Europe fears a massive economic downturn if Russia shuts off gas

As the deadline for resuming Russian gas supplies to Germany approaches this week, European officials and business leaders are increasingly concerned about the economic repercussions that would spread across the continent if Moscow turns off the tap.

The Nord Stream pipeline, which transports gas from Siberia to Germany, was shut down last Monday for an annual maintenance expected to last 10 days. Many in the West fear that Moscow could extend the deadline, perhaps permanently shut down the pipeline and deprive Germany, Europe’s industrial heartland, of a key component needed to run local and neighboring factories.

European leaders accused Moscow of using the gas as a weapon when pipeline flows began to dwindle last month. Moscow attributed the shortage to technical problems associated with Western sanctions.

According to the annual maintenance schedule, Nord Stream should start working again next Thursday. Accordingly, the gas supply should resume the next day.

According to officials and company executives, it may be difficult to understand whether Russia will fully restore gas supplies. According to one scenario, Moscow could start the pipeline again, but with a smaller volume, as it has already done, citing technical problems due to sanctions.

On Monday, Germany’s largest buyer of Russian gas, Uniper SE, said it had received a force majeure letter from Gazprom — a legal statement exonerating the company from contract obligations for reasons beyond its control — that explains past and current gas supply disruptions. .

Uniper said it rejected the request as unfounded. Gazprom did not immediately respond to a request for comment.

Germany is highly dependent on Russian gas and also acts as a transit hub for gas supplies to Austria, the Czech Republic and Ukraine. In addition, the German industry produces various raw materials and components, from glass to plastics and other chemical products, which are of key importance to other manufacturers throughout Europe and beyond.

Russia, for various reasons, has already cut off gas supplies to France, Poland, Bulgaria, Finland, Denmark and the Netherlands. It recently cut supplies to Germany and Italy amid Western sanctions.

European solidarity
If Nord Stream does not start filling up after Thursday arrives, Berlin will declare a state of emergency using new legislation to control the energy market. And if the reduction leads to a shortage of gas, the authorities may resort to fuel rationing.

French President Emmanuel Macron warned last Thursday that the European Union must „be ready for a scenario in which we have to completely phase out Russian gas.”

On the same day, Shell PLC chief Ben van Beurden told an energy conference that Europe might need to curb energy consumption and face price spikes as the continent prepares for a „really tough” winter.

Berlin says it will not cut exports to neighboring states. EU countries have entered into agreements – one of them is the Security of Supply (SOS) directive – designed to prevent one country from stockpiling fuel in such a scenario. Germany has promised to help several neighbors in the event of a cut in Russian gas supplies.

European Commissioner for Energy Thierry Breton visited Berlin earlier this month. The main task of EU officials is to prevent a repeat of the first days of the pandemic, when some member countries stocked up on medical and protective equipment.

„Each country must demonstrate that it will do its best for itself and for others,” Breton said after the visit.

The EU executive, of which Breton is a member, will soon publish new gas-saving guidelines that propose limiting temperatures in office buildings across the block to 19°C, or around 66°F, officials said Thursday.

European producers in gas-intensive industries are switching to alternative fuels, such as oil and coal, and stockpiling chemicals and other critical ingredients in the run-up to winter when demand for gas is higher, business and trade officials said. But these measures work only to a limited extent. Industry leaders and economists have said that gas shortages severe enough to force rationing in any European country, especially Germany, the bloc’s largest economy, will inevitably be felt across the continent.

As Günter Oettinger, former European energy commissioner and German politician, said, this will undermine European supply chains, especially in the petrochemical sector, which depends on the use of gas and oil as raw materials. It will also seriously affect the production of steel, copper and ceramics. German law gives households and institutions such as hospitals priority in gas supplies, making it more likely that industry will be the first to face rationing in the event of a shortage. Given how tightly integrated the continent’s economy is, the effects will quickly spread beyond its borders.

“The entire EU will suffer if any particular economy enters a sharp and prolonged recession,” German insurance company Allianz SE wrote in a recent report.

Priority deliveries
According to the German Chemical Industry Association (VCI), which includes many of the country’s largest chemical and pharmaceutical companies, more than 60% of the chemical products imported by Germany, excluding pharmaceuticals, come from other EU countries. Germany, in turn, sends most of its chemical exports to industrial consumers in the EU.

Plastics and other materials made in the Netherlands can be made using German ammonia or acetylene, a compound used in welding and as a chemical building block for batteries, cables and other products. The plastics could be shipped to other countries for the molding or production of car seats, drug packaging, electronics or building materials, the industry group said.

Acetylene is also used in medicine. Chemical industry officials are wondering how European officials will decide who will prioritize gas supplies: producers of life-saving medicines or fertilizers that increase crop yields, a key aspect in the face of runaway food inflation.

“We go to great lengths to explain that when gas needs to be prioritized, we as fertilizer producers need to be the first priority,” said Jacob Hansen, director of industry group Fertilizations Europe, representing the majority of European fertilizer producers.

According to him, most factories operate around the clock throughout the year, except for a few weeks. Most of them must run at a constant power of 75% or more to maintain the heat and pressure required for the manufacturing process.

If Germany starts rationing gas consumption, the government will have to decide which sector will be hit first or the hardest, and which will avoid such measures. Companies and business associations are lobbying in Berlin for their industries to be considered critical.

“Our main goal is to ensure that there is no gas shortage in the EU,” said a spokesman for the German chemical association VCI, whose members are Germany’s largest gas consumers, accounting for more than 30% of industrial gas consumption.

The VCI believes that other European countries will be able to absorb part of the German chemical production if they are provided with gas to a greater extent. However, high prices for gas and other components, as well as difficulties in transporting goods, including flammable gases, threaten to exacerbate already painful inflation.

In one scenario, gas shortages disrupting plastics production could lead to a halt in the production of cars or even sneakers, said Ruud Schmeinck, a partner at the Amsterdam-based consulting firm Deloitte who specializes in industrial supply chains.

“Supply shortages are cascading down the value chain and things are getting worse and worse and worse,” he added.

The threat associated with the supply of Russian gas may increase due to other factors. U.S. LNG producers have promised to boost supplies to Europe, experts say, but tropical cyclones that are typical for this time of year could disrupt plans and complicate supplies of other commodities.

“Hurricane season is coming and always causing problems in the US supply chain,” said Guy Bessant, president of Stolthaven Terminals, part of Oslo-listed Stolt-Nielsen Ltd., which transports and stores bulk chemicals and other products around the world. the world.

He, like others, believes that existing European gas pipelines can handle the redistribution of fuel to some extent, and rail and other freight lines can help move some chemical supplies to other countries, but not for free.

“The market is hot,” Bessant said. “He doesn’t have a lot of free chemical storage capacity.”

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