Germany as a bellwether for post-war European energy security

Crediti: @CEphoto, Uwe Aranas (CC BY-SA 4.0)

Germany’s change of course is constrained by a myriad of technological and infrastructural obstacles, namely the lack of pipelines and liquefied natural gas (LNG) import terminals. To underscore the urgency for action, in July Gazprom raised the spectre of permanently cutting off energy supplies to Europe by suspending deliveries of natural gas to Germany through the trans-Baltic pipeline, Nord Stream 1.

New arena of conflict

Rather than restructuring the industrial base of the economy away from natural gas – which is likely untenable for political and environmental reasons – policymakers should work with the private sector to formulate effective regulations and subsidies, while making targeted investments, first in natural gas and then oil. Additionally, an optimal approach requires Germany to work in close cooperation with bordering neighbours, the European Union and allies. If Germany is left to “go alone”, there is a real risk that the economic and political fallout could undermine European security and unity in support of Ukraine.

Responding to Moscow’s threats does not replace the long-term transition away from hydrocarbons towards cleaner and renewable energy. The reality is that oil and natural gas are expected to remain the largest component of Germany’s energy supply mix until at least 2050 according to the latest government projections. Thus, for the next 20-30 years, it makes sense for Germany and Europe to invest in oil and gas supply diversification. Even if Russia continues to be an important supplier in the future, creating supply alternatives will prevent Russia from weaponising energy.

Whichever path Germany ultimately takes, Berlin’s approach is a good practical indicator for what is in store for Europe as a whole. As the Energiewende was a precursor to EU energy policies, Germany today, with its diverse federal state politics, strong industrial lobby, plurality of views on Russia, and tension between economic and environmental goals, stands as a bellwether for future negotiations and compromises that European states must take to wean themselves off Russian natural gas. If Ukraine represents the new frontier for Russian military aggression against Europe, Germany is the new arena of conflict where Moscow is wielding its energy weapon regarding the West. Moscow’s goals are twofold – to coerce the German leadership to reverse its policies towards the Russo-Ukrainian War through industrial and public pressure and secondly, to divide European solidarity in support of Ukraine through sanctions.

The origins of German-Russian cooperation

In the 1960s, the discovery of natural gas fields in Western Siberia encouraged the Soviet Union to enhance trade relations with the Eastern Bloc as a means of integrating them into the Soviet sphere. For West Germany, pursuing normalisation with East Germany implied pursuing détente with the Soviet Union. For the strategy to work, Bonn considered natural gas imports to be the foundation of trade and cooperation with the USSR. This launched a process of West German-Soviet cooperation, known as Ostpolitik. The ruling Social Democratic Party (SPD) credited Ostpolitik with improving relations not only with the USSR but also the German Democratic Republic (GDR, East Germany). Using the principle of Wandel durch Handel (change through trade), Chancellor Willy Brandt’s government pursued natural gas trade with the Soviet Union with the intention of improving relations with the Eastern Bloc.

Negotiated in 1969, the first German-Soviet natural gas deal included an interconnecting pipeline of three billion cubic metres (bcm) of supply. Then in the 1980s, West Germany aided in the development of the Urengoy-Pomary-Uzhhorod pipeline despite objections from the United States. West Germany soon became the Soviet Union’s largest western trading partner as energy exports nearly tripled from the first negotiated agreement. Before Russia’s 2022 invasion of Ukraine, the history of Ostpolitik and German-Soviet partnership continued to influence Berlin’s policymakers after the Cold War, particularly those from the SPD. The notion that trade, cooperation and dialogue could also change Russia’s behaviour on non-commercial issues was widespread, and it is still unclear to what extent the Russo-Ukrainian War will alter this in the long term. Indeed, Berlin appears to be navigating a balancing act between western support of Ukraine and placating Russian aggression to this day.

