Germany risks recession as Russia’s gas crisis deepens

Pipes at the landfall facilities of the ‘Nord Stream 1’ gas pipeline are pictured in Lubmin, Germany, March 8, 2022. REUTERS/Hannibal Hanschke/File Photo

BERLIN/COPENHAGEN, June 21 (Reuters) – Germany faces something of a recession if already faltering Russian gas supplies are halted entirely, an industry association warned on Tuesday, as Italy said it would consider offering financial support to firms to help refill gas storage to avoid a deeper crisis in winter.

European Union countries from the Baltic Sea in the north to the Adriatic Sea in the south have outlined measures to deal with a supply crisis after Russia’s invasion of Ukraine put energy at the center of an economic struggle between Moscow and the West.

The EU depended on Russia for up to 40% of its gas needs before the war – rising to 55% for Germany – leaving a huge gap to fill an already strained global gas market. Some countries have temporarily rolled back plans to shut down coal-fired power plants in response.

Gas prices have reached record levels, fueling inflation and posing additional challenges for policymakers trying to pull Europe out of an economic doldrums.

The German industry association BDI lowered its economic growth forecast for 2022 to 1.5% on Tuesday, downgrading it from the 3.5% expected before the war began on February 24. He said a halt to Russian gas supplies would make a recession in Europe’s largest economy inevitable.

Russian gas is still being pumped through Ukraine, but at a reduced rate, and the Nord Stream 1 pipeline under the Baltic Sea, a key supply route to Germany, is only at 40% capacity, which Moscow says is due to western sanctions preventing repairs hinder. Europe says this is an excuse to reduce flows.

The slowdown has hampered Europe’s efforts to refill storage facilities, which are now about 55% full, to meet an EU-wide target of 80% by October and 90% by November, levels that would help the bloc to bring through the winter if supplies were further disrupted.

Italy’s minister for ecological transition, Roberto Cingolani, said Italy must accelerate its refill efforts and that Rome should consider how to help companies finance gas purchases for storage.

An Italian government source said a state guarantee could be an option to lower financing costs.

“Gas is so expensive right now that operators can’t put money into it,” Cingolani said.

The benchmark gas price for Europe traded at around 126 euros ($133) per megawatt-hour (MWh) on Tuesday, below this year’s high of 335 euros but still more than 300% above the level of a year ago.

‘WE HAVE A PROBLEM’

Italy, as well as other countries such as Austria, Denmark, Germany and the Netherlands, have activated the first early warning stage of their three-stage plan to deal with a gas supply crisis.

As part of Germany’s contingency plans, the Bundesnetzagentur’s gas regulator revealed details of a new auction system due to start in the coming weeks, aimed at encouraging manufacturers to use less gas.

The head of the Federal Network Agency questioned whether current gas supplies would get the country through the winter, although he previously said it was too early to declare a full-scale emergency or the third stage of the contingency plan.

“From today’s perspective, we have a problem,” said Federal Network Agency President Klaus Müller on the sidelines of an industry event in Essen.

The CEO of Germany’s largest energy supplier RWE (RWEG.DE) Markus Krebber said Europe has little time to develop a plan.

“How would we redistribute the gas if we were completely shut down? There is currently no plan … at European level … as each country is examining its contingency plan,” he said at the same event.

The high European price has attracted more LNG cargoes, but Europe lacks the infrastructure to meet its full demand for LNG, a market that was already tight before the Ukraine war.

Disruptions at a major US producer of liquefied natural gas that made shipments to Europe are adding to the challenge.

Europe is looking for more pipeline supplies from its own producers like Norway and other states including Azerbaijan, but most producers are already reaching the limits of production.

As the crisis spreads across Europe, even a small consumer like Sweden has joined European allies to launch the first phase of its energy contingency plan.

The state-owned energy agency said Tuesday the supply was still robust, but it was “signaling to industrial players and gas consumers connected to the west Swedish gas network that the gas market is tight and a deterioration in the gas supply situation could ensue.”

Sweden, where gas accounted for 3% of energy consumption in 2020, relies on pipeline gas supplies from Denmark, where storage facilities are now 75% full. Denmark activated the first stage of its contingency plan on Monday.

($1 = 0.9477 euros)

Reporting by Rachel More and Paul Carrel in Berlin, Stine Jacobsen in Copenhagen, Nina Chestney in London, Giuseppe Fonte and Francesca Landini in Rome and Vera Eckert in Frankfurt; writing by Edmund Blair and Barbara Lewis; Edited by Carmel Crimmins

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