What if the Gas Is Cut Off? German Industry Prepares for Worst-Case Scenario
You can find something from Hinrich Mählmann just about everywhere you look in Germany. His company, the Otto Fuchs Group, founded in 1910, literally delivers the things that make the country move. They include wheels and coupling systems for railroads, engine components for the aviation industry and even battery housings for electric cars. Mählmann also sells thermally insulated windows and doors through its subsidiary Schüco. The supplier has revenues of just under 3 billion euros annually and employs 10,000 people.
The article you are reading originally appeared in German in issue 14/2022 (April 2nd, 2022) of DER SPIEGEL.
If the family business in the small town of Meinerzhagen in the western German state of North-Rhine Westphalia was suddenly no longer able to manufacture its goods, the German economy would have a problem. Without Mählmann’s upstream products, manufacturing in entire industries would be at risk – from car factories to construction.
Until now, such a horror scenario seemed unthinkable. To supply what German industry so urgently needs, the company operates aluminum presses "as heavy as the Eiffel Tower," as Mählmann says, plus large furnaces and smelters. The plants consume vast quantities of natural gas, an energy source that the group, like thousands of other companies across Germany, obtains to a large extent from Russia.
Currently, Mählmann is busy preparing for the possibility of the day when natural gas from Russia may no longer flow. It would be a "catastrophe," says the businessman. Turning off a gas-powered furnace for several hours a day is virtually impossible, he says. Doing so would cool them down, and bringing it back up to temperature would consume a disproportionate amount of time and energy. And replacing gas with electric power is out of the question: It would make no sense environmentally or economically. Relocating the machines would also be impossible due to their sheer size and the cost. "The plant would have to shut down," says Mählmann.
He pleads for gas imports not to be frozen completely and for the energy source to instead be rationed if necessary to at least "keep everything running on the back burner."
Germany on the back burner, a country in emergency mode. These are the kinds of considerations Germany is making right now across all sectors, industries and trades. What if Russia turns off the gas? Or the European Union bows to the growing pressure and imposes an import ban itself? Who would then get the much-coveted raw material? Which rules would fall into place? As of today, it seems certain that private consumers and their heating systems would be given the priority. Drug manufacturers and hospitals as well as public infrastructure are also at the top of the list.
After that, things get tricky. Should those industries be supplied with gas, at least in part, whose products are urgently needed by others for further processing? Or is it really a matter of only the most urgent needs, a war economy in which it is the security of supply counts and no longer the continuity of industry?
Germany is extremely ill-prepared for this worst-case scenario. A "Gas Emergency Plan for the Republic of Germany" has been in place since September 2019. But it is based on a fundamental miscalculation: In the very first pages, it states that the natural gas supply situation in Germany is "highly secure and reliable." And that the likelihood of a massive supply crisis is "very low."
The plan is clearly not designed for an emergency of this magnitude. The document contains a rough graduation of who should be given supply priority in the event of supply shortages: consumers and critical infrastructure. Industry would be the first segment to see its gas rationed.
But there’s a problem with that: Which companies are so important in terms of supplies that they would need to keep producing? And which ones are unable to throttle their plants for technical reasons? Whose products are dispensable? The emergency plan does not provide answers to these questions, even though they are crucial for Germany’s economy and security. "We’re all doing this for the first time," says a senior official with an association representing industry.
The BASF plant in LudwigshafenFoto:
Andreas Pohlmann / obs
Since Russia's invasion of Ukraine, Germany has been facing a situation that had previously been considered unfathomable. Europe’s largest industrialized nation may soon have to ration its energy supplies, essentially throttling the economy. The gas is still flowing, but many are afraid they won’t be able to rely on it for much longer. At the latest since the Kremlin announced that Russia would only accept payment in rubles for its energy exports, there has been a mood of alarm among politicians and the business community. Revelations over the weekend that the Russian military may have committed ghastly war crimes in towns under its occupation have intensified that alarms and redoubled calls for a suspension of energy imports from Russia.
German Economics Minister Robert Habeck declared the early warning stage of the emergency plan. The step primarily aimed at speeding up preparations in government agencies and companies.
