SPIEGEL ONLINE

SPIEGEL ONLINE

05/06/2014 05:51 PM

Cold Turkey

How Germany Could End Russian Gas Dependency

By and

The crisis in Ukraine has made painfully obvious just how dependent Germany and other European countries are on Russian natural gas. There are serious alternatives for supplying the vital natural resource, but they all come at a price.

At the edge of the moorlands east of Bremen, an oil derrick juts into the sky. The site, known as Völkersen-Nord 24a, belongs to the oil and natural gas production company RWE Dea and taps into natural gas reserves located 5,000 meters (16,500 feet) below the earth's surface. At the tip of the steel derrick, a German flag flutters in the breeze. But the black, red and gold banner seems out of place.

RWE Dea was just sold to the Russian oligarch Mikhail Fridman five weeks ago for €5.1 billion ($7.1 billion). With the purchase, the 50-year-old multibillionaire now controls a fifth of German natural gas production and a quarter of the country's oil production. His holdings in Germany now also include the oil platform Mittelplate in Wattenmeer National Park on the North Sea coast. It is "an attractive portfolio," Fridman said of his purchase when he signed the contract in Hamburg at the end of March.

Alexey Miller, head of the Russian energy giant Gazprom, likewise finds Germany to be an attractive market. This summer, Gazprom's purchase of Wingas -- the Kassel-based trading company that controls a fifth of the German natural gas market -- is scheduled to be finalized. The acquisition will grant Gazprom authority over a 2,000 kilometer (1,243 mile) long pipeline network in addition to several natural gas storage facilities, including Western Europe's biggest, located in Rehden. It is large enough to supply some 2 million households for an entire year.

Awkward Timing

The timing of the purchases is awkward. Just as all of Europe is looking nervously at the escalating crisis in Ukraine, a significant portion of Germany's energy infrastructure is being sold to Russian buyers -- even as Moscow already plays a key role in meeting the country's energy needs.

Almost 39 percent of Germany's natural gas comes via pipeline from Russia. Thus far, at least. But what happens if Moscow turns off the tap? It is a concern plaguing many politicians in Berlin, and the rhetoric has become sharper in recent days.

Andreas Mattfeldt, a parliamentarian from Chancellor Angela Merkel's Christian Democrats who was born in Völkersen, says that RWE Dea's sale to a Russian oligarch makes him "more than uneasy." He says the deal has "extremely troubled" Germans in his Lower Saxony constituency, adding that, given Germany's existing dependency on Russian natural gas, he himself finds the transaction "very alarming." The country's energy security, he says, is "enormously imperiled."

The scenario of natural gas flows being intentionally reduced by Moscow had long been considered unlikely. Even in the chilliest days of the Cold War, the Soviet Union proved itself to be a reliable supplier. In the years immediately prior to the fall of the Berlin Wall, West Germany got fully half of its natural gas from Russia, via pipelines optimistically named "Brotherhood" and "Union."

A quarter century later, the world has become more complicated and foreign policy less predictable. The conflict in eastern Ukraine looks as though it could explode at any moment, injecting yet more uncertainty into the situation. And Russia has warned of potential delivery interruptions, a reaction to European threats of additional economic sanctions.

The issue has become a major focus of international diplomacy, with negotiators from Moscow, Kiev and Brussels meeting last Friday to discuss Russian gas deliveries to Ukraine. This week, G-7 energy ministers are meeting in Rome to discuss ways to wean themselves off of dependency on Russian natural gas.

Among the proposals on the agenda is a Polish idea to further integrate the gas supply grids of European Union member states so as to prevent shortages. Warsaw envisions the creation of a single European body that could coordinate or direct gas deliveries to and from large storage facilities on the Continent as well as make purchases. The proposal also calls for billions of euros to be made available for natural gas exploration on the Continent.

Germany too has once again begun discussing energy policy. In 2011, Merkel turned the country away from nuclear power and accelerated the development of renewable energy sources in a policy move known as the Energiewende. Now, though, geopolitical factors have suddenly become paramount in the debate over the country's future energy supply. Should Berlin increase its focus on exploiting domestic energy sources? How can Germany expand its supply network? And last but not least: What does all this mean for the environment?

Pursuing Liquefied Natural Gas

One potential solution to Europe's energy policy conundrum can be viewed at the very edge of the Port of Rotterdam, right where ships sail out into the open sea. There, a consortium has constructed GATE, a terminal on several acres of reclaimed land equipped to handle ships carrying liquefied natural gas (LNG). The tankers sail in from Norway, Qatar and Nigeria and are unloaded here. Some of the vessels carry enough natural gas to supply 60,000 households for a year.

