Germany’s switch to diesel from gas comes at a cost



Leaders across Germany have spent the past few months playing warfare over how to react if Russian President Vladimir Putin cut off gas supplies. And many, from small companies to global behemoths, have come to the same solution: going oil.

In Munich, the municipal utility converted two gas boilers to run on diesel. Further south in the German Alps, the agricultural cooperative Berchtesgadener Land sent two dairy truck drivers to learn how to operate an oil rig, in case they needed to buy. To the north, the Veltins beer brewery near Düsseldorf has stored five weeks worth of diesel to prepare for an emergency switch away from gas.

In some cases, this involves burning fuel oil in boilers and steam generators that previously operated on natural gas; in others, it involves running diesel generators to avoid power outages.

Berlin quietly encourages change. Wiegand-Glas, which produces glass bottles, was able to obtain the necessary documents to have its ovens ready to run on oil rather than gas in a matter of days, for example. “I promised to reduce bureaucracy when converting systems to an absolute minimum,” said Anja Siegesmund, the regional environment minister.

Privately, oil traders say they receive inquiries from German companies that have never bought fuel oil or diesel before, or abandoned the practice many years or even decades ago.

Take Covestro AG, a chemical company that produces the building blocks of plastics. For years, it relied on natural gas. But earlier this week it told investors during its second quarter results presentation that it was “dropping various measures to reduce its gas needs in Germany in the short term, such as switching to steam generators based on oil”.

The incentive to reduce gas consumption is huge after Putin cut supplies to Germany via the Nord Steam 1 gas pipeline. The Dutch gas contract TTF, a European benchmark, is trading above 205 euros (209 $) per megawatt-hour, 10 times its decade-to-2020 average and equates to about $350 a barrel of oil. Meanwhile, Brent crude is hovering around $100 a barrel. Hans-Ulrich Engel, chief financial officer of BASF SE, did the math earlier this month: at current prices, “it may actually be cheaper to use, for example, fuel oil to produce your steam, than to use very expensive natural gas”. he said.

The consequences are twofold. German industry, long accustomed to operating on cheap Russian energy supplies, may be able to reduce its dependence on gas more than previously thought without having to shut down completely. German gas demand is already well below its five-year average for this time of year. Morgan Stanley estimates that German industrial gas consumption fell 24% in July compared to the same month in 2021. If the trend continues, gas prices in Europe may not rise as much as expected, even if Putin stops altogether exports later this year. The worst-case scenario, with TTF prices exceeding 300 euros or even 400 euros, can be avoided. But the corollary could be an increase in German demand for oil this winter well above anything currently estimated, which could push up global oil prices.

The magnitude of the potential for additional oil consumption is hotly debated, with bears and bulls providing good reason for optimism and pessimism. Last year, oil bulls were anticipating a significant increase in demand from oil-fired power plants that never materialized. Nevertheless, Energy Aspects Ltd., a consultant, estimates that if all of Europe’s oil-fired power plants were running this winter, it would add an additional 340,000 barrels per day to demand on the continent. To put this into context, it is higher than the 200,000 barrel per day increase in European oil demand predicted by the International Energy Agency for 2023.

Additionally, these figures do not take into account the potential explosion in the use of diesel generators and the use of oil and fuel oil in industrial boilers and steam generators. With little hard data on how many companies have refurbished their boilers to run on oil and how many others have purchased standby generators, any estimate is more guesswork than guesswork. forecast. Yet some oil traders and consultants are injecting an additional 200,000 barrels a day into Germany and neighboring countries.

However, the transition from gas to oil comes up against enormous obstacles. BASF, the German chemical juggernaut, is paradigmatic of the difficulties. In a presentation to investors last week, the company said preparations to replace natural gas with, for example, fuel oil were “progressing well”, echoing what other German companies have said in recent years. weeks. But it included a big caveat in a small footnote: “The prerequisite is the sufficient availability of fuel oil.”

If companies in Europe’s biggest economy simultaneously switch from oil to gas this winter, it could potentially trade one problem – gas shortages – for a second problem – a tighter market for diesel.

For now, European diesel has stabilized at around $1,000 per metric ton, down from a record high of around $1,500 in early March, days after the Russian invasion of Ukraine. Still, the market will have to grapple with the upcoming ban on Russian refined products, which will take full effect in early February and cut diesel supplies in Europe just when buying could peak.

Diesel is the workhorse of the global economy. Since the start of the crisis, it has been the most popular refined product, even if it is often eclipsed by gasoline prices in the United States. As German industry prepares to wean itself off Russian gas in the coming months, diesel prices could start to hit the headlines – for all the wrong reasons.

More from Bloomberg Opinion:

London paid record price to avoid blackout: Javier Blas

Having trouble staying cool? The same goes for the generator that powers your air conditioning: David Fickling

Putin’s New Weapon of Mass Disruption: Kazakh Oil: Julian Lee

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Javier Blas is a Bloomberg Opinion columnist covering energy and commodities. A former Bloomberg News reporter and commodities editor at the Financial Times, he is co-author of “The World for Sale: Money, Power and the Traders Who Barter the Earth’s Resources.”

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