Russia has no hesitation in using gas as a weapon, and it looks like the country may continue to use this weapon successfully in the years to come. This can be seen from the curve of futures contracts TTF, which points the way for the gas market.
Prices will remain high as Europe competes with Asian buyers for existing LNG capacity in tight supply – at least until Europe secures new production capacity and LNG infrastructure.
The question is: How can Germany counter Russia’s ability to use gas as a weapon?
In order to reduce Germany’s dependence on Russian gas, around 30 billion cubic meters of new gas supplies are needed each year. The German government is to be commended for making significant progress in building LNG terminals in Germany. But these are “only” the terminals for converting liquid gas back into the gaseous state.
The key task remains unsolved – how to fill these terminals with liquefied gas at a reasonable price. We see some encouraging examples on this front: In May of this year, RWE signed a memorandum of understanding for three billion cubic meters of US LNG.
The short terms that Germany plans for new gas contracts prevent deals with suppliers
In June, EnBW agreed to buy two billion cubic meters of LNG from the US over a period of 20 years. At the beginning of September, Uniper signed a contract for one billion cubic meters over 16 years. As a result of Chancellor Scholz’ trip to the Arabian Peninsula, RWE will be a first Got delivery from Abu Dhabi to Brunsbüttel.
In June, EnBW agreed to buy two billion cubic meters of LNG from the US over a period of 20 years.
(Photo: IMAGO/STAR MEDIA)
But that’s far from enough: Germany still lacks another 24 billion cubic meters per year of new gas or LNG capacity to blunt Russia’s gas weapon.
Current suppliers – Norway and others – have only limited possibilities to increase their supplies. So new delivery capacity is needed to deliver the remaining 24 billion cubic meters per year. Either liquid gas from countries such as the USA, Qatar, Mozambique, Egypt and Israel or pipeline gas from Azerbaijan or Kurdistan can be used for this.
Global gas reserves total over 800 trillion cubic meters. Every LNG project worldwide should be profitable at real gas prices of 40 to 50 euros per megawatt hour. The current LNG spot and forward prices – many times higher – should actually motivate companies to start construction immediately. But this doesn’t happen. From my point of view, the question of the term of new gas contracts is central in this context.
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Recent state-level negotiations with Qatar ended with no deal – Qatar wants a long-term deal to sell its LNG to Germany, which the German government is unwilling to support.
The federal government has three options for combining fast gas deliveries and climate targets
The main argument is that this would contradict the German goal of climate neutrality of the electricity system by 2035 and climate neutrality of all areas by 2045. We have to achieve this goal, which is absolutely right, in order to be credible in our climate ambitions.
So what can be done to succeed in the ongoing negotiations with new gas suppliers? The federal government must determine an acceptable term for new gas contracts that is compatible with climate neutrality goals. There are three options – none of them are ideal, but we need a solution.
Construction of the LNG terminal near Brunsbüttel.
(Photo: Getty Images)
1. The new capacities of 24 Billions of cubic meters per year that are additionally needed to replace Russian gas are treated differently than existing capacities.
This volume corresponds to around a quarter of the total consumption in 2021. It will be required in Germany for industry and heating even after gas-fired power generation has been completely phased out in 2035, until climate neutrality in 2045.
This new capacity could be prioritized over the existing capacity. Private companies could confidently sign 20-year contracts for this: three to five years to build terminals or lines, and 15 years for supplies.
It would help to leave the destination of the delivery open in the contracts (no destination clause). Then the companies could also sell the contractually agreed LNG outside the EU, for example to China or India, which have only set themselves a target of 2060 for their decarbonization.
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An alternative would be to allow flexibility for how LNG is produced in the producing countries (such as the Middle East, North America or Australia). These countries are currently producing gas, but want to produce green hydrogen in large quantities in the future.
Through the development of new forms of energy such as green hydrogen and technologies such as that of TES (Tree Energy Solutions), some LNG deliveries could possibly be decarbonised, i.e. replaced by more climate-friendly fuels, before the climate target of 2045 is reached.
For example, TES is currently building the “Hydrogen Hub Wilhelmshaven” in Wilhelmshaven together with its partners Eon and Engie, an industrial plant for both the regasification of LNG and the return of CO2 recovered from the consumption of LNG to the manufacturing countries.
There the CO2 is used again for the methanation of green hydrogen. The built LNG infrastructure could then be used for carbon-free LNG in producing countries as well as in Germany.
The built LNG infrastructure could then be used for carbon-free LNG in producing countries as well as in Germany.
(Photo: IMAGO/Bonnfilm)
2. If the federal government does not want to distinguish between the new and existing capacities, we need a different approach. Then the government has to decide on contracts for difference.
The state uses tenders to determine which price level is guaranteed for the companies so that the investments in the new LNG projects are amortized within around ten years. Such mechanisms have been successfully used by EU Member States in the development of renewable energy sources.
3. As an alternative to supply contracts, the state could encourage equity participation by German energy suppliers in LNG projects, for example in the USA finance – in a similar amount to the approximately three billion euros for the LNG regasification terminals.
The era of German competitive advantage through cheap Russian gas is over
If the question of the duration of the contracts is clarified, then the negotiations in countries such as Qatar, UAE and the USA will be more successful.
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However, as an energy importer, Germany should not opt for just one option, but strive for a mix of diversified suppliers and instruments. As Winston Churchill said at the beginning of the last century: “Only diversification brings security of supply.”
Clarity about energy security will allow German industry to adapt to the new realities and will instill confidence among consumers and voters.
The era of German competitive advantage from cheap Russian gas is over, but a new balance has yet to be struck on the road to carbon neutrality.
More: How the energy crisis is threatening the German economy.