With Germany in the midst of a deepening energy crisis German Chancellor Olaf Scholz is now calling for the construction of a pipeline which would reach from Portugal to Central Europe. Naturally, the goal of such a pipeline would be to reduce Germany’s dependence on Russian gas. Even though Germany and other European nations have made strides to shrink their dependence on gas shipments from Russia, it has become clear that reliance will not diminish before the winter season arrives. Scholz has broached the topic of a pipeline with the officials from Portugal, Spain, France and the European Union. Portuguese Prime Minister António Costa has been pushing for the pipeline proposal to be examined by the EU since the early days of Russia’ invasion of Ukraine. Germany and other nations with a heavy reliance on Russian gas paid the issue little mind.
Now Germany appears intent to push the matter, even publicly admitting regret that a sincere effort was not made earlier. Of course, the geopolitical situation has changed. Now that Germany is anxiously seeking other sources for natural gas supplies, a pipeline from Portugal to Central Europe suddenly seems to be an ideal solution.
Unfortunately for Berlin, the energy troubles confronting Germany are not strictly limited natural gas. Water levels on the Rhine River dropped to a critical low on Friday. This will affect barge traffic on the river and subsequently restrict the flow of essential commodities to inland Europe even more. Not exactly welcome news and a firm indication that the energy crisis facing Europe is a long way from being brought under control.
With Gazprom 1 having announced another reduction in the Nord Stream 1 pipeline’s output to around twenty percent of its capacity, Germany and other Central European nations could be faced with having to make some unpalatable choices in the weeks to come. Service resumed on the pipeline last week following a ten-day maintenance period at roughly 40 percent capacity. Now that has been halved and the prospect of even deeper reductions is looming. Other nations in Central Europe are contending with reductions as well. Italy has been informed by Gazprom that the amount of gas it normally receives is being reduced as well. The Russian energy giant claims overall gas flow in the pipeline is lower because of technical concerns with one of the turbine engines. Germany claims this reason is a ‘made up pretext’ and the move is nothing less than a Russian powerplay.
Earlier in the week EU energy ministers announced support for a voluntary 15% reduction in natural gas usage. The plan has been somewhat watered-down following resistance from Southern European nations, but the 27 member-states have agreed to cut back on usage by the winter. The plan is an effort to make certain fuel supplies are adequate for the coming winter. Despite the claim by Brussels that the bloc is united in standing up to Russian energy strongarm tactics, objections by nations not reliant on Russian gas raise the prospect of a disunited front in the future.
In a somewhat ironic reversal of fortunes from ten years ago, now it is Southern European nations like Spain and Portugal chiding Germany for its failure to prepare and short-sighted thinking. They’re not wrong. Berlin ignored the warnings for quite some time as it became dependent on Russian gas. Therefore, the argument put forward by Madrid and Lisbon is that the Germans should carry the largest burden instead of nations whose economies are not reliant on Russian gas.
Yesterday’s declaration by state-owned Russian energy giant Gazprom that ‘unforeseeable circumstances’ could make it unable comply with European gas contracts is placing Germany in an even more precarious position. The prospect of Russia shutting down the flow of natural gas to Germany seems more probable. With Gazprom threatening to send less gas to Germany and other European nations, German firm Uniper, a major energy importer, has rejected the claim. According to a company spokesperson, Uniper rejects the force majeure claim put forward by Gazprom. Realistically, Uniper’s rejection does not change matters one way or another.
The Nord Stream 1 pipeline is scheduled to come off its 10-day maintenance period and resume operations on Thursday. It’s unclear if the pipeline will start operating at a reduced capacity, or at all. Despite Berlin claiming to have reduced its overall dependence on Russian gas from 55% to 35% it is still highly dependent on Nord Stream 1. The two other pipelines providing natural gas to Germany from Russia were closed off.
Many analysts still seem to agree that Nord Stream 1 will resume operations, albeit in a limited capacity, perhaps. However, Germany’s nightmare scenario of Putin halting gas deliveries entirely is haunting Berlin and Brussels. The nation is already falling behind efforts to top off its natural gas storage supplies before winter sets in. We discussed this in an earlier entry last week. Gas rationing and other conservation steps will have a detrimental effect on the German economy. A number of companies are concerned such measures will force them to close permanently.
Germany is not the only target either. A dozen EU nations have seen their gas supplies from Russia either severely reduced or cut off entirely. The lack of a European-based energy sharing plan and the shortsighted thinking of EU leaders on the energy-security front are now coming home to roost.
Europe is on edge as the Nord Stream 1 undersea natural gas pipeline running from Russia to Germany has gone offline for a 10-day maintenance period. Although European efforts to wean the continent off Russian fuel and energy continue, a large portion of Central Europe remains reliant upon Nord Stream 1. Austria, Italy and the Czech Republic receive gas by way of Nord Stream 1, and despite the European sanctions now in place against Moscow, Germany continues to obtain 30% of its natural gas from Russia. Until Germany and other European nations can remove the albatross from around their collective neck that is the dependence on Russian energy, Russia can use this to its advantage. In fact, it already is. Last month Gazprom reduced the westward flow of gas by 60%. The move sent energy prices surging and forced Germany to initiate the second stage of its emergency gas plan.
Naturally, German officials are becoming concerned Russia might use this pre-scheduled maintenance period to shut down the pipeline completely. Germany has been moving to fill its gas storage reserves by November to increase supplies for the winter. If Russia halts the gas flow entirely, a recession will become inevitable. This means the gas crisis Germany has been working hard to avoid will become a reality by the end of the year. Think tanks in Europe have become serious lately, analyzing the data, modeling the situation, and drawing conclusions on the matter. Some conclusions are more realistic than others, at least in my opinion. But a consensus has emerged that for Germany to weather the coming winter with only non-Russian gas supplies, consumption will need to be significantly lower than it has been in recent years.
The German and Russian governments both realize this as well.
At the G7 Conference in Germany, the Group of Seven leaders are working on a new plan to minimize Russia’s oil profits as Ukrainian leader Volodymyr Zelenskiy continues to call for more arms as Russian air strikes continue across his nation. It has finally become clear to the G7 that Russia has been able to ride out the heavy sanctions placed upon it in response to its invasion of Ukraine. Russian oil sales have kept the nation afloat while causing a ripple effect of economic fallout from the conflict around the world.
Most G7 leaders are facing domestic political pressure as the conflict in Ukraine continues. The economic fallout mentioned above includes soaring inflation, runaway energy prices and the prospect of more significant hardships as the conflict goes on. To be sure, the Russia-Ukraine War has continued on far beyond the expectations of most analysts, observers and politicians. And while the G7 continues to pledge undying support for Ukraine in public, pressure is building behind the scenes for Western leaders to bring an end to the conflict and contain the spreading economic damage.
Zelenskiy has stated he wants to see the war conclude by the end of 2022. However, given the fact that Russia now has the initiative and Western populations are growing weary of the cost they are being forced to bear, a negotiated conclusion to the fighting appears more probable. Most likely one that cedes the Donbas to Russia in exchange for an end to the fighting.
Author’s Note: Apologies for the shortness of this update, I’m just getting over a stomach bug that kept me down for most of the weekend.