Under pressure from the Trump Administration to reduce its dependence on Russian energy, Germany seems ready to embrace the idea of its very own liquified natural gas (LNG) import terminal. And it is long overdue.
German Chancellor Angela Merkel announced in October that her government will co-finance the construction of a $576 million LNG shipping terminal in northern Germany. Private investors are already studying the possible construction sites in Brunsbuettel and the nearby Stade, two small ports on the Elbe River close to Hamburg.
LNG Stade GmBh consortium, uniting Macquarie Group Ltd. and China Harbor Engineering, has already revealed a plan envisaging a terminal capable of handling between 5 and 8 billion cubic meters (bcm) per year. This is still a meager amount relative to the 36.47 bcm Germany imported from Russia in 2017, just under half of its 80 bcm annual total. But Berlin’s dependence on Russian gas exports is about to grow as the Nordstream 2 gas pipeline will become operational in late 2019.
The question is: how does a new LNG terminal fit into Germany’s energy strategy and to what extent should these new developments be interpreted as an economically sound move versus an appeasement gesture towards the United States?
Russia’s Gazprom is by far Germany’s top gas supplier, well ahead of the Netherlands and Norway. Gas output from the North Sea – a longtime European alternative to Russian supplies — is declining, and the Netherlands will likely close its enormous Groningen gas field by 2030 due to environmental concerns. Last year the Netherlands became a net importer of gas for the first time since the 1950s.
It is in this context that Germany decided to back the $11 billion Nord Stream 2 project, which would double the existing Nord Stream 1 capacity of 55 bcm, further boosting the country’s dependence on Russian gas. The 110 bcm combined capacity of Nord Stream 1 and 2 would increase German gas imports from Russia to nearly 60%. European imports of Russian gas would similarly jump to about 60%.
President Trump has heavily criticized the Nord Stream project and the EU’s overall dependence on Russian hydrocarbons. He has lobbied heavily for an increased sale of U.S. LNG to Europe and threatened to sanction the Nord Stream 2 project. Merkel’s LNG receiving terminal announcement could then go a long way in diffusing U.S. – German trade tensions.
Diplomatic considerations aside, it is a logical step for Germany to diversify and expand its natural gas sources. The country envisions a carbon-neutral economy by 2050 and is following the national Energiewende program as its blueprint. But the transition will not be easy. Germany still relies on dirty lignite coal for 37% of its power needs. The country will also shutter its last nuclear plant in 2023, forcing it to increase nuclear power imports from neighboring France to offset the drop in baseload power. And without adequate utility-scale energy storage, the challenge of renewable energy intermittency is ever-present. Natural gas, then, could be the mid-term solution to securing clean(er), reliable, and stable energy sources for the German economy.
Moreover, the new terminal would improve Germany’s long-term flexibility and direct access to global LNG markets. It would potentially limit the exposure to external market shocks, particularly from Russia. Direct access to foreign LNG would possibly set a price ceiling for Gazprom, meaning the Russian energy giant would no longer be able to demand whatever it wants. The example of Lithuania demonstrates that import diversification makes a big difference when negotiating with Russia: the country secured a 23% discount on Gazprom’s supplies in 2014 after the completion of its own LNG receiving terminal.
Despite a concerted push by the Trump administration, there is no guarantee that the new terminal would favor American gas over that of other producers. Shipments would need to compete with supplies from other top LNG exporters like Qatar, Australia, Nigeria, Indonesia or even Russia. Qatar Petroleum has already pledged a 10-billion-euro investment in Germany’s energy sector, and is in talks with German companies RWE and Uniper to build a joint LNG terminal.
Further, an increased import capacity does not guarantee the project’s commercial viability. Many European countries already have LNG terminals (Spain has seven, the UK six, France has four etc.) with a total capacity of 227 million tonnes of LNG a year, but their average utilization rate is only 25%. That can be explained by the combination of relatively low gas prices and abundant supplies from Russia and Norway.
LNG exports to Europe are an interplay of economic sustainability and energy geopolitics. In order to make a buck, American LNG exporters will need to sell for at least $6-$7 per million Btu in Europe, a price around 20% higher than Russia’s gas price for Germany. While moving U.S. gas supplies to Germany and Europe might be a good way to contain Moscow’s influence and bolster EU energy security, U.S. energy companies need to ensure that their gas is competitive on price and terms if they want to compete inDeutschland’s energy markets.
No matter the source, ship-based LNG imports will afford Berlin much-needed leverage in its still asymmetrical energy relationship with Moscow.
Balázs Kiss, Intern at International Market Analysis Ltd., contributed to this article