LNG is cooled to a temperature of minus-162 degrees Celsius (minus-260 degrees Fahrenheit), which shrinks its volume to 1/600th of its original. The gas is pumped out of the ships at the Rotterdam terminal and into vast, 55-meter (180-foot) tall tanks, with walls of concrete and steel that are two meters thick. Excess heat from a neighboring coal-fired power plant is then used to re-vaporize the gas before it is fed into the pipeline network.

The facility in Rotterdam cost some €900 million to build and it can handle up to 200 tankers per year. So far this year, however, only seven have arrived. Indeed, since Queen Beatrix of the Netherlands cut the red ribbon opening the facility in 2011, a total of only 40 LNG ships have docked at the port.

The Rotterdam LNG port's slow start is primarily a function of the lack of sufficient liquefaction facilities in natural gas production countries. With several such facilities currently in the works, it seems likely that the situation will improve by the end of the decade.

There is, however, no shortage of LNG reception terminals. In Europe, there are already 22 LNG ports with more under construction. Indeed, the EU theoretically has the infrastructure capacity to cover two-thirds of its natural gas needs with LNG.

But there is another factor which has kept liquefied natural gas from playing a greater role in satisfying European energy needs: Price. For large exporters such as Qatar, it is much more lucrative to sell LNG in the Far East than to ship it to Europe. Suppliers are able to charge more than $15 per million British Thermal Units (BTUs) in Asia whereas the price in Europe is around $10. Since the nuclear meltdown in Fukushima in 2011, the price difference has become even larger as a result of Japan's increased need for natural gas.

As such, while it is certainly conceivable that LNG could become a greater part of the mix in Europe, it would mean higher energy prices. And the construction of further LNG terminals, such as the one that had been planned for Wilhelmshaven, Germany, seems unnecessary for the moment.

Exploiting Shale Gas

In the northwestern corner of Lower Saxony, on National Highway 75, the Bötersen Z 11 drilling site, belonging to American energy giant ExxonMobil, can be found. "Z" stands for "Zechstein," a term describing a sedimentary layer found in the European Permian Basin, which underlies a significant portion of northern Europe. The site was constructed almost three years ago.

At the time, everything was prepared, with technicians planning to inject a liquid deep into the ground at 450 bar (5,525 psi). The procedure would have lasted about an hour. But it didn't happen. Public protests against the procedure had become too intense to allow the project to go ahead. Today, a human-sized plug valve seals the drill site.

Aside from nuclear energy, no other technology is currently as controversial in Germany as fracking. Critics fear incalculable environmental damage, particularly to aquifers. Producers counter by claiming that the procedure is well-tested. And indeed, fracking has been employed in Germany since 1961, but only in conventional repositories in porous sandstone, which is comparatively easy to unlock.

The conflict over fracking is more rancorous when it comes to shale. Deposits in such sedimentary rock are much more difficult to access and the procedure is considered to be riskier. Though experts believe that the potential for the technology is great in Germany, shale fracking has not yet been carried out here.

The US energy expert Daniel Yergin estimates that by 2040, Germany could cover some 35 percent of its own natural gas needs were it to aggressively exploit shale gas. That amount is roughly equal to what Germany currently imports from Russia.

But Yergin's optimism is not widely shared. Germany's Federal Institute for Geosciences and Natural Resources recently concluded in a study that "it cannot be expected that shale gas in Germany will become the 'game changer' it has in the US." German shale gas, the study noted, "doesn't play a central role" relative to deposits elsewhere in the world.

Expanding Pipelines

The region surrounding the Caspian Sea, which is believed to have immense natural gas reserves, is a logical first place to look in the attempt to reduce dependency on Russia. Several gas fields are already being developed, including Shah Deniz, located around 70 kilometers (43 miles) southeast of Baku. Countries like Azerbaijan are indeed very willing to deliver gas to Europe. The only problem at the moment is that there's not a single pipeline in the area that isn't controlled by the Russians.

It's a problem a consortium of international energy companies now says it wants to tackle. The investors include German energy utility company E.on, Norway's Statoil and Britain's BP. The project foresees the expansion of an existing pipeline from the Caspian Sea through Azerbaijan and Georgia, the construction of a pipeline across Turkey and another that would then carry gas through Albania and Greece to Italy. The project, known as the Trans-Adriatic Pipeline, is targeted for completion by 2019 and envisions around 10 billion cubic meters of gas being transported to Europe each year. But with banks proving hesitant, it remains uncertain whether the project will ever be carried out.