How well Germany manages this emergency will determine whether the country can defend its competitiveness – or lose hundreds of thousands of jobs, as leading trade unionists have warned in recent days.
Behind the scenes, people are now working under intense pressure to think and plan the unthinkable. Three working groups, each staffed by a dozen experts from key companies and industry associations are developing criteria that could be used to limit or cut off gas supplies to various factories. Legal, technical and financial issues have been placed on the table, and thousands of companies, countless products and millions of jobs are at stake. The issue is so complicated that it will take weeks to come up with a reasonably manageable set of criteria, fears one source involved in the talks. The source describes a "feverish tension" in the talks.
Industry associations also seem to be fine with the fact that the German government is picking up the pace in terms of dealing with the issue. In recent weeks, the source says, the associations have been overrun by panicked companies all wanting to know where they stood in the rankings and what they would have to reckon with if Russian gas supplies are cut off. A working group is now continuously reviewing the supply situation on behalf of the economics minister. If the situation deteriorates seriously, Habeck can declare a state of emergency and have individual industrial customers disconnected from the supply. The distribution of energy would then be in the hands of the state, a first in the history of postwar Germany.
The fact that the country has allowed itself to get into this precarious situation is the result of a series of misguided historical decisions. Since the 1970s, Germany has become increasingly reliant on natural gas as an energy source. Dependence on Russia as a major supplier grew as a result of the country’s decisions to phase out coal and nuclear power. At the time those decisions were made, there were no doubts about the stability of the partnership with Putin’s regime. And why should there have been? For decades, the Russians had delivered reliably, regardless of whether there was a Cold War or a hot one, like the Soviet invasion of Afghanistan in 1979. But the Kremlin exposed just how naïve the Germans’ blind faith in Russian energy had become the moment Moscow deliberately began using natural gas as a weapon in its economic war with the West.
In this war, Germany is more vulnerable than other countries. Around 25 percent of the energy needs of industry in the country are supplied by natural gas. And around 55 percent of the country's natural gas imports come from Russia. As such, industry associations and trade unions are predicting that a gas embargo could break value chains and bring the manufacturing sector more or less to a standstill. Jörg Hofmann of the IG-Metall trade union is warning of the possibility of a "recession that will be much more severe than the recessions we have seen so far." Some 1.2 million jobs are tied to the chemical, metal processing and food industries alone, three of the country’s most gas-hungry sectors.
Germany's Federal Labor Ministry has begun gearing up for such an emergency. With economic aid and federally subsidized work furlough programs, the government "has instruments at hand to get the labor market through this crisis well," says Labor Minister Hubertus Heil of the center-left Social Democratic Party (SPD). If supply chains break down and high energy costs bring companies to their knees, Germany’s work furlough, or "short-time work," program, which sees the government subsidizing part of employees' salaries, could save hundreds of thousands, if not millions, of jobs. The work furlough subsidy package introduced during the coronavirus pandemic has already been extended until the end of June, but so far, at least, no one is pushing to increase its size. A short-time work program triggered by a cessation of deliveries of Russian gas might have to be larger than any previously seen in Germany. If Heil so decides, however, he could extend the coronavirus relief package until September to prepare for such an emergency. Corporate lobbyists are pushing for him to do so.
Just how bad the effects of a gas supply freeze would actually be is a matter of debate among researchers. Estimates range from "manageable" to an economic slump of 6 percent, economic damage of 230 billion euros and an increase in unemployment. What is indisputable is that a large-scale freeze of energy supplies would be unprecedented in the history of postwar Germany.
From a purely technical standpoint, it is no problem turning off the gas tap. Hundreds of distribution system operators would be responsible for doing so. In addition to controlling the flow of gas through the pipelines, they also command centers for several thousand natural gas transfer points in Germany. If you think of natural gas supply as a highway network crisscrossing the country, the transfer points are like highway exits that can be closed or reopened.
The actual shutdown in an emergency must be carried out in part by the industrial plants themselves on the instructions of their grid operator. Some companies can reduce the gas flow by any percentage, but others can only turn the valve on or off at their facilities, depending on the plant and the equipment. If companies were to refuse to turn off their gas, the police or other public officials would have to force them to do so.