Unequal interdependence

Since the 1970s, German policymakers and commercial leaders have pointed to the interdependence of natural gas trade between Germany and Russia as a stabilising force. From this perspective, dependence on German energy markets would constrain Russia’s actions when disputes arise. While this dynamic may have influenced Russia’s calculus in the past, interdependence is not a static state and actors have different thresholds for acceptable costs. Over the past two decades, Russian gas deliveries to Germany have risen, supported by new pipelines and joint gas field development projects. Ever since Germany announced that it would support Ukraine with military equipment and arms, Russia’s veiled threats of suspending natural gas supplies to Germany have caused energy prices to soar with inflationary effects on the German and European economy.

The German-Russian trade relationship, which initially created a balanced interdependence between the two economies, has become more weighted in Russia’s favour over the years. While Germany’s neighbours have sought to build alternative supplies through LNG, Germany did not diversify its natural gas suppliers, depending largely on Russian and Norwegian pipeline gas. Complicating matters, Germany has a high concentration of gas-fired power plants, making its economy more dependent on natural gas for electricity generation compared to other large European countries. France and Sweden, for example, use nuclear power to supply a majority of their electricity consumption. The following figure illustrates the European natural gas pipeline and LNG infrastructure (excluding Ukraine and Belarus) combined with gas-fired power plants.

While the lack of LNG terminals makes Germany vulnerable in relation to Russia, another factor makes the trade relationship unequal. This is Germany’s growing dependence on Russian natural gas. From 2003 to 2017, the volume of Russian gas exports to Germany grew from 29.6 to 65.7 bcm. As the figure below illustrates, Russian natural gas exports to Germany have steadily risen over the past two decades, even after the Russo-Georgian War in 2008 and the annexation of Crimea in 2014, reaching its peak in 2017. Although exports dropped in 2019-20, this was primarily due to the downturn in demand during the COVID-19 pandemic.

Source: Gazprom

As Russian supplies have dwindled in recent weeks, Uniper SE (formerly E.ON/Ruhrgas), the largest German importer of Russian gas, is facing pressure to meet the demands of customers. Because Russian pipeline-transported natural gas is typically cheaper than LNG and supplies from other regions, reduced access would affect the competitiveness of Germany’s manufacturing-heavy, export-oriented economy. Natural gas accounts for 25 per cent of Germany’s energy consumption, of which industry consumers make up 15 per cent. The chemicals industry is particularly gas intensive and BASF, the German chemicals company, requires natural gas not only as a source of energy, but also as raw material-feedstock for the production of products such as plastics, fertilisers, solvents and glues. This is further exacerbated by the fact that the chemicals industry’s demand for natural gas is fairly rigid, meaning natural gas may be substituted for only four per cent of production. Because of the complexity of supply chains and the logistics of the product lines in the manufacturing process, it will be impossible to relocate parts of the production to other locations without building completely new infrastructure.

Geopolitical ripple effects throughout Europe

The interdependence between Russia and Germany has also created geopolitical and security concerns for the EU. Only after the Russian invasion of Ukraine did Germany suspend the Nord Stream 2 pipeline (expansion of Nord Stream 1), which was scheduled to double the volume of natural gas, from 55 to 110 bcm per year. This trans-Baltic pipeline running from the Gulf of Finland to Germany, bypassing transit countries in between, was condemned by some EU member states, particularly Poland, Estonia, Latvia and Lithuania. These countries viewed the pipeline as a tool for Russia to weaponise natural gas. Although Germany has suspended Nord Stream 2, the project has tarnished German credibility within the EU.

While Chancellor Scholz was preparing to visit Kyiv with President Emmanuel Macron and Prime Minister Mario Draghi to show support for Ukrainian President Volodymyr Zelenskyy, Gazprom announced a cut in gas supplies to Germany through Nord Stream 1 by 40 per cent. Robert Habeck, Germany’s economic minister, called the cut off “a political decision and not due to technical reasons”, as Gazprom has initially stated. Yet, there is little Germany could do to offset this disruption. As Russia has been gradually cutting off gas deliveries to Europe, state-owned Gazprom has managed to maximise profits from soaring prices and reduced volume. Out of the 62 billion euros from EU exports of oil, gas and coal, Germany imported the most – nine billion euros in the first two months of the war in Ukraine. As Russia continues military operations, the energy weapon targeting Germany uses economics as an underlying strategy. With Russia’s windfall in export revenues and weaponisation of energy dependence, it has managed to mitigate the effects of the sanctions imposed by the EU as evidenced by the rebound of the rouble, while Germany will pay a high price for needing to quickly replace Russian pipeline gas.