Indeed, a similar project, the Nabucco pipeline, collapsed in 2013, despite the participation of major energy companies like Germany's RWE. Even the European Commission had offered its backing for the project. But in the end, the consortium threw in the towel in frustration after years of planning.

One factor in the failure was interference by Gazprom CEO Miller, who felt the undertaking threatened his lucrative business model. Gazprom is able to sell its gas in Europe at comparably inexpensive prices due to decades of significant investment in a pipeline system stretching over thousands of kilometers. Nord Stream, the pipeline directly connecting Russia with Germany and completed in 2011, even makes it possible for Miller to circumvent countries he views as politically unreliable, including Poland and Ukraine.

An alternative pipeline from Azerbaijan has the potential to challenge his entire system. In fact, Miller is now pressing ahead with the construction of his company's own pipeline for Caspian Sea gas. When completed, the South Stream pipeline will traverse the Black Sea through Bulgaria and into Austria. Last Tuesday, Miller and Austrian oil and gas producer OMV reached an agreement to extend the planned pipeline into Austria.

Miller isn't just planning to use the pipeline to transport Russian gas to Europe. He also wants to pass along natural gas purchased by Gazprom in the Caspian region -- from the same areas where the Western Europeans are currently seeking to exploit reserves.

The Biogas Option

Given that gas isn't found exclusively beneath the ground, other alternatives are also available. For example, plants rich in pulp like corn or sorghum can also be used to produce natural gas. Around 40 kilometers northwest of Berlin, in the city of Oranienburg, KTG Energie operates one of its 21 biogas plants.

At the plant, a shovel loader dumps slightly sulfuric smelling organic compounds into a steel tank at regular intervals. A spiral conveyor belt then transports the mass up into the fermenter. "The way we feed the plant is like fattening geese," company CEO Thomas Berger says, grinning.

KTG Energie is majority owned by KTG Agrar which, with around 40,000 hectares (98,842 acres) of farmland, is one of Europe's largest agricultural companies. The company uses grass and other low-value grains to produce energy around the clock. Two combined heat and power units transform some of the biogas into electricity, producing enough to provide the needs of around 4,000 homes. But a much larger share of the biogas is purified in order to make it compatible with natural gas and is then fed at high pressure into the network of the local gas supplier.

Currently, the volume of biogas being produced in Germany is equivalent to about 20 percent of what the country is importing from Russia. Berger estimates that modern technology could be used to double that figure in a very short time. "Only a few months would be required to increase production," he says.

An expansion like that also wouldn't automatically have to mean that plant operators would suddenly have to increase the tonnage of corn they use, one of the important points of criticism in biogas production, since it puts gas in competition with food production. KTG Energie works primarily with so-called catch crops like grass or sorghum that are seldom used in food production, Berger explains. "We're creating a solution for the gas tank and the dinner plate." He says that organic waste can even be used to produce biogas.

He argues that there's only one hitch: Plans by German Economics Minister Sigmar Gabriel to phase out federal subsidies for biogas. The latest amendment to the country's Renewable Energy Law (EEG) already introduces reductions to the current feed-in tariff -- particularly for highly efficient plants. With it, Gabriel is seeking to set an upper ceiling for subsidies. "It punishes performance," Berger says.

Though this change may help to contain the escalating costs of Germany's subsidies for renewable energies, it is unlikely to do much to reduce its dependence on Russian gas.

Alternatives Possible, But More Expensive

Nevertheless, reducing independence is a goal that would still be entirely possible with the help of modest efforts, including increased biogas production, additional LNG imports, the exploitation of domestic reserves and the prospect of importing gas from the Caspian Sea region. Of course, none of these alternatives will be available overnight. Most importantly, higher costs are an inevitability.

There's also another alternative that could be put into place relatively quickly. Germany could establish a strategic natural gas reserve. The country has plenty of gas storage facilities, and the German Economics Ministry also has plans ready which would enable it to order the operators to maintain minimum reserves of gas.

The question is who would pay for this storage. Would the costs be picked up by the natural gas companies or passed on to consumers or taxpayers?

The German government already made this decision years ago in regard to another important energy source. Following the price crisis of 1973, it required national suppliers to create reserves in their storage facilities for crude oil and oil products to ensure a minimum of a 90-day supply in the event of an emergency. Since then, the costs have been passed on to consumers, who are required to pay 0.27 cents per liter of gasoline for the service. That's the price of a little more independence.

Translated from the German by Charles Hawley and Daryl Lindsey

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