Rui Soares is an investment professional for FAM Frankfurt Asset Management, an independent investment firm.
The Russian energy problem for the European Union and Germany was never oil.
Russia accounts for approximately 10 per cent of the worldwide oil production: 10.5mn barrels per day, of which 5mn are exported to the EU. A full EU oil embargo would not take the 5mn barrels out of the market, since these can be easily re-routed to China, which imports 9mn out of the 14mn barrels per day it consumes. Instead, the 5mn barrels a day from the Middle East currently sold to China could be re-routed to the EU. We know because this is already happening.
There are powerful economic incentives for China to keep switching from Middle Eastern to Russian oil: pre-Ukraine invasion, Russian oil (Urals) used to trade in line with Brent crude. Demand for Russian oil in international markets dropped as a result of western sanctions, including self-sanctioning by many companies, leading to a current discount of 20-25 per cent to Brent.
Things are a bit trickier for diesel imports from Russia to the EU and Germany. Around 70 per cent of the EU road traffic runs on diesel and 75 per cent of the EU diesel imports are used to power road traffic. The EU and Germany import 8 per cent and 12 per cent respectively of their consumed diesel from Russia in refined form.
Tensions have built up in the European diesel market due to a lack of refining capacity in Europe. The evolution of the European crack spread — the difference between the price of diesel and crude oil — tells the story:
Then again, even if Russian diesel imports were to be fully banned, the EU and Germany could cope without incurring into major economic disruptions: mandatory white-collar working from home for three (or possibly even two) days a week would be enough to reduce the consumption by the amount required to compensate for a full Russian diesel import ban. These are the joys of living in the digital era.
Germany’s big Russian energy problem was always natural gas. Imports from Russia account for approximately 50 per cent of German natural gas consumption.
Industry accounts for 35-40 per cent of Germany’s natural gas demand, with a further 10-15 per cent going to electricity power stations. Supply to households and services last year were, respectively, approximately 31 per cent and 13 per cent of demand. On top of that, and accounting for around 6 per cent of the total, is district heating (Wärme und Kälteversorgung) which links households and commercial buildings to centralised gas-to-heat plants.
Electricity production can be readily replaced by electricity produced by coal power plants — admittedly not happy news for the environment, but doable.
However, if Germany wants to fully protect its industry while banning all natural gas imports from Russia, there is only 10-15 per cent of natural gas supply left to meet the 45-50 per cent of demand coming from households and services. A 70-80 per cent reduction in natural gas household consumption is therefore unavoidable. And politically almost impossible to implement.
Full natural gas independence from Russia before 2024 or 2025 is unrealistic. That was the reality three months ago.
Not any more. With two new floating LNG terminals (known as floating storage and regasification units, or FSRU) scheduled to start operations by the end of 2022 and the beginning of 2023, things will change dramatically. LNG transported by ship from the Middle East will partially replace Russian natural gas imports, which will then account for only one-third of current German natural gas consumption.
Running the numbers, it means that after fully protecting the industry and banning natural gas imports from Russia there will be an amount equivalent to 27-32 per cent of the current natural gas supply left to meet the 45-50 per cent of demand from households and services. A 40 per cent reduction in German household’s natural gas consumption will then be enough to achieve energy independence without any impact for the industry.
This 40 per cent figure might look too high but far from unattainable. According to the International Energy Agency, there is a 6-7 per cent reduction in natural gas consumption for every 1C reduction in the thermostat. Thus, reducing room temperature by 6 per cent in the winter months could be enough to achieve natural gas independence from Russia.
According to the German Heizperiode law, tenants whose heating costs are included in the monthly rent (Warmmiete contracts) are entitled to a room temperature of 20-22C in winter with a minimum of 18C during the night. The average winter room temperature of German houses is around 20C. However, an average temperature of 14C combined with good ventilation is considered enough to avoid mold and long-term damage to a building. On top of that, 15 per cent of German household natural gas consumption is used to heat up water — and it goes without saying that the German industry will surely put in place a few extra energy efficiency measures by the beginning of winter.
In the war for energy independence from Russia, the numbers are increasingly on Germany’s side. Holding out against Vladimir Putin this winter might need nothing more than a woolly jumper and quick shower every other morning.