The prospect of natural gas shortages this winter has already produced cracks in EU unity for support of Ukraine. Two recent events exemplify this situation. After Lithuania blocked freight trains from mainland Russia to Kaliningrad Oblast carrying steel and ferrous materials, a provision under new EU sanctions against Moscow, Russia quickly threatened retaliatory measures. While the EU has reaffirmed Lithuania’s right to check sanctioned goods, Germany has been urging Lithuania to lift EU restrictions on transport to Kaliningrad. In support of Russia, Scholz argued that the shipments in question were a domestic matter between two parts of Russia, and therefore, EU sanctions should not apply.

Similarly, Canada has submitted to pressure from Berlin to exempt a sanctioned electric turbine needed for the operation of Nord Stream 1. In response, Habeck recently stated that “releasing the component would remove an excuse for Russian President Vladimir Putin to keep the conduit closed.” However, both the Kaliningrad and Nord Stream component examples will only assist Russia in violating the sanctions regime and strengthen Moscow’s energy leverage over Europe. Germany’s actions risk undermining the EU’s combined sanctions against Russia. They will be perceived by Moscow as a weakness, another reason to further deprive Germany of supplies. Thus, it is possible, if not likely, that Russia’s current decrease in natural gas deliveries could turn into a complete shut-down of supplies to Europe.

How Germany responds to Russian coercion will have both political and economic ripple effects throughout Europe. In order to sustain political credibility within the EU – and to reassure the Central and Eastern European member states – Germany could lead in the European response to Russian aggression by setting an example and extricating itself from dependence on Russian oil and gas. Likewise, the German leadership will need to safeguard the national economy and mitigate the effects of energy price spikes and inflation to the greatest extent possible. As such, Berlin has committed to hasten the transition to alternative sources, cut usage of natural gas, fill storage facilities for the upcoming winter, and restart conventional coal-fired power plants. These measures will likely alleviate the current inflationary pressure that Germany is facing temporarily.

Decoupling from Russian energy dependence in the long run, however, will require significant investments and years-long lead times to build the necessary infrastructure. With respect to oil, Germany has relied on deliveries through Russian pipelines because of the country’s limited super tanker compatible ports and insufficient pipeline network connecting the northern coast to inland industrial centres in the south. To supplement the loss of Russian oil imports as a result of EU sanctions, Germany has already turned to Norway and the Gulf states for replacement supplies. Additionally, Germany will have to access the port of Gdańsk and refineries in Poland to supplement the potential loss of the crude oil refinery in Schwedt. The refinery is owned and operated by Russia’s Rosneft. As a sign of problems to come, Rosneft has refused to process non-Russian oil in its Schwedt refinery.

Germany is rushing to procure natural gas from other sources, even though switching suppliers poses more obstacles compared to oil due to the physical constraints of transporting natural gas, possible only by pipeline or in super cooled LNG infrastructure. Alternate supplies from Norway, the US and Qatar are potential options but are limited and more expensive than Russian pipeline gas. In the short term, this will impact German manufacturing industries, making them less competitive on the world market due to higher production costs. According to recent assessments, Germany’s economy could contract by up to six per cent if Russian natural gas deliveries are completely withheld. With respect to LNG, there are two newly planned terminals set for construction in Brunsbüttel and Wilhelmshaven. The terminals are expected to cost three billion euros and will become operational in 2024 at the earliest. In the meantime, four floating LNG regasification terminals will serve as an interim solution, with the first ship expected to receive LNG shipments by the end of 2022.

Despite these short-term measures, Germany will require “wartime” levels of funding to execute plans. This includes an accelerated investment and permit approval process to ensure that alternate energy sources will come online in time to minimise the economic shock from the loss of Russian hydrocarbons. Ironically, the suspension of Nord Stream 2 could assist with the construction of new infrastructure. This would require Germany to expropriate newly built pipeline material from Nord Stream 2 and then put it to use for the planned construction of LNG terminals. The German Federal Ministry of Economic Affairs and Climate Action (BMWK) is reportedly investigating the possibility of deploying unused pipeline segments of Nord Stream 2 as an interconnector pipeline for offshore LNG imports in the Baltic Sea. Finally, the current energy crisis is calling into question the speed at which Germany will ultimately phase out nuclear energy, a commitment the previous Merkel administration made in response to Fukushima. Given Germany’s position as the “engine of the European economy”, the effects of its new, crisis-inspired Energiewende will be felt across the EU.

