Gazprom is no longer delivering natural gas to Germany through the Nord Stream 1 pipeline. What does that mean for the coming winter? We have answers to the most pressing questions.
The landfall facilities of the Nord Stream 1 pipeline in Lubmin, Germany-Foto: HANNIBAL HANSCHKE / REUTERS
The news that Gazprom sent west on Friday evening could hardly have been worded more awkwardly. During maintenance work at a compressor station near the Baltic Sea coast in Russia, a “leak of engine oil” had been discovered, the company announced. As a result, the turbine facility, which is used to send natural gas through the Nord Stream 1 pipeline to Germany, could no longer be safely operated. As such, Gazprom said, deliveries through the pipeline would be completely suspended.
Just a few months ago, the announcement would have been a complete disaster
for Germany’s natural gas supplies. For years, Nord Stream 1 was the most important pipeline for gas imports to Germany, and Gazprom was by far the country’s most important supplier. A suspension of supplies through the pipeline means that Germany is no longer able to plan on natural gas deliveries from Russia, even if the country’s Federal Network Agency has its doubts as to whether the defects found are enough to justify a cessation of operations.
Either way, the consequences of Gazprom’s announcement have been clear this week in Europe. On the European reference market TTF, natural gas prices on Monday were up to 30 percent higher than on Friday, while Germany’s blue chip stock index, the DAX, plunged by up to 3 percent. Concern was widespread that the German economy would find itself in a tight spot this winter without natural gas from Russia.
On the other hand, ever since Moscow’s invasion of Ukraine in February, Germany has been doing all it can to become independent of gas imports from Russia. The country’s storage facilities are filling up and natural gas consumption, particularly in industry, has dropped significantly. So does that mean that the suspension of deliveries via Nord Stream 1 isn’t such a big deal after all? We have compiled answers to the most important questions.
How badly will German natural gas supplies be affected by the suspension of Nord Stream 1 operations?
The discontinuation of gas deliveries from Russia is certainly a setback for German efforts to fill storage facilities to maximum capacity before the arrival of winter. And drives prices even higher. For the moment, though, no industrial operation or household must be concerned about a sudden suspension of gas supplies. Natural gas demand is rather low for the time being, and plenty of the fuel is being delivered from other countries, though at a much higher price.
In recent months, Germany has taken steps toward breaking its addiction to Russian natural gas, in part thanks to Gazprom’s decision to limit supplies. Indeed, for several weeks prior to suspending deliveries completely, the state-owned company was only delivering a fifth of the normal amount through the Baltic Sea pipeline – and more recently, just a tenth of Germany’s normal imports were arriving.
Can Germany survive the winter without Russian natural gas?
That question can’t yet be conclusively answered, but the situation is far better now than just a few months ago. German natural gas storage facilities are filled to 86 percent capacity, a level that initial government plans had first foreseen for October.
On behalf of the Federal Network Agency, Trading Hub Europe a natural gas network cooperation founded in Germany in 2021, has purchased several billion cubic meters of natural gas in recent months. Consumers will face significant energy bills as a result, but supply security is at least safe for now.
The country’s current reserves of 20 billion cubic meters would be sufficient for two winter months. But Germany will continue to receive natural gas deliveries – either through pipelines from Norway or in the form of liquefied natural gas (LNG). Germany’s first two floating LNG terminals in Wilhelmshaven and Brunsbüttel are scheduled to begin operations toward the end of this year or early 2023.
Whether it will ultimately be sufficient depends on several factors. How cold will the winter be? How much natural gas will be delivered by other countries? How much natural gas will be necessary for electricity generation? Should the situation become concerning in these areas, then a fourth question will become of particular importance: To what degree will industry and private consumers be able to reduce consumption?
Have higher prices already resulted in lower natural gas consumption in Germany?
In the most energy-intensive industries, the spiraling prices have had their effect. Germany’s largest industrial gas consumers used almost 19 percent less gas in the last full week of August than the average seen in the same time period last year, according to the Federal Network Agency. The agency says that weekly reductions since May have been between 3 and 27 percent.
