The gas problem in Germany may not be such a big problem anymore

The gas problem in Germany may not be such a big problem anymore

Nice out, isn’t it? Europe’s exceptionally mild winter was the necessary stroke of luck to preserve gas supplies, with consumption around 30% lower than the seasonal average and storages full in Germany and France.

The charts below and throughout are from Barclays analysts Mark Cus Babic and Abbas Kahn:

It’s a combination of tighter industrial demand and a sudden drop in domestic consumption to well below average in October. The trends for Germany are typical for Europe as a whole:

Warm weather is buying time for Germany, which is building two new liquefied natural gas terminals. Floating storage is expected to come online in the coming months in preparation for the complete shutdown of Russian supply.

But there is no mileage on an empty tank. Europe may be temporarily awash in LNG, but the market remains tight, prices remain well above historical norms and a supply shortfall is still likely by next year. How could Germany get what it needs?

To answer this question and a few more, we sat down with Rui Soares of independent investment firm FAM Frankfurt Asset Management, whose work on Russia’s gas dependence we published in May.

Most LNG contracts are long term. Where will new supplies come from?

“Germany needs to exploit around 3% of the world’s annual LNG production to fill its new terminals. One of them is through wild capitalism. Most LNG contracts are long-term, but suppliers can breach the terms, pay a breach of contract penalty, and sell the LNG to the highest bidder. German industry is able to make high offers.

“Trafigura and Glencore, which trade around 6% of all LNG in the world, are very opportunistic. And Germany only needs half of the LNG it markets.

Does this mean a European one-upmanship to divert supplies from the other?

“Some EU countries have more LNG under contract than they consume. They can resell the excess. For example, Spain has an LNG storage capacity of 70 billion cubic meters [BCM]. But it only consumes 36 billion m3 per year. Enagas [of Spain] has more than 36 billion cubic meters contracted annually through long-term LNG contracts, but sells the excess on the spot market. No one knows exactly how much, but 10 billion cubic meters alone would already cover two-thirds of Germany’s needs. Shipments can easily be diverted.

“It also explains why the EU passed legislation in June requiring all member countries to fill their gas storage sites to at least 80% capacity by November 1. The reservoirs are full, the trade in surplus natural gas is effectively interrupted. , and EU members stand ready to redistribute supplies as needed.

But isn’t the problem also the limited supply?

“Although conventional wisdom holds that there is no additional LNG production capacity in the world, there is in fact not the case. Some natural gas producers, particularly those in the Gulf, may not not be fully transparent.It is suspected that they have extra production capacity but do not report it.

“For example, after the Fukushima accident in March 2011, Japan increased its consumption of natural gas from 20 to 25 billion cubic meters in 12 to 18 months. The prevailing view at the time was that there would be no short-term additional LNG production capacity available worldwide and that Japan would have to divert LNG from other countries. Still, production met the extra demand and the extra supply came largely from Qatar.

What about shipping?

“At the end of 2019, there were 584 LNG carriers in the world. At the end of 2021, there were 700, an increase of 20%. It is possible that the new vessels will be smaller, but the production and export of LNG between 2019 and 2021 only increased by 6.5%.

“On top of that, the global order book for new LNG carriers stands at 140-150 units, with Russia supposedly accounting for 20-30 of them. Between a fifth and a quarter of the order book is delivered each year. A capacity crisis seems unlikely.

What happens if the new terminals are not completed on time?

“Things are much better now than they looked in May. EU natural gas storage targets have been met early on.

“In mathematical terms, Germany’s natural gas consumption before the Ukrainian war was around 100 billion m3 per year, compared to a storage capacity of around 23 billion m3.

“The industry represents around 35 to 40% of consumption and is cyclical. Less than 15% is intended for the production of electricity. The rest is demand from households and the service sector, with four-fifths of their consumption taking place during the winter months. It is therefore reasonable to estimate that Germany’s natural gas consumption during the winter months is around 50 billion m3.

“Germany imports 55 billion m3 of non-Russian gas per year through its pipeline network. Deliveries are reasonably constant, amounting to around 18 billion cubic meters during the winter months. Add that to the existing storage and Germany will have around 40 bcm of natural gas at its disposal, suggesting that without the new tanks consumption would have to be reduced by around 20% for the numbers to add up.

It seems like a lot.

“German industry has already reduced its consumption by more than 20% through efficiency measures, production shutdowns and fuel changes. Households could achieve the same savings by lowering their thermostats by around 3 degrees Celsius, or possibly less if you factor in oil stoves, electric heaters and even fireplaces. This would mean that German households live with an ambient temperature of between 17 and 19 degrees Celsius. Hardly an unbearable sacrifice.

“And if the terminals are operational, even that sacrifice could be avoidable. In short, winter will be less pleasant than usual in Germany, but households will not freeze and industry will not collapse. Reality is better than perception.

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