Extricating Germany from Russian energy dependence

For the future, an optimal strategy for Germany would need to account for the entire region, taking into consideration concerns of the Central European and Baltic member states while at the same time benefitting from available supplies from Western European neighbours. Domestic and European energy security are intertwined, and there are several measures that Germany can adopt in order to address this energy security dilemma in the short and long term, taking into account geopolitical circumstances at the EU level.

Before measures can be identified and implemented, however, Europe must come together along with like-minded allies and partners in North America, the MENA region and the Indo-Pacific to coordinate a strategy. The recent announcement of an extraordinary meeting for EU energy security is a step in the right direction. These meetings should convene at least monthly to respond to the coming winter energy crisis. Furthermore, the topic of coordinating energy supplies will be important to include on the agenda of multilateral meetings in the G7, G20 and International Energy Agency (IEA). Allies can also continue to put pressure on OPEC and petroleum-exporting countries through bilateral channels to support increasing supplies to Europe. The fallout of a poorly managed response in Germany (and the rest of Europe), could undermine international unity and support for Ukraine, which is what Russia is aiming for and expects.

However, there are steps that Germany has already taken, such as rationing gas consumption, that are clearly needed in the short term. Germany’s immediate priority should centre around accumulating as much gas in storage as possible in order to weather the upcoming winter, while simultaneously advancing more long-term strategic projects to diversify away from Russian hydrocarbons. Environmental trade-offs will be required, such as increased coal consumption, to secure enough electricity for households and industries. Industries will require significant economic and financial aid in order to keep production levels constant, including subsidies to dampen the impact of higher energy prices. Even with subsidies, some gas-intensive companies and industrial giants will inevitably face financial hardship. They may even require government bailouts. Fortunately, German policymakers can defer to recent pandemic programmes, such as Kurzarbeit, as a template for companies that are particularly vulnerable in the short term.

The rising energy costs accompanied by soaring inflation for German citizens and companies are unfortunately, unavoidable. Had Germany used its market power to diversify gas suppliers before the February invasion of Ukraine, it could have avoided the current Russian-initiated energy crisis.

One option that may counter export revenue windfalls for Russia is to support Italy’s initiative to form a unified EU response – by introducing a price cap on Russian oil and gas together with a joint European procurement platform. While some analysts believe that this could lead to supply disruptions, this is already a reality for Europe. It is possible that Russia could refuse to sell any oil or gas under the capped price, but a countermeasure could sanction those states who break ranks and pay above the capped price, thereby putting further pressure on Russia. In times when oil is sold to China at 70 US dollars per barrel, significantly less than the current European price – which is fluctuating between 110-120 dollars per barrel at Brent – this two-pronged approach would constrain Russia’s ability to destabilise Europe with price spikes and unstable supply deliveries.

Looking ahead past 2022, Germany can invest now in new energy infrastructure for long-term supply diversification. This would entail building sufficient LNG import capacity (terminals) in addition to non-gas alternatives. Likewise, investments in electricity interconnectors and a wider-spanning network of interstate pipelines with reverse flow capacity would open transportation options from neighbouring countries and create flexibility for deliveries to the industrial south (especially Baden-Württemberg and Bavaria). To accompany this on a political level, a new set of national regulations is needed to safeguard foreign-owned, domestic infrastructure from being weaponised by Russia. In this case, the oil refinery in Schwedt and the Rehden storage facility in Lower Saxony are prime examples of vulnerable assets that Russia has already signalled it would use to coerce Berlin. New regulation targeting these facilities would deprive Russia of the possibility to weaponise critical energy infrastructure in Germany, while making new assets available for national and EU-wide needs.

