Russian Gas Beckons for Germany as Merkel Turns From Nuclear

Chancellor Angela Merkel’s shift away from nuclear power is set to make Germany more reliant on Russian gas and Merkel more dependent on her predecessor, Gerhard Schroeder.

Merkel’s pledge to speed the exit from atomic power after the crisis in Japan is helping push natural-gas prices higher as Germany scrambles to identify energy alternatives. Gas supplied by OAO Gazprom may be the easiest way for her to meet Germany’s climate goals and keep Europe’s largest economy running.

As workers battle a meltdown at the Fukushima Dai-Ichi plant, Merkel is leading a global push to revisit nuclear energy, which provides about a quarter of the power generated in Germany. Increasing imports of gas from Russia, which holds the world’s biggest reserves, would deepen ties to the east yet risk raising tension with the U.S.

Russia is “re-emerging as this stable energy supplier for Europe,” Will Pearson, a London-based energy analyst at Eurasia Group, said in an interview. “There’s so much energy capacity there and right now it looks like a safer alternative” to options such as North Africa.

Likely winners include the Nord Stream AG Baltic Sea gas pipeline chaired by Schroeder, a 7.4 billion-euro ($10.6 billion) project that underscores Europe’s dependence on Russia as an energy supplier and the growing global clout of emerging economies that also include China, India and Brazil. The so- called BRIC nations are due to discuss commodities when they meet on April 14 in Sanya, China.

Pipeline Rivals

Also set for a boost is the Nabucco project, a pipeline that’s still on the drawing board, to channel Caspian gas to Europe. It’s championed by former Foreign Minister Joschka Fischer, a one-time leader of Germany’s anti-nuclear Greens party and Schroeder’s partner in government from 1998 until Merkel defeated their coalition in 2005.

Merkel is scheduled to meet with Germany’s 16 state prime ministers on April 15 to discuss the future energy mix after last month calling a 90-day moratorium on a planned extension of the lifespan of Germany’s 17 atomic plants and ordering the seven oldest reactors idled pending industry wide safety checks.

Pressured by a regional election loss amid a surge in support for the Greens, Merkel, a trained physicist and former advocate of atomic power, said on March 28 that her “view on nuclear energy has changed.”

‘Nuclear Witch-Hunt’

The result is “a nuclear witch-hunt” that may result in more than seven reactor closures, said Lueder Schumacher, an analyst at UniCredit SpA in London. “So far the public debate in Germany has focused on the desire to exit nuclear energy with little thought being spared as to what is actually going to replace it.”

German power for next year has risen about 10 percent since Merkel’s announcement, reaching its highest price in more than 19 months on April 4, according to broker data compiled by Bloomberg. Gas for delivery in 2013 cost 7 percent more at the Dutch-based Endex TTF gas exchange yesterday.

Europe’s most populous nation, Germany imports 85 percent of its natural gas and is already more reliant on Russia to meet its needs than the European Union as a whole. Germany imports about a third of its gas from Russia, compared with about a quarter for the EU.

Germany wants Russia to be “a major supplier of natural resources,” Merkel said on Nov. 26 during a visit by Prime Minister Vladimir Putin. “Europe and Russia are strategic partners whose potential for cooperation is far from exhausted.”

Merkel, who speaks fluent Russian, is already elevating Russia as a commercial and diplomatic partner, promoting exports there by German companies such as train maker Siemens AG. (SIE)

‘Full Steam Ahead’

“The German attitude seems to be full steam ahead” with Russia, Charles Kupchan, a senior fellow at the Council on Foreign Relations, said by phone from Washington. Merkel is “very pragmatic, very realist, and that’s where western Europe is headed right now in terms of relations with Russia.”

For their part, the Russians are keen to oblige. Gazprom said that “German partners can increase gas purchases” under the terms of current contracts, according to an e-mailed response to questions on March 31.

“I am glad that pragmatic voices in the European Union point to the high significance of gas as an energy source,” Energy Minister Sergei Shmatko told reporters in Moscow two days ago. “The latest events which we have been witnessing lately show that stable and safe supplies of gas from Russia on the long-term basis is key to Europe’s energy security.”

‘Frequent Power Outages’

German utilities have so far borne the brunt of Merkel’s nuclear reversal, caught between powering the world’s No. 2 exporter and EU emissions-reduction goals.

RWE AG (RWE) filed a lawsuit on April 1 challenging the shutdown of its Biblis A nuclear plant by the state of Hesse as part of the government-imposed moratorium. Chief Executive Officer Juergen Grossmann warned two days later of “more frequent power outages, say two, three days a year.”

“I fear that some of the industrial foundation of our country will be lost,” Grossmann said in a Deutschlandfunk radio interview.

E.ON AG (EOAN) and RWE, the two biggest utilities, are among the worst performers this year on the 30-member benchmark DAX index (DAX), declining 2.7 percent and 5.9 percent as of yesterday.

The Bloomberg Global Leaders Solar Index of solar company shares is up about 11 percent since March 11, when the earthquake and tsunami in Japan knocked out cooling systems at the Fukushima plant. Munich-based Wacker Chemie AG (WCH), which makes polysilicon used in solar cells, has gained more than 23 percent in that time.

CO2 Emissions

While Merkel has said she wants to speed the transition to energy from the wind and sun, traditional power sources are still needed to counteract the variable nature of renewables, said Matthias Heck, a Macquarie Research analyst.

“Longer term there’ll likely be a move to natural gas because it has lower CO2 emissions than coal and the government will want to keep carbon emissions down,” Heck said by phone from Frankfurt.

Rising prices for the permits that companies buy for the right to emit carbon rose may spur the shift. EU carbon permits rose to their highest price in almost three weeks on the ICE Futures Europe exchange in London on April 4.

Growing gas demand also plays into the hands of Schroeder and Fischer, who crafted Germany’s original pullout from nuclear power by about 2022 when in coalition government in 2002.

Schroeder, who was hired to head Nord Stream by Russia’s gas monopoly Gazprom months after leaving office in 2005, lost little time in claiming that Merkel’s new-found skepticism about nuclear power vindicated him.

‘Social Progress’

“It’s welcome social progress when others are capable of recognizing that we need to exit nuclear energy as quickly as possible,” he told the Die Zeit weekly in an interview published March 23.

The Nord Stream undersea pipeline to Germany is due to start delivering Russian gas to European consumers in October. Chances that Nabucco will also be built are increasing as Germany edges away from nuclear power, said Claudia Kemfert, an energy analyst at the Berlin-based DIW economic institute.

“This pipeline will be swept up in the boom,” she said. “It will be built to meet increased demand for gas.”

Not all Germans are convinced that Nabucco, which would avoid Russian territory, is enough to stem Germany’s reliance.

“We have to make sure there’s a diversity of sources,” said Michael Kauch, parliamentary environment spokesman for Merkel’s Free Democratic Party coalition partner. “We can’t get too dependent on Russia.”

For Merkel, practical considerations may outweigh any concerns at becoming over-reliant on Russia, Alexander Rahr, a Russia expert at the German Council on Foreign Relations in Berlin, said by phone.

Merkel “understands very well what she can expect of Russia; where Russia can be of help, where Russia cannot be of help,” Rahr said. “Nobody expected what happened in Japan, but in the end it will benefit those who have built those extra pipelines from Russia.”

To contact the reporter on this story: Tony Czuczka in Berlin at aczuczka@bloomberg.net.

To contact the editors responsible for this story: James Hertling at jhertling@bloomberg.net

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.