Under pressure

Germany needs LNG terminals

lng terminal, germany, japan
If you build it... Source: Bloomberg

Germany is under pressure. A planned German coal and nuclear phaseout — combined with ambitious carbon targets — places the country in a unique and unenviable position. For, when the coal plants are closed and reactors are shut down, Germany must find a way to power its enormous industrial economy primarily with renewables and natural gas. This is no mean feat.

While solar, wind and battery technologies continue to improve, they still suffer from intermittency and scalability problems, meaning Germany will remain heavily reliant on imported gas for many years to come. Despite Germany’s ambitious Energiewende, the country ranked as the world’s second-largest gas importer in 2017 — one place behind Japan — data from the BP’s annual global energy review shows.

But unlike its neighbors France, Italy, the United Kingdom and Spain, Germany has no liquified natural gas (LNG) terminals, meaning these imports arrive almost exclusively by pipeline from Russia, the Netherlands and Norway. This is detrimental for both energy security and the German consumer, who would benefit from increased competition in the gas market.

There is significant evidence that increasing competition in the gas market is good for consumers and the security of supply. The recent construction of an LNG terminal in Lithuania is one such example, for it allowed the country to source cargoes from around the world, reducing its reliance on Russia as its sole supplier.

Conversely, in Japan and South Korea — another of the world’s largest importers of the fuel — the lack of cross-border pipelines has hampered competition and led to higher prices. To mitigate this problem, governments in Tokyo and Seoul have long explored options of building connecting pipelines to Russia and China — and even through North Korea.

A prospective German LNG terminal would coincide with a boom in global trade of the fuel. Dozens of new liquefaction plants are under construction across the globe. In fact, there are over 850 million tons of proposed annual liquefaction capacity in planning for 2020 onward. While some of these export plants may not be built, the competition between projects has created a buyer’s market for potential LNG customers.

Arguments against German LNG terminals are therefore perplexing, particularly in light of the Netherlands’ plans to mothball Europe’s largest gas field and the decision to build the Nord Stream 2 pipeline between Germany and Russia. Both these developments will make Germany more dependent on Russia, a country increasingly at odds with the West over a number of issues ranging from Ukraine and Syria to the recent use of a military-grade nerve agent on the streets of a bucolic English city.

The European Commission has already raised concerns about the behavior of Russia’s state-owned gas company, Gazprom. In 2015 the commission said the company was breaching EU antitrust rules by seeking to partition European gas markets. Three years later, the commission imposed a number of binding obligations on the company in order to prevent it from abusing its position of market dominance.

Russia already supplies 51 percent of Germany’s gas and a considerable amount of the country’s oil. Nord Stream 2 will double Russia’s export capacity to Germany while avoiding transit routes through Belarus and Ukraine. Both of these facts will increase Russia’s leverage over both Germany and Europe.

Meanwhile, the Dutch government has announced plans to shut down the Groningen gas field by 2030 and has already significantly scaled down production. The country supplied nearly a quarter of Germany’s gas in 2016, meaning that replacing Dutch imports will be a priority in the medium term.

Without an LNG terminal, Germany would be faced with no choice but to increase imports from Russia and Norway. Entering discussions with no other supply options would be like going into a negotiation with a gun to your own head.

Eventually, as Germany decarbonizes and decentralizes its energy mix, natural gas will play a smaller role in the country’s energy supply. However, in the meantime, German LNG terminals are a necessity.

As Great Britain entered the petroleum age a century ago, Winston Churchill famously stated that “safety and certainty in oil lie in variety and variety alone.” Germany should heed that wisdom today.

The views expressed in this article are those of the authors and do not necessarily reflect the views of Royal United Services Institute or IABG. To contact the authors: columnist@handelsblatt.com

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