Germany’s gas problem may not be such a big problem anymore

Nice looking, isn’t it? Europe unusually mild winter was the stroke of luck to maintain the gas supply, with consumption around 30 percent below the seasonal average and full storage facilities in Germany and France.

Charts below and throughout are by Barclays analysts Mark Cus Babic and Abbas Kahn:

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

Warm weather buys time for Germany building two new ones LNG terminals. The floating storage facility is scheduled to come online over the next few months in preparation for the complete shutdown of Russia’s supplies.

But there are no kilometers in an empty tank. Europe may be temporarily flooded with LNG but the Market remains tightprices remain well above historical norms and a supply gap is likely to be next year. How could Germany get what it needs?

To answer this question and a few others, we caught up with them Rui Soaresof independent investment firm FAM Frankfurt Asset Management, their work on Russian gas dependency we published in May.

Most LNG contracts are long-term. Where are new deliveries coming from?

“Germany needs to tap about 3 percent of the world’s annual LNG production to fill its new terminals. One way is through wild capitalism. Most LNG contracts are long-term, but suppliers may break the terms, pay a penalty, and sell the LNG to the highest bidder. German industry can bid high.

“Trafigura and Glencore, which trade about 6 percent of all LNG globally, are very opportunistic. And Germany only needs half of the traded LNG.”

Does that mean a European bidding war to hijack each other’s supplies?

“Some EU countries have contracted more LNG than they use. You can resell the surplus. For example, Spain has an LNG storage capacity of 70 billion cubic meters [BCM]. But it only uses 36 billion cubic meters per year. Enagas [of Spain] has contracted more than 36 billion cubic meters annually through long-term LNG contracts, but sells the excess on the spot market. No one knows exactly how much, but 10 billion m³ alone would already cover two thirds of Germany’s needs. Shipments can be redirected without any problems.

“This also explains why the EU passed a law in June that obliges all member countries to fill their gas storage facilities at least 80 percent by November 1st. Tanks are full, surplus Nat gas trading is virtually at a standstill, and EU members are prepared to redistribute supplies as needed.”

But isn’t the problem also in the shortage of supply?

“While the general opinion is that there is no additional LNG production capacity globally, in fact this is not the case. Some nat gas producers, particularly those in the Gulf, may not be fully transparent. The suspicion is that they have additional production capacity, but do not report this.

“Like after that Fukushima accident In March 2011, Japan increased its nat gas consumption by 20-25 billion cubic meters in 12-18 months. At that time, the prevailing view was that no additional LNG production capacity would be available worldwide in the short term and that Japan would have to divert LNG from other countries. However, production met the additional demand and most of the additional supply came 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 percent. It’s possible the new ships are smaller, but LNG production and exports increased by just 6.5 percent between 2019 and 2021.

“In addition, the global order book for new LNG carriers stands at 140 to 150 units, with Russia reportedly accounting for 20 to 30 of them. Between a fifth and a quarter of the order book is delivered annually. A capacity bottleneck is unlikely.”

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

“Things are much better now than they looked in May. The EU natural gas storage targets were achieved early.

“According to calculations, Germany’s nat gas consumption before the Ukraine war was around 100 billion cubic meters per year, compared to a storage capacity of around 23 billion cubic meters.

“Industry accounts for about 35-40 percent of consumption and is cyclical. Less than 15 percent is used for power generation. The remainder is accounted for by household and service sector demand, with four-fifths of their consumption occurring during the winter months. It is therefore reasonable to estimate Germany’s nat gas consumption in the winter months at around 50 billion cubic meters.

“Germany imports 55 billion cubic meters of non-Russian gas annually through its pipeline system. Deliveries are fairly consistent, amounting to around 18 billion cubic meters during the winter months. Add that to the existing storage and Germany will have about 40 billion cubic meters of Nat gas available, suggesting that without the new tanks it would need to cut consumption by about 20 percent for the numbers to add up.”

That sounds like a lot.

“German industry has already reduced consumption by more than 20 percent through efficiency measures, production shutdowns and fuel changes. Households could achieve the same savings by lowering their thermostats by about 3 degrees Celsius, or perhaps less when oil stoves, electric heaters and even fireplaces are factored in. This means that German households live with a room temperature between 17 and 19 degrees Celsius. Hardly an unbearable sacrifice.

“And if the terminals are up and running, even that casualty could be avoidable.” To make it short: It will be a less pleasant winter than usual in Germany, but households will not freeze and industry will not collapse. Reality is better than perception.”

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