Germany triggers emergency plan to secure energy supplies

Europe’s largest economy, historically dependent on Russian energy, implements an emergency plan in anticipation of eastern gas flows being potentially plugged due to Putin’s demand for fuel payments made in rubles.
Photo: Tobias Schwarz/AFP/Ritzau Scanpix
Photo: Tobias Schwarz/AFP/Ritzau Scanpix
By Arne Delfs, Elena Mazneva & Isis Almeida, Bloomberg News

Germany triggered an emergency plan to brace for a potential Russian gas cut-off, as President Vladimir Putin steps up demands that the crucial fuel should be paid for in rubles.

Berlin, which relies on Russia for more than 50 percent of its natural gas and coal, initiated the first of three phases of the plan, signaling there are serious signs the supply situation will deteriorate, Economy Minister Robert Habeck said Wednesday. The announcement comes as the Kremlin plans to tell European energy companies by Thursday how to pay for fuel in the Russian currency, a request that countries from Germany to Italy labeled a breach of contract.

The standoff between Europe and Russia is threatening to upend energy markets, with European gas prices surging as much as 15 percent after the announcement. German industries from steel to chemicals would shut down within a matter of weeks if Russia supplies were cut off, with the government having already held talks with various companies about potential rationing.

“This is about monitoring the situation,” Habeck said at a press conference. “There are two more steps, the alarm and the emergency phase, but we are not there yet. The situation would have to worsen dramatically before we reach those stages. We would then practically need a change in the supply lines and would have to react accordingly.”

Reducing consumption

The European Union is trying to wean itself off Russian gas in a response to the war in Ukraine, with a plan to cut dependency by two thirds this year. That would mean buying less fuel than currently agreed under long-term contracts with Gazprom PJSC, a move that could also mean a breach of such deals.

Putin ordered his government, the central bank and Gazprom to prepare all necessary documents for the switch to rubles by Thursday, with Kremlin spokesman Dmitry Peskov saying that Russia would not supply gas for free. More than 50 percent of Russia’s long-term contracts are settled in euros.

“Each party is trying to punish the other,” said Anne-Sophie Corbeau, a research scholar at the Center on Global Energy Policy at Columbia University who previously worked for British oil major BP Plc. “This has been Russia’s way to counter Europe’s plan to cut dependency by two thirds, which would mean buying less than stipulated in long-term contracts.”

An energy group representing Germany’s main gas and electricity suppliers had already urged the government to trigger the emergency plan, saying it couldn’t rule out disruptions due to the rubles payment request. With Habeck’s move, a task force is now set to meet on a daily basis to monitor the state of gas consumption and inventories.

The minister urged companies and consumers to help by reducing energy usage wherever possible. Government officials will also talk to energy suppliers and major consumers to discuss how to prioritize gas use. For now, storage facilities are 25 percent filled and the government doesn’t need to intervene in the market.

“Only in the third phase, the state will intervene and regulate the gas flow,” Habeck said, adding that the energy regulator Bundesnetzagentur “will at that moment decide which regions and which industry sectors will be served on a secondary basis.”

Possible arbitration

Paying Russia in rubles would require European energy firms to renegotiate their long-term contracts, a process that could take months if not years. It could also backfire, as utilities could in turn require more favorable terms from Gazprom, including shortening terms or changing pricing mechanisms.

“If they can’t find a solution, that will probably go to arbitration,” Corbeau said, commenting on energy companies. “And that’s a very long process.”

Europe’s energy traders were on Tuesday already bracing for supply disruptions, with German gas prices surging to a premium of about 14 euros a megawatt-hour to the European benchmark traded in the Netherlands, according to broker data. On Wednesday, Dutch gas futures climbed to a high of 124.26 euros, rising for a third day.

“Russia’s demands to pay for gas in rubles continues to lack details and therefore after last week’s announcement has partly been downplayed with regards to impacting short-term gas supply,” said Tom Marzec-Manser, head of gas analytics at ICIS in London. “But today’s early warning from Germany will reignite those concerns to a certain degree.”

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