To prevent a shutdown and conserve Germany’s gas storage reserves for as long as possible, energy and grid operators are looking for ways to quickly reduce consumption. In German energy network jargon, this is called "shedding the load." Customers who have agreed to disconnection clauses in their contracts receive gas at a lower price, but in return have to agree to forego supply in the event of shortages. As it has been doing as a part of the phase-out of coal-fired power, the federal government could also pay money in a kind of auction to those companies that agree to voluntarily forego gas supplies or take less gas.
At the point that such market mechanisms are no longer sufficient to prevent storage facilities from running dry, the emergency stage kicks in. The Federal Network Agency would then have final jurisdiction over supplies. Klaus Müller, the new head of the agency, who until a few months ago served as the head of the Federation of German Consumer Organizations (VZBV), protecting consumers from corporations, suddenly became the gatekeeper for the flow of natural gas in Germany.
The Emergency Manager
Christian Nemitz / Bundesnetzagentur
The agency, based in Bonn, has established a crisis center to address the current problem. It’s located on the first floor of an adjacent building to the headquarters in a conference room that resembles a bunker in the way it is outfitted: It has its own power and water supplies, and food is also on site. The 65 members of the crisis team could stay here for days at a time without leaving the building. Technicians, economists and lawyers are part of the staff, which is set up to work in shifts should it come to that, seven days a week, around the clock. Cots are even stored in the basement for such extreme situations.
For days, Müller’s team has been asking one question: What would happen if the gas supply broke off? According to the analysis, the gas pressure would gradually decrease in the three pipelines from Russia. But after a few days, it would become critical. At that point, the fight against gas shortages would begin. Gas storage facilities would be activated, especially in the southern and eastern parts of the country, where the easing of the gas pressure would have the first impact. Gas would continue to come from the west, from the Netherlands and Norway, for example, or from Belgian liquefied natural gas (LNG) terminals.
Experts believe that would be enough to get Germany through the spring and summer. But things would really start to get tight in the coming winter once the cold weather arrives and people turn their heaters back on again. That’s why it would be disastrous if gas imports were to stop now. The levels in the storage facilities are still far too low to get through the coming winter without Russian gas.
The Federal Network Agency says a list for shutting down gas with specific company names does not exist. For the past several days, associations, authorities and politicians have been besieged by companies that are desperate to prove their systemic relevance. Every paper manufacturer is pointing out that important medicines are packed in their cartons. Glass manufacturers are reminding officials that they produce the vials that hold vaccines, Müller has told reporters. He says he can understand the companies’ perspectives, but if worse comes to worst, a selection will have to be made.
Kerstin Andreae, the head of the German Association of Energy and Water Industries (BDEW), is calling for a different approach to be taken. "We advocate creating a positive list that lists criteria for determining which companies are systemically relevant and will remain on the grid for as long as possible," she says.
Adding to the complexity is the difficulty of forecasting how long the supplies in the country’s total of 45 gas storage facilities would actually last. Currently, the storage facilities are filled to 26 percent of their capacity. Temperatures over the next few months will determine how much gas is used for heating. Skyrocketing energy prices are already causing some companies to voluntarily shut down their plants because production is becoming unprofitable. That reduces energy consumption. It is also unclear at what point the LNG tankers ordered by Economics Minister Habeck could help fill the storage facilities. Or how big the load shedding will be over the next few weeks.
The helplessness of politicians is reflected in a proposal made by Peter Hauk, the agriculture minister for the state of Baden-Württemberg. The politician, with the center-left Christian Democrats, thinks that German households need to cut back on heating and get used to colder temperatures in their homes.
The only problem is that freezing for peace isn't likely to deliver much relief in the coming months. Between May and September, only around 14 percent of gas consumption in Germany is used for buildings. A few percentage points less would hardly be much of a help.
At BASF in the city of Ludwigshafen, one of the sites with the highest energy demand in Germany, Uwe Liebelt has begun preparations to trigger the company’s own emergency plan. "If Putin insists on payments in rubles, we will quickly run out of time," says the head of the world’s largest contiguous chemical site and president of BASF’s European Verbund sites. Around 200 production sites are spread over an area of 10 square kilometers here. For more than 150 years, chemical substances and thousands of upstream products have been produced here that are needed in almost every other industry, from detergents to car dashboards. If the gigantic plant is threatened with even a partial shutdown, Liebelt wants to ensure that this at least takes place in an orderly manner.