Beyond its national borders, Germany could lead the way in establishing a joint EU energy infrastructure fund to explore building new pipelines for supplies from the MENA and Caspian regions along with Central Asia. Recent discoveries of natural gas in Algeria’s Hassi R’Mel, which already supplies 11 per cent of gas consumed in Europe, and is planned to increase supply to Italy to 30 bcm per year, will require expanded infrastructure to tap into newly discovered supplies. A Trans-Med 2 (TM2) pipeline doubling the existing 30.2 capacity of Trans-Med 1 would supplant half of Russian natural gas exports to Germany in 2020. TM2 would also open a new link for the Greenstream pipeline from Libya, thereby providing the EU further import capacity from the south. Similarly, the expansion of the projected East-Med pipeline would further connect the Mediterranean Basin with Europe, adding a hub of integrated pipelines, gas fields and LNG terminals to the network of pipeline routes connected to Europe. Given Germany’s large Turkish minority and special relationship with Ankara, Berlin could also strengthen bilateral relations in the area of energy cooperation. After all, Turkey is a natural gas hub and important transit country for Caspian and Central Asian supplies. In this context, the US-backed Qatar-Turkey-Europe pipeline project may be revisited, along with the Trans-Caspian and Nabucco pipeline projects. Qatar alone boasts 25 trillion cubic metres of proven gas reserves. Besides Qatar’s LNG shipments that are already destined for European terminals, a gas pipeline that would connect Qatar through an Iraq-Turkey transit route to Europe would, theoretically, replace the EU’s need for any Russian gas. This is just a partial list of projects that, with European investment, could significantly diversify European supplies and extricate Germany, along with Europe, from Russian energy dependence, particularly with respect to natural gas. 

Is past prologue?

In 1973, a geopolitical crisis in the Middle East, the Arab-Israeli War, caused an energy crisis in Europe and North America through OPEC’s oil embargo. This in turn prompted West Germany to look east for security of supply, leading to the first natural gas pipeline agreements with the Soviet Union. In the decades that followed, West Germany, with other Western European countries eventually following suit, would benefit from ever greater access to oil and gas supplies from Russia unfazed by Cold War rivalries and geopolitics. In 2022, however, the Russian invasion of Ukraine has not only changed the geopolitical landscape of Europe, it has also ended an era of uninterrupted energy trade with Germany that began in 1973. Ironically, Germany must now return to the south (and globally) to secure oil and gas supplies. While there are some historical parallels with 1973, Germany today has more options to diversify energy supplies, including an ongoing energy transition process toward renewables, alternative pipeline suppliers (such as Norway), and a developing global LNG market that could eventually replace Russian supplies. Yet, the process of extricating the country from Russian energy dependence will take time, significant investment, and most importantly, political will.

The temptation to succumb to Russian demands in exchange for cheap energy will only grow as Germany enters the peak demand of winter. At the same time, Germany will need to uphold European solidarity in support of Ukraine, while also enacting significant changes in its long-term energy diversification.

Germany has two hurdles to overcome. The first is simply to get through the winter with minimal economic disruption. This will require securing as much gas supply as possible and putting it into storage, reducing energy demand through a combination of regulation and incentives, and working with neighbours, the EU and allies to coordinate policies and distribution of supplies. The next hurdle is more long term but will require immediate investments. This entails building pipeline and LNG infrastructure that will allow Germany to import from alternative suppliers. While the Energiewende is ongoing, the prospects for transitioning away from hydrocarbons completely are untenable, at least in the next 20 to 30 years when the German economy will still require oil and gas supplies. In the very short term, environmental trade-offs will be necessary for electricity generation such as burning coal and extending nuclear plant operations. If Germany can overcome these two hurdles, it will find itself in a more diversified, resilient, and secure energy position.

Ismet Fatih Čančar was a Partnership for Peace Fellow at the NATO Defence College from March to July 2022. His research examines the geopolitics of the Western Balkans, energy security and international security relations.

Marc Ozawa is a Senior Researcher in the Research Division at the NATO Defence College. His current research examines NATO-Russian relations, the geopolitics of energy, and Russian and Eurasian affairs.

energy security, EU, Germany, Russia