A Stress Test for Solidarity
Looming Natural Gas Shortages Has the EU
Scrambling for Solutions
With the threat of recession and further inflation,
Vladimir Putin could deal a devastating blow to the European Union if he cuts
gas supplies this winter. Should that happen, it would be a major test of
solidarity for the block.
By Claus
Hecking, Martin Knobbe, Steffen Lüdke, Ralf Neukirch, Jan Puhl und Gerald
Traufetter
15.07.2022, 17.42 Uhr
This time,
the Germans want to be good Europeans right from the start. "We will help
each other with gas supplies," German Economics Minister Robert Habeck
asserted on Monday during a visit to the Czech Republic. "We will also do
the same from Germany for the Czech Republic."
Habeck had
traveled to Prague to prepare a solidarity agreement in case Russia halts gas
supplies to the European Union, the absolute worst-case scenario for European
energy supplies. Similar agreements already exist with Austria and Denmark, and
the one with the Czech Republic will likely be ready by winter.
The hope is
that things will be different between the Europeans this time than they were at
the beginning of the coronavirus pandemic two years ago. In March 2020, the
German government imposed an export ban on masks, protective clothing, gloves
and other medical products. France had already banned the export of protective
masks a short time before. Both countries drew the ire of the others, and for a
time, it seemed as if the European Union's internal market would break apart
under pressure from the crisis due to the egoism of the member states.
A repeat
this time around is to be avoided at all costs. The German government wants to
conclude solidarity agreements with all European countries, with our
"direct neighbors, but also beyond, such as with Italy," Habeck said
in Prague. His message is clear: Europe will not allow itself to be divided by
Putin.
The first
stress test for European solidarity could come on July 21. That's when the
annual mandatory maintenance on the Nord Stream 1 pipeline, which delivers gas
directly from Russia to Germany, will be completed. Russian gas should start
flowing to Europe again on that day, unless Russian President Vladimir Putin
decides otherwise.
Whether the
Europeans will truly succeed in sticking together is, of course, an open
question. In June, when Russia throttled gas deliveries via the Nord Stream 1
pipeline, onward shipments of Russian natural gas from Germany to France came
to a halt. The French, though, already have the means to meet their (much
lower) demand using other sources – by importing liquified natural gas through
their four LNG terminals, for example.
But if
there is a total loss of Russian gas, radically different distribution issues
are likely to arise. Will Germany still deliver sufficient gas to the Czech
Republic, even if its own industry is suffering? And will partners be ready to
help a Germany that they perceived as not showing much solidarity during the
euro crisis?
Worse than
the Euro Crisis
The gas
crisis could have repercussions that dwarf even the euro debacle. Recession,
unheated apartments, high prices – solidarity within the EU would be subjected
to a stress test.
During the
euro crisis, it was primarily the smaller EU countries like Greece or Portugal
that had to make significant cutbacks. This time, though, it could be the EU's
largest country that gets hit hardest. Germany not only consumes more natural
gas than all other EU member states – it is also the most important transit
country for the fossil fuel. Habeck said at the end of June that there would be
no permanent reduction in the amount of gas transmitted to the neighboring
countries. "That would be illegal – and absurd."
But the
situation isn't quite so clear-cut. The European Commission and the European
Council agreed on a solidarity mechanism five years ago requiring member states
to supply fuel to distressed member states as a "last resort" in
extreme situations - provided they were connected to those struggling countries
through existing natural gas networks. This applies when the other country requests
assistance and no longer has enough gas to supply private households, hospitals
or social institutions.
But for
that to work, member states would have to conclude the kind of bilateral
solidarity agreement that Germany and the Czech Republic are now preparing. The
agreement is to contain the technical, legal and financial details of emergency
supplies: which pipelines will be used, the quantities that will be provided
and the prices that will be paid in the event of an emergency.
Without
these contracts, there's a risk of complicated negotiations in the event of an
emergency, for which there is no time.
And therein
lies the problem: So far, only six of these agreements exist in the EU. If
significantly more countries don't negotiate with each other by the winter the
form that aid should take if there's an emergency, then it could become
difficult to provide mutual support.
Next
Wednesday, the European Commission is slated to present how it believes the EU
should deal with the impending gas shortage. Sources in Brussels say that no
specific recommendations will be made to individual member states about, for example,
how they should save energy. Block members will have to decide for themselves
how they want to manage the bottlenecks. The most that is being discussed in
Brussels is setting of an EU-wide conservation target of 8 percent.
Coordinating,
not Going It Alone
More
important is the European Commission's role in sharing information on key
metrics such as gas demand and supply chains. For example, Brussels intends to
offer its services in coordinating the emergency plans of member states to
prevent the shutdown of a factory in one country from leading to the unintended
shutdown of production in another.
Habeck and
his staff are insisting that everyone must show solidarity. If shortages do
begin to appear in the autumn or winter, then industrial companies in Germany
would have to cut back on production and citizens would also be forced to cut
back on energy consumption.
"But
that will only work if the countries to which we transport the gas reduce their
consumption as well," says a senior official. That would be the only way
of explaining to the populace why natural gas continued to flow to those
countries from Germany.
But the
idea of European solidarity isn't being met with enthusiasm everywhere.
