faces the prospect not only of rationing, but also steep increases in gas prices which could trigger an industrial recession and bankruptcies along supply chains.

Last week, Germany raised its alarm level to two out of three, allowing it to implement plans to boost coal-fired power generation and raise prices to control demand. Level 3 would allow for emergency gas rationing.

The German government has amended its Energy Security Act of 1973 to allow companies along value chains to raise their gas prices to current market levels in the case of a supply emergency. However, it has not yet triggered this legislation by publishing an official notice on its website.

Companies with contracts governed by German law could see suppliers insisting on new prices linked to the global Henry Hub benchmark, pushing up costs significantly.

SKW Piesteritz is Germany’s second largest consumer of natural gas after BASF, using 13 terawatt hours per year.

Around 80% of the company’s production costs are related to natural gas.

A spokesperson for SKW Piesteritz confirmed that the company may be forced to declare force majeure if its gas supplier uses the amended Energy Security Act to break its contracts by raising prices and potentially cutting supplies.

She said: “A renegotiation is only necessary if the gas supplier proves a gas shortage in accordance with the Energy Security law. The gas supplier is then entitled to cancel the gas contracts concluded with us and to offer us new conditions at daily prices.

“SKW does not want to increase or change the prices – we have secured our existing contracts with fixed gas prices and do not intend to adjust these independently unless the gas shortage situation is so critical that we are forced to do so by the actions of the gas supplier.”

Executives from the company met with local and national politicians this week to make the case that their gas supply should be protected.

They pointed out that their products are important, not just for farming, but for AdBlue, an additive for commercial diesel engines. SKW also produces resins for the furniture and construction sectors plus materials for pharmaceutical uses.

The spokesperson said that cheap, often inferior quality products are being imported to Germany from Russia, Iran, Nigeria and Egypt where gas prices are much lower.

IMPORTANCE OF NATURAL GAS
Natural gas is used both as a source of power as well as a feedstock for chemicals production. It is particularly important for the production of ammonia, an important source of fertilizers. According to Germany’s chemical trade group VCI, Germany has around 2.5m tonnes/year of ammonia capacity, making it one of the largest basic chemicals by volume to be produced in the country.

German chemical producers are in danger of losing access to Russian natural gas which is sold at a steep discount to global prices. Russian contract prices to Germany are currently around $14/MMBTu compared with a Henry Hub northwest Europe price of around $40/MMBTu on 28 June.

As well as rationing, a significant rise in gas prices could also cause production cuts for gas-intensive chemical production.

CUTS, CLOSURES ACROSS EUROPE
Earlier in June, CF Fertilisers UK announced that it would permanently shut its Ince manufacturing facility near Chester, a supplier of ammonia, ammonium nitrate (AN) nitrogen, phosphorous and potassium.

This is the latest in a series of closures and production cuts which began as gas prices leapt late in 2021.

Julia Meehan contributed to this article.

Front page picture: SKW Piesteritz’s production facilities in Germany 
Source: SKW Piesteritz

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