Germany’s worsening energy crunch was back above the fold on Thursday, after Uniper withdrew its outlook and nodded to a possible government bailout.
The company, Germany’s largest buyer of Russian gas, cited “major geopolitical uncertainties” and ambiguity around the scope of Russian flows for the decision to pull its full-year guidance. CEO Klaus-Dieter Maubach described a “noticeable deterioration” in business conditions.
The utility is at the center of Germany’s frantic efforts to secure sufficient gas supplies amid a sharp contraction in volumes from Gazprom. Uniper’s shares plunged 15% to a five-year low (figure below).
The German Economy Ministry confirmed “ongoing” discussions with Uniper about “stabilization measures.” The company mentioned guarantees, an increase in an existing, untapped credit line with KfW and equity investments.
Last week, Economy Minister Robert Habeck warned of a “Lehman effect” while raising the country’s alert level to “alarm,” the second-highest phase in a tiered system that could eventually see the state commandeer the distribution process. On Thursday, Habeck described winter supply as “a tight calculation.” Storage is currently around 60% full.
Read more: Germany Faces ‘Lehman Effect’ In Gas Standoff With Putin
According to analysts, Uniper is suffering some €30 million in losses per day as a result of reduced Russian flows, which have forced the company to procure missing volumes on the spot market, where prices are up sharply. One analyst who covers the company warned of “very negative consequences for the entire gas and power market in Europe” in the event Uniper can’t pass those costs along.
Of course, Europe is grappling with record-high inflation, due in no small part to higher energy costs. Consumers can scarcely afford price hikes. German inflation came in below estimates for June, data out Thursday showed, but the relief was tied to palliative government measures, not any actual improvement in the macro backdrop. Benchmark European electricity prices are up double-digits this week to the highest since December.
An analyst at Metzler cautioned that Uniper’s revenue is “drying up” given that half the company’s long-term contracts are with Moscow. Margin calls on derivatives are likely exacerbating the situation. Uniper on Wednesday said it’s “examining” ways to “further secure” liquidity.
Uniper borrowed billions for margin calls before the war started as erratic prices played havoc. European gas was on track for the largest monthly gain since September (figure above).
The situation may be on the verge of deteriorating further given the proