Brent crude briefly fell below $100 a barrel on Monday, a week after reaching a 14-year high of $130 on March 6, easing fears of an energy-driven recession and chronically high gasoline prices.
This marks the first major correction in the energy markets after a period of heightened volatility. Last week, Moscow made good on its threat to weaponize its energy exports in retaliation against Western sanctions by imposing wide-ranging export bans. Alexander Novak, Russia's deputy prime minister, said his government has the "full right" to "impose an embargo" on gas supplies by halting gas supplies through the Nord Stream 1 pipeline.
The rise in oil and gas prices triggered by the Ukraine conflict has raised the threat of the worst stagflationary shock to hit Europe since the 1970s. Amid heavy reliance on fossil fuels, energy prices in Europe have spiraled out of control, with European natural gas trading at ~$62/mmbtu, translating to $360 per barrel oil on an energy equivalent basis. With the United States and the United Kingdom banning Russian energy exports and the European Union announcing it will reduce Russian gas imports by two-thirds by the end of the year, the West is scrambling to replace Russian energy deliveries.
Few European nations, however, are feeling the heat of the energy crisis as keenly as Germany.
Europe's largest economy is in dire straits after effectively boxing itself into a corner with its energy policies. For decades, successive governments in Berlin have pursued a policy of maximizing the country's dependence on Russian oil and gas, and almost completely ditched nuclear energy, with the final two functional reactors set to be turned off in 2022. As a result, Germany has become heavily reliant on natural gas, with the fuel accounting for 25% of the country's total primary energy consumption. Although Germany has substantial supplies of natural gas of its own that could be accessed by fracking, Berlin has banned the technology, meaning it has to import 97% of its gas mainly from Russia, Netherlands, and Norway.
In a worst-case scenario in which Russia stops all pipeline exports, Goldman Sachs' Chief European Economist Sven Jari Stehn and his team say Euro area GDP growth is likely to fall by 2.2pp in 2022, with sizable impacts in Germany (-3.4pp) and Italy (-2.6pp).
Germany's woes are partly excusable. The dramatic nuclear phase-out is as much part of the country's Energiewende (energy transition) as the move towards a low-carbon economy. Natural gas is cheap and reliable, produces only half as much emissions as coal, and is a critical input in many sectors. In Germany, 44% of gas was used for heating buildings in 2020, while industrial processes consumed 28%. Gas is the best and cheapest feedstock for the manufacture of synthetic nitrogen fertilizer, of which Germany is a critical supplier. Gas is also used in refining, the production of chemicals, and many other types of manufacturing. All these are difficult--if not impossible--to completely replace with green energy anytime soon.
Turning to Africa
With a calamitous energy crisis unfolding, Germany has announced it will join the bandwagon of nations rolling back their climate goals by increasing its use of coal, which overtook wind to become the biggest input for electricity production globally in 2021. Indeed, Germany is left with little choice than to burn lignite in its power plants--widely regarded as one of the dirtiest fossil fuels and extracted in vast open-pit mines that litter the German countryside. The European Commission has already given its absolution to countries replacing Russian gas with coal and producing higher emissions as a result.
But coal is merely a stop-gap solution, and Germany must also be clear-eyed about its long-term energy future--a future without Russia's gas. Nuclear energy is out of the question considering that few, if any, European nations are as opposed to nuclear energy as Germany is. Last month, German politicians vehemently denounced the EU's attempt to label nuclear energy as sustainable.
Vijaya Ramachandran, director for energy and development at the Breakthrough Institute, Berlin, should look to Africa if it's serious about achieving energy security. Ramachandran notes that the continent is endowed with substantial natural gas production, reserves, and new discoveries in the process of being tapped. Very little of Africa's gas has been exploited, either for domestic consumption or export.
Algeria is already an established major gas producer with substantial untapped reserves and is connected to Spain with several undersea pipelines. Germany and the EU are already working to expand pipeline capacity connecting Spain with France, from where more Algerian gas could flow to Germany and elsewhere. Libyan gas fields are connected by pipeline to Italy. In both Algeria and Libya, Europe should urgently help tap new fields and increase gas production. New pipelines under discussion currently focus on the Eastern Mediterranean Pipeline Project, which would bring gas from Israel's offshore gas fields to Europe.
But the biggest African sources lie south of the Sahara--including Nigeria, which has about a third of the continent's reserves, and Tanzania. Senegal has recently discovered major offshore fields.
Ramachandra says Germany should not ignore these opportunities. For instance, the proposed Trans-Saharan pipeline will bring gas from Nigeria to Algeria via Niger. If the project is completed, the new pipeline will connect to the existing Trans-Mediterranean, Maghreb-Europe, Medgaz, and Galsi pipelines that supply Europe from transmission hubs on Algeria's Mediterranean coast. The Trans-Saharan pipeline would be more than 2,500 miles long and could supply as much as 30 billion cubic meters of Nigerian gas to Europe per year--equivalent to about two-thirds of Germany's 2021 imports from Russia (For comparison purposes, the Yamal-Europe pipeline, one of the major routes for Russian gas to Europe, is 2,607-mile-long). On its part, Nigeria is enthusiastic about exporting some of its 200 trillion-cubic-foot reserves of gas, with Nigerian Vice President Yemi Osinbajo arguing in favor of natural gas' critical role, both as a relatively clean transition fuel and as a driver of economic development and foreign exchange earner.
Unfortunately, the Trans-Saharan pipeline will likely take a decade or more to complete, and LNG shipments to Germany would bring quicker relief.
But, again, Berlin's kamikaze energy policies have gotten in the way: Germany has not built a single LNG import terminal as part of its policy to make the country dependent on Russian gas and, in turn, make Russia more dependent on Germany. But there's hope: Berlin has already renounced its old ways and says it will now build LNG infrastructure.
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Luckily for Germany and other stranded EU nations, Ramachandran says LNG loading ports can be built reasonably quickly in Africa, with the Greater Tortue Ahmeyin field, an offshore gas deposit straddling the maritime border between Senegal and Mauritania, a prime example. When the field comes online next year, it will place the two west African nations among Africa's top gas producers. Floating liquefaction plants above the offshore gas field produce, liquefy, store, and transfer the gas to LNG tankers that ship it directly to importing countries. While the initial production from this field will be small, it is slated to double in a few years, and the field sits within a larger basin of natural gas with substantially greater reserves.
Elsewhere in Africa, too, gas production will continue to expand as projects in Tanzania, Mozambique, and other countries come online in the next few years.
Developing a gas pipeline as big as the Trans-Saharan pipeline will likely present many challenges as it runs through areas plagued by conflict and insurgency. But it's about time Berlin abandons its myopic energy strategy, stops financing Putin's brutal wars, and helps Africa develop and integrate economically.
By Alex Kimani for Oilprice.com
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