“We shouldn’t assume that we will be receiving natural gas this winter from Nord Stream 1.”
German Economy Minister Robert Habeck
But Germany’s natural gas-fueled power plants also need supplies, and despite the higher prices, the electricity they supply has been necessary. Several nuclear power plants in France have been temporarily taken offline, hydroelectric plants in southern Europe have been struggling with low water levels and coal-fired power plants in Germany, which have largely served a backup role in recent years, have been slow to return to the power market. The result was that in July, Germany actually used 8 percent more natural gas than in same month in 2021.
When the colder temperatures arrive in the coming months, the more crucial household gas consumption will be for Germany’s overall usage.
What do the German government and Federal Network Agency have to say about the suspension of Nord Stream 1 deliveries?
In Berlin, plans for the winter have long assumed that no more Russian natural gas would be flowing through the pipelines, a premise that German Economy Minister Robert Habeck reiterated last week.
During a press conference at which he announced the leasing of a new, floating LNG terminal, Habeck said: “We shouldn’t assume that we will be receiving natural gas this winter from Nord Stream 1.” He added that Gazprom was no longer a reliable supplier and that all talks were exclusively taking place between the companies involved and not at the state level.
The government and the Federal Network Agency are proud of having boosted deliveries from Norway and the Netherlands and of the amount of natural gas they have managed to purchase on the international market. The fact that the country’s storage facilities are close to capacity is also a source of pride.
“We even managed to stockpile when deliveries from Nord Stream 1 were completely suspended due to alleged maintenance,” says an official at the Federal Network Agency. That will provide a vital buffer for the winter.
Just as important, though, will be uninterrupted deliveries from Norway and the Netherlands. Significant technical difficulties would be extremely difficult to overcome.
Habeck has said over and over again that one decisive factor will be a 20 percent reduction in natural gas consumption. The painfully high gas prices which have heaped political pressure on the government could ultimately be a key factor in achieving that reduction: Both industrial operations and private consumers are likely to cut natural gas usage in response.
Will natural gas become even more expensive?
Higher gas bills are a distinct possibility, though they won’t be as sudden as those seen on Monday morning on the European futures markets. Most serious suppliers buy their gas over the course of months, or even years, frequently far in advance of deliveries on the derivatives markets.
The result of those purchases is an average price, the foundation for their price calculations. The result is that the bill paid by consumers include prices paid for past years along with predicted prices for coming years.
On the one hand, that will slow down the current price spike. On the other, though, it means that gas prices for consumers will remain high for the next several years, even if the market price begins to drop.
The same holds true for electricity bills, which are significantly influenced by natural gas prices and are trending upward as a result. In response, the German government has announced an effort to prevent skyrocketing electricity bills: According to the plan, consumers are to be able to buy a certain base quantity of electricity at a capped rate. Financing is to come from taxes on windfall profits earned by electricity producers who produce electricity more cheaply but still benefit from higher energy costs.
Thus far, Germany’s political leaders have not agreed on a similar cap for gas prices.
What will the consequences be for the economy?
Initially, there won’t be any. With the storage facilities approaching capacity, there are no shortfalls on the immediate horizon. In the winter, however, that situation could change. If severe gas shortages begin developing, industrial consumers would be the first to suffer, since private households and facilities such as hospitals have priority, according to current German law.
The Federal Network Agency will make decisions regarding which factories would enjoy priority if the situation becomes dire. Criteria for that decision will include the importance of the company for the general welfare of the country and for production supply chains, the expected economic and environmental damage and the costs and length of time it would take for a given company to restart production.
Starting in October, the Trading Hub Europe (THE) will launch an auction through which companies can earn money by cutting their natural gas consumption. The system envisions THE establishing the amount of gas to be saved and factories then submitting bids indicating the price they are willing to pay for cutting consumption. The lowest bid wins.
Will Nord Stream 1 resume deliveries? And if so, when?
That is a question for Russian President Vladimir Putin.