Rehden, a sleepy village in north-west Germany that is home to western Europe’s biggest natural gas storage facility, offers the key to understanding how hard it will be for Europe to wean itself off Russian energy.
The underground site, which spans the equivalent of 910 football pitches and accounts for a fifth of Germany’s gas storage capacity, is owned and operated by Gazprom, the Russian state-owned energy group.
Gazprom, which controls a third of all German, Austrian and Dutch gas storage, emptied the tanks at Rehden and other EU sites to unusually low levels last year in an apparent attempt to squeeze European energy supplies ahead of Russia’s invasion of Ukraine.
The conflict has exposed the heavy bet on Russian energy by Germany, Italy and much of Europe as a strategic error, say economists. Russia provides more than 40 per cent of the EU’s gas and coal imports and a quarter of its crude oil.
“In Germany it is a bit problematic that we always focus on one solution and rely on it almost completely,” said Veronika Grimm, an economics professor at the University of Erlangen-Nuremberg who advises the government. “Maybe we have now woken up.”
With mounting calls for Europe to block Russian energy imports, governments are now hunting for alternatives, part of an EU-wide push to cut the bloc’s gas imports from Russia by two-thirds over the next year.
“That’s the first order question: building terminals and securing contracts that are independent of Russia,” said Jörg Kukies, the top economic adviser to German chancellor Olaf Scholz.
As policymakers prepare for potential gas shortages and seek to build the infrastructure to diversify away from Russia, Europe is facing some tough questions about energy security.
Could Russian supplies to Europe be cut off?
Such an energy shock cannot be ruled out. Poland has urged the EU to ban all Russian energy imports, while Moscow has threatened to cut off gas supplies to Europe in retaliation for sanctions.
But while Germany suspended the Nord Stream 2 pipeline that would have doubled direct Russian gas deliveries to Germany, it has resisted calls for a full embargo on Russian energy, with Scholz calling continued supply “essential”.
Leonhard Birnbaum, chief executive of Eon, Germany’s biggest energy company, endorsed Scholz’s position last week, saying: “In the short term it is not possible without Russian gas — at least not without serious consequences for the European economy.”
Europe’s daily energy bill to Moscow is about €800mn. Ukraine’s president Volodymyr Zelensky has urged Berlin to sever its economic links with Russia, which he said “just uses you and other countries to finance its war”. A YouGov poll this month found that 54 per cent of Germans supported a Russian energy boycott.
Gerhard Mangott, professor of international studies at the University of Innsbruck, said Russia earns 23 per cent of state income from taxing oil exports, while taxes on gas only contributed 8 per cent.
“I do think Europe will cut off the oil supply from Russia, but I doubt they will cut off the gas,” he said. “Moscow may retaliate by cutting off the gas anyway.”
Most European countries have emergency plans to cope with gas shortages by prioritising household supplies and cutting production in energy-intensive sectors. Bruegel, the think-tank, estimates the suspension of Russian imports would leave Europe unable to refill storage tanks before next winter and force a 10 to 15 per cent cut in energy usage via rationing.
The European Central Bank estimates a suspension of Russian energy imports would likely knock 1.4 percentage points off this year’s eurozone growth, reducing it to 2.3 per cent.
But a study by the German National Academy of Sciences Leopoldina concluded that “a short-term suspension of the supply of Russian gas would be manageable for the German economy” and that rationing may not be required.
Can Germany wean itself off Russian energy?
Not easily. Germany imports about 60 per cent of its total energy use, according to the World Bank. Half of German gas and hard coal imports come from Russia, which also supplies a third of the country’s oil imports.
While Germany could find alternatives to Russian oil and coal, it would struggle to quickly replace Russian gas, according to a recent study by Econtribute, a research group set up by Bonn and Cologne universities.
Germany burns gas for about a quarter of its electricity generation and it is also used for heating households, industrial heating and cooling and making chemicals.
Liquefied natural gas could help, but it would be expensive: Germany has no LNG terminals and would have to rely on other countries to process the imports.
While the EU at present imports gas capable of generating 1,768TWh from Russia, the Leopoldina study estimates the bloc only has capacity to increase LNG imports equivalent to 1,100TWh with its present infrastructure.
Robert Habeck, Germany’s economy minister, said on Sunday that he had reached a long-term LNG supply agreement with Qatar.
Is Italy in the same boat as Germany?
Yes. Italians voted overwhelmingly in a 1987, post-Chernobyl national referendum to impose a moratorium on the development of nuclear power. Renewables supply only 11 to 12 per cent of Italy’s energy needs, well below the European average of 22 per cent.
With gas covering 40 per cent of its energy needs — and 40 per cent of that gas coming from Russia — reducing Italy’s dependence will take time.
“We don’t have a good energy mix,” said Roberto Cingolani, minister for ecological transition. “The mistakes the country made for decades cannot be fixed in one year.”
Italy’s domestic gas production has fallen sharply, from about 20bn cubic metres a year — approximately a third of the national requirement — to just 3.7bn cubic metres a year, mainly due to environmental concerns.
“We did reduce our domestic gas production but we increased imports,” Cingolani said. “The environmental impact was constant, and we self-damaged the economy.”
How will Europe escape its Russian energy ties?
Germany is pushing through legislation requiring all gas storage facilities to be at least 90 per cent filled by December — up from only 25 per cent now. If necessary, this will be done via government purchases, as part of a wider EU drive to boost gas storage.
Berlin also hopes to accelerate construction of three LNG terminals. “The conventional wisdom was five years [to build a terminal],” said Kukies. “We’ve got them down to three, and we think we can get it done in two, maybe even quicker.”
Increased investment in renewable sources, such as wind and solar, which already produce more than 19 per cent of Germany’s energy needs, is part of the longer-term plan.
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Berlin has ruled out extending the life of its remaining three nuclear power plants. Instead, it aims to step up production from coal-fired power plants using German lignite coal.
Ferdi Schüth, vice-president of the Max Planck Institute, said higher CO2 emissions from burning coal would be offset by the EU emissions trading system, which was preferable to “reopening the can of worms” on nuclear power.
Cingolani said Rome had secured preliminary agreements from major gas exporters for 16bn to 18bn cubic metres a year — equivalent to about half its Russia imports. But tapping those supplies will also require leasing two floating regasification plants at a cost of €36mn to €54mn a year.
Italy is also speeding up approval of large-scale renewable projects, but bringing new energy on stream will take time. “This is, unfortunately, nothing you can correct in one day,” Cingolani said.
Additional reporting by Alexander Vladkov in Frankfurt and Neil Hume in London
Source: Financial Times