"Where was Europe's energy solidarity and energy security when the Germans
built Nord Stream 1 against the will of Poland and many others?" asks
Joachim Brudziński, a member of the Polish parliament with the governing PiS
party in Warsaw. "No matter how much fresh Brussels-speak there is about
European solidarity, about European energy policy, about the rule of law and
European values – in the end, it's always about German or French
interests."
In Southern
Europe, too, where the euro crisis has left deep scars, the willingness to step
up to help Germany remains limited.
Portuguese
politician Bruno Maçães negotiated with the Germans as his county's secretary
of state for European affairs during the euro crisis. He says the German
government spent years blocking alternatives to Russian gas. As a result, he
says there is a dearth of pipelines between the Iberian Peninsula and the rest
of Europe.
Solidarity
with the Germans?
"During
the euro crisis, (then German Finance Minister Wolfgang) Schäuble always said
that the costs should not be socialized," Maçães says. "Why should
that happen now – after all the German mistakes?"
Germany's
actions on the international gas markets have done little to assuage such
resentment. The German government has so far made 15 billion euros available to
fill its own gas storage facilities. Largely unnoticed by the German public,
the market area manager for the German gas market, Trading Hub Europe, has used
this money to buy up whatever natural gas is available on the world markets.
It has been
a success, at least from a German perspective. Domestic gas storage facilities
had filled up to over 64 percent by this week, almost 2 percent more than the
European average. Another consequence, however, is rising prices. It is
becoming increasingly difficult for many European countries to pay for gas.
An
additional source of resentment, especially in Eastern Europe, is the fact that
Germany has lobbied to send a gas turbine serviced in Canada for the Nord
Stream 1 pipeline to Russia, even though this would mean an exemption to
Russian sanctions. In the Baltic states and Poland, this is seen as evidence of
German energy egoism.
The German
government, on the other hand, argues that Putin still thinks legalistically on
some issues. And Berlin doesn't want to give him any excuse to continue
blocking gas supplies to Europe once maintenance on the Nord Stream 1 pipeline
is completed.
The German
government also took early action in other areas. For example, Berlin
commissioned the construction of floating LNG terminals at a time when they
could still be obtained on the market. They should be ready to go into
operation by the end of the year. That need not be problematic for other
countries. On the contrary, it could prove helpful as long as Germany provides
some of that gas to its partners in the event of an emergency.
Germany
Blocks Joint Gas Purchases
A number of
EU countries have come out in favor of making joint gas purchases, as has the
European Commission. This, it is hoped, would allow more favorable prices to be
achieved because member states would not be competing against each other. The
gas purchased would then be distributed to individual countries, similar to the
way coronavirus vaccines were disbursed during the pandemic.
The plan,
though, has been blocked at several EU summits by German Chancellor Olaf
Scholz, even though the government in Berlin is anything but united on the
issue. There are influential advocates of making these pooled purchases within
Habeck's Economy Ministry, for example.
The Natural
Gas Continues to Flow
But
resistance is coming from large natural gas utilities in Germany, like RWE, and
from industrial customers as well. They want to buy their own gas and fear that
they won't be allocated sufficient supplies by the EU. They are exerting
pressure through the unions, the result being that European leaders were only
able to agree on a voluntary procurement pact at the last EU summit.
In addition
to all the political issues, it is unclear whether the European gas network is
at all equipped to meet the challenges of winter.
Thus far,
most of the gas has flowed from Russia to the West via three pipelines. If
Putin turns off the gas taps for any length of time, then natural gas will have
to be pumped into the interconnected European energy system from the south,
west and north. Pipelines from the south carry gas from North Africa and
Italy's LNG ports, while western pipelines originate from terminals in Spain
and France. From the north, meanwhile, Norwegian supplies will increase in
importance.
Can
Europe's Grid Handle Flows?
A research
group from the Munich-based technology academy Acatech this week presented a
series of expert reports on whether the European gas grid can handle these
flows.
"The
further east the country, the more complicated the supply is in a situation
like this," says Mario Ragwitz, one of the study leaders at the Fraunhofer
Institution for Energy Infrastructures and Geothermal Energy. "As an
important transit country, Germany plays a key role in ensuring secure supplies
to its Eastern European neighbors such as the Czech Republic and
Slovakia."
The experts
warn that in the event of a Russian embargo, there could be a shortage of 20
percent of the gas needed throughout Europe and as much as 30 percent in
Germany. As such, they are strongly advising a technical upgrade of the grid to
reflect the new direction in which the gas is to flow. Among other things, they
have identified weak points between Germany, Austria and Italy that could
affect the flow of Norwegian gas to the south and LNG gas from Italy to the
north.
The hope in
Brussels is that governments of the EU member states have learned their lessons
from the coronavirus crisis. A senior EU officials says that the pandemic
nearly brought the single market to collapse. "The last two years have
shown that everyone in the EU has benefited from solidarity."
The
question is whether this applies exclusively to the European Union.
How will
the EU states respond if Ukraine also runs out of gas? Kyiv may not be an EU
member, but a united Europe would look disastrous if people in the war-torn
country had to freeze in winter because Western countries preferred to save
their industries.
"It's
like so many times in recent years," says one Brussels insider. "The
crisis is so huge that it will either cause the EU to break apart – or continue
to grow together."
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