Merkel’s Baltic Backyard Split Over $18 Billion Oil Rush

Photographer: Krisztian Bocsi/Bloomberg

German Chancellor Angela Merkel’s election district is perched on a sea of oil that was once top secret and now promises a 13.5 billion-euro ($18 billion) windfall for one of Germany’s poorest states, according to the company drilling test wells. Close

German Chancellor Angela Merkel’s election district is perched on a sea of oil that was... Read More

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Photographer: Krisztian Bocsi/Bloomberg

German Chancellor Angela Merkel’s election district is perched on a sea of oil that was once top secret and now promises a 13.5 billion-euro ($18 billion) windfall for one of Germany’s poorest states, according to the company drilling test wells.

Chancellor Angela Merkel’s election district is perched on a sea of oil that was once top secret and now promises a 13.5 billion-euro ($17.7 billion) windfall for one of Germany’s poorest states, according to the company drilling test wells.

Central European Petroleum GmbH, a joint German-Canadian venture, has been granted eight concession licenses to explore for oil in more than 3.6 million acres near the Baltic Sea in Mecklenburg-Western Pomerania, where Merkel’s district is located, and in Brandenburg, where she owns a weekend home. Goldman Sachs Group Inc. is among the project’s backers.

“We’ve drilled four wells and found oil in all of them,” Thomas Schroeter, CEP’s managing director, said in a June 10 interview in Berlin. “It’s not an exaggeration to say that parts of Mecklenburg-West Pomerania and Brandenburg are floating on oil.”

The prospect of an oil bonanza in Merkel’s backyard puts her electorate at the heart of a struggle between Germany’s shift to clean energy and industry complaints that the cost of renewable power makes it harder to compete in an age of cheap U.S. shale oil. Germany imported crude worth almost 60 billion euros in 2012, according to the Federal Statistics Office.

While the oil won’t turn Germany into another Saudi Arabia, CEP’s best-case scenario of about 500 million euros a year for Mecklenburg-West Pomerania represents about 7 percent of the northeastern state’s budget.

Environment vs Jobs

With federal elections on Sept. 22, local officials from Merkel’s Christian Democratic Union party stress the jobs at stake in a region burdened with the second-highest unemployment rate and the lowest per capita income in Germany. Yet the proposals have angered environmentalists who say exploiting oil risks undermining the burgeoning tourism industry focused on the Baltic coastline.

“Some people in the government are concerned that oil could damage Mecklenburg-West Pomerania’s tourism image, but we’re a state with too many low-wage jobs in tourism,” said Benno Ruester, the CDU mayor of Grimmen, about 20 kilometers (12 miles) from the Baltic coastline. “Look, we’re not going to get a Mercedes factory here,” he said. “We need oil.”

The chancellor’s Energiewende, or energy switch, is one of her biggest gambles in almost eight years in office. As she runs for a third term, political opponents and industry groups charge her with bungling the shift and pushing up household electricity costs as a result. Germany has the third-highest consumer power prices in the 27-nation European Union, behind only Denmark and Cyprus, according to Eurostat.

Brent Quality

A CEP study shows that, subject to further testing, there may be 40 million barrels of oil possibly deemed extractable in a 160 square-kilometre (62 square miles) coastal area of Mecklenburg-West Pomerania known as “Big Barth.” The oil is extractable by conventional means and not by hydraulic fracturing, or fracking.

It’s Brent quality: “light, sweet, low sulphur-content crude,” said Schroeter, 56, a geologist who has worked on oil projects in Texas, Libya, Kuwait and Venezuela. “This is my first project in Germany and when I came here I thought, finally here’s some oil that’s not in a war zone.”

CEP, a wholly owned subsidiary of Calgary-based Central European Petroleum Ltd., said it hopes to get final approval to produce oil by 2016. First evaluations show the total economic impact including drilling, building facilities, corporate taxes and royalties would be about 2.25 billion euros for Big Barth alone over the next 25 years. That would rise to 13.5 billion euros for the entire state “if all present leads and prospects should be successful,” said Schroeter.

Roland Leithaeuser, a spokesman for Goldman Sachs AG in Frankfurt, said that Goldman is an investor in CEP, declining to comment further.

Soviet Order

CEP, which says it has spent 80 million euros searching for oil in Germany, is using modern technology such as horizontal drilling techniques to breathe new life into an industry exploited in eastern times. Oil production in eastern Germany dates back to the 1960s when the Soviet Union ordered its communist satellite to search for hydrocarbons.

“In the old days under communism, this was top secret,” said Dieter Landes, 75, the former director of the northeast production district in East Germany who now heads the Oil Museum in Reinkenhagen near Grimmen. Now, “I’m giving all the data about our past drilling activities to CEP,” he said.

Grimmen, a town of about 10,000 near where the first East German oil well was drilled and entered production in 1962, illustrates the dilemma the region faces. While just south of Stralsund, the Unesco World Heritage Site port where Merkel has a constituency office, Grimmen has few of the tourism benefits of the coastal resorts. Unemployment of 14.7 percent is more than double the national average of 6.9 percent.

Stock-Car Racer

For Mayor Ruester, 52, a former hobby stock-car race driver, economic growth is crucial for the town which this year is experiencing its first net population growth after losing people since the 1990 German reunification.

“Jobs are the top election issue,” Ruester said in an interview in Grimmen’s 15th century red-brick town hall. CEP’s plans could transform the entire state by producing “a flood of tax revenue,” he said. “We really need to get moving on this.”

Oil advanced for a second day amid forecasts that crude stockpiles dwindled last week in the U.S., the world’s largest oil consumer. West Texas Intermediate for August delivery was at $95.65 a barrel, up 47 cents, in electronic trading on the New York Mercantile Exchange at 1:09 p.m. London time.

Environmental groups remain opposed to the drilling.

Tourism, Fisheries

“This region is built on tourism, fisheries and sustainable development,” Max von Maltzahn, coordinator of the Greenpeace office in nearby Greifswald, said by phone. “When people come here they don’t want to see oil rigs.”

Energy companies “shouldn’t be allowed to invest in the development of new oil fields,” Greenpeace said in a statement. “The golden age of oil is over and the future belongs to renewable energy.”

With opinion divided on the benefits of drilling for oil, the regional government of Mecklenburg-West Pomerania, a coalition of Merkel’s CDU as junior partner with the Social Democrats, the main opposition party nationally, has yet to reach a position, said Andreas Timm, the government spokesman in a phone interview from the state capital in Schwerin. He declined to comment further.

Merkel Silence

A spokeswoman for the federal government in Berlin, asked if Merkel supported oil drilling in her district, said by e-mail that she was unable to provide any comment from the chancellor. An employee in Merkel’s constituency office in Stralsund, Damaris (MLDAM) Kunkel, also declined to comment. “We don’t receive journalists,” Kunkel said by phone.

A resumption of oil production would be a dream come true for Landes at the oil museum, who had to fire workers and close down the former East German company in the 1990s after reunification and the introduction of the market economy.

“People hated me for doing it and then I was the last one there and the last to lose my job,” he said, walking outside the museum next to a Romanian-built oil pump installed in 1962. “I’m crossing my fingers that CEP is successful,” he said. “It would be a blessing for the region.”

To contact the reporter on this story: Leon Mangasarian in Berlin at lmangasarian@bloomberg.net

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

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