Germany Faces Systemic Risk to Its Gas Market

Wednesday, 06 July 2022
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Under pressure from high LNG spot prices, overall declining Russian pipeline flows and a looming maintenance shutdown that could see an end to gas flows via Nord Stream 1 within weeks, the German government is scrambling to find a solution to mitigate systemic risk to the German gas market. 

Wholesalers such as Uniper have been forced to cover their gas shortfalls on the spot market and are struggling financially. 

Uniper, Germany’s leading gas importer, is struggling to remain solvent amidst an acute shortage of Russian pipeline gas supplies, according to reports by Reuters and German news magazine Der Spiegel.

lng market tracker july 4

Uniper is currently receiving less than half of the usual gas volumes from Gazprom and has been forced to plug the gap from more expensive alternative sources, namely spot LNG. Russian pipeline gas arrives in Europe through long-term contracts with prices tied to formulae designed to protect from extreme price shifts. 

European demand pushes up prices

Meanwhile, the Dutch TTF index – a key determinant of LNG prices in Europe – had risen to its second highest point since the beginning of the year at around EUR 164 at the time of writing. By comparison, the TTF stood at just over EUR 34 this time last year.

European LNG demand was up by 1.65mmt (18pct) year-on-year in May and by more than 3.78mmt (69pct) year-on-year in June, our data show.

New legislation

Germany’s Federal Government has announced it is working on solutions to bring financial relief to Uniper and potentially other German energy providers.

A prospective route is to introduce new legislation to allow the Federal Government to provide loans and debt guarantees,  take a direct stake in the company in return for a capital injection or a combination of the three. 

Systemic risk

The German government insists the plan for new legislation is about more than saving a single company.

Federal Economy Minister Habeck warned of a “cascading effect” should companies such as Uniper become insolvent and drew parallels to the collapse of Lehman Bros. in 2008.

Uniper is a key gas wholesaler to hundreds of municipal power providers and German industry.

Importantly, Uniper is Germany’s most significant gas storage facilities operator and has been planning to complete Phase 1 of the country’s first LNG terminal by the time winter arrives this year.

The terminal is to enable Germany to diversify its gas procurement portfolio away from Russia.

 Time pressure

Time is of the essence if the intended emergency measures are to become law before the German parliament’s recess at the end of the week.

Gazprom has announced it would start maintenance on the Nord Stream 1 pipeline by the beginning of next week, which would lead to a complete stop of gas flows via that route.

There have also been concerns Gazprom will not restart deliveries via Nord Stream at the end of the maintenance period.

Gazprom blamed the current capacity cut at Nord Stream on the sanctions-induced stop to the shipment of a repaired gas turbine from Canada.

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