A network of 2,850 kilometers of pipelines links the production facilities here, and taking individual ones offline would be a kind of operation on the industrial heart on which large parts of the German economy depend. But that’s exactly what Liebelt and his people are gearing up for.
Members of his crisis team monitor what is called the "pressure entry point" of the huge chemical plant every hour. There, the pressure at which the gas arrives is measured. The gas is distributed over the huge area and used in two company-owned power plants and several production facilities. This "gas pulse" might indicate whether dramatic failures will occur even before the emergency plan ordered by the federal government has been developed.
If the pressure drops below a certain threshold, an emergency shutdown ensures that initial production facilities are shut down – for the basic chemicals ammonia and acetylene, for example. That would set off a chain reaction throughout the industry.
BASF produces ammonia for fertilizers, AdBlue for the automotive industry and glues and impregnating resins for construction and other industries. And the site is also where substances like hydroxylamine, which BASF supplies to pharmaceutical companies, is produced. If the upstream products are missing for a longer period of time, drugs such as antibiotics and new medications against COVID-19 can no longer be produced. If the pressure on the gas pipeline in Ludwigshafen fell below further thresholds, other plants would also have to be gradually shut down and eventually the entire site, including the plants.
Liebelt believes that the idea that it will be possible to draw on gas reserves until the winter and more or less go on with business as usual is misguided. In the short term, the gas reserves would help. But it wouldn't take long before an allocation plan for Germany would have to be put into effect. Because drawing from storage facilities would run counter to the goal, anchored in law, of filling gas storage facilities to 80 percent of their capacity by autumn.
"Germany is not prepared in detail for a gas emergency like that, as the discussions in recent weeks have shown," says Liebelt. Because it isn’t known how much gas would be distributed to which industry as part of an emergency plan, BASF is developing scenarios.
If up to 30 percent less than the normal demand were obtained, production of the major gas guzzlers ammonia and acetylene could be reduced to the technical minimum, which would lead to a shortage of the goods produced from them. Scenarios two and three would have more serious consequences. If BASF only received around 50 percent of its gas requirements, other basic products such as synthesis gases would be drastically reduced. Depending on the scenario, there would be a shortage of important basic products that go into plastics, pharmaceuticals, crop protection products, disinfectants and fuels and packaging, among others. The consequences would be felt by a number of industries and households. If the gas supply at BASF falls below the 50-percent threshold, the entire chemical park in Ludwigshafen would have to be shut down. "We hope and demand that we be allocated at least 70 percent of our maximum requirement in the long term as part of an allocation plan to avert major damage to the German economy," Liebelt says. Especially given that BASF’s power plants are systemically relevant according to Germany’s Energy Industry Act.
Other chemicals companies are making arguments similar to those being proffered by BASF. But who wants to make the decision on how much gas is absolutely necessary for which company and for which plant? "Any attempt to treat companies in an industry differently will be difficult and could result in lawsuits from companies put at a disadvantage"” Liebelt says.
Law firms like Freshfields Bruckhaus Deringer are already being overrun by unsettled companies. They want to know if they can sue their energy provider if gas deliveries aren’t made. The utilities, in turn, are having checks carried out to see from whom they could claim damages. "There is currently an enormous number of inquiries from clients from the DAX and the MDax, and some companies have to have thousands of individual contracts reviewed by us," says Christoph Seibt, a partner at Freshfields and one of the country’s most respected business lawyers.
The companies seem to be pre-programmed for a fight over the gas. "We’re already seeing battles over the distribution," says a government minister in one German state.
The case of Merck shows just how difficult it would be to regulate gas distribution based on individual products. The company’s portfolio is huge – ranging from cancer drugs and chemicals for semiconductors to lipids for BioNTech, a basic ingredient in its coronavirus vaccine. Products from all three of the company’s divisions – pharmaceuticals, life science and electronics – are manufactured at Merck’s largest site in Darmstadt near Frankfurt. All of them require hot steam, which is used to drive huge stirring devices, keep solutions liquid in reactor vessels or bring ingredients to the right temperature.
A Gas Emergency for Chemicals Companies
Evonik CEO Christian Kullmann, Merck CEO Belén Garijo, BASF CEO Martin BrudermüllerFoto:
Oliver Tjaden; Bernd Hartung / Merck; BASF SE
"A crisis team has been dealing with the emergency for weeks now. We have not yet reached the point of ranking which products are dispensable," says Joachim Christ, Merck’s global chief procurement officer. That would hardly be possible because everything is "intertwined." Once generated, steam is used in many processes in parallel and successively.
According to an internal scenario, factories will probably have to plan for 10 to 20 percent less gas in the medium term. Merck is considering expanding wind and solar energy to get away from gas, at least for electricity generation and heating buildings. In the future, natural gas could even by replaced in manufacturing by green hydrogen. But that, Christ says, will take years. He says it would probably be quicker to relocate parts of production to places where supplies are guaranteed – like the United States or Asia.
The example also shows, though, that if Germany is unable to offer its companies a secure energy supply, some might turn their backs on the country.
Evonik, Germany’s sixth-largest chemicals company, is planning to return to coal power for the time being. Around 10,000 people work at the company’s largest plant in Marl in North Rhine-Westphalia. Specialty chemicals are manufactured here that are needed for medicines, insulating materials, latex mattresses and shampoos. An in-house coal-fired power plant supplied much of the company’s energy needs for years. The company had originally planned to shut it down this April, replacing it with two new gas-fired power plats that produce less CO2. Now, the company is considering keeping the coal plant running. The leverage that would provide would be enormous: Switching to coal would save as much gas per year as Russia delivers to Europe through the Nord Stream 1 pipeline in one day.
The only problem is that this is of no use in the short term. The plant needs a technical overhaul, but there is a lack of qualified personnel to do that. The fuel is also a problem: The special coal that is needed has to be purchased on the international market. Prices have already risen dramatically, and the additional costs can only in part be passed on to customers. With some products, Evonik would hardly be competitive anymore. And, finally, the company still doesn’t have authorization from the federal government to continue its operation.
The coalition government in Berlin, with Habeck at the helm of the effort, is currently looking for alternatives to Russian gas. Liquefid natural gas (LNG) from Qatar, Norway and the U.S. is expected to help Germany eliminate its dependence on Russia. But according to BDEW, only around 8 percent of German industry’s gas needs can be replaced by next winter. The country also still doesn’t have any of the LNG terminals that are needed to process it. Management consultancy BCG estimates that it will only be toward the end of the decade that Germany can finally become independent of Russian gas – and that assumes that the European Union’s "Green Deal" continues to be implemented. It’s a play for time.
And it is possible that some companies won’t survive.
The Royal Porcelain Manufactory Berlin (KPM), founded in 1763 by Frederick the Great, is one of the oldest manufacturing companies in Germany. It survived the Great Depression and two world wars. The Ukraine conflict is now threatening KPM’s very survival. By its own calculations, the company, which is part of Germany’s cultural heritage, consumes 1,500,000 kilowatt hours of gas each year, almost as much as 100 single-family homes. "Without gas, we can no longer produce," says CEO Martina Hacker. Porcelain is fired twice – at 1,000 degrees Celsius and at 1,400 degrees. "You can only do that in a gas oven," she says. "The temperature couldn’t be evenly distributed in an electric oven. The result would be porcelain that is yellowish instead of white."
KPM has been owned since 2006 by Berlin banker Jörg Woltmann, who saved it from bankruptcy – and from being sold to Asian investors. If KPM had to stop production due to a lack of gas, it would still have enough goods for six months to three quarters of a year to supply specialist retailers and its own stores. "But I don’t know how long we would be around after that," Hacker says.
Employees are now trying to rescue what can still be saved. Since February, they have also been working on Saturdays to produce and replenish stocks to the extent possible. "We’re producing at full hilt right now," says Hacker. "Who knows how long we will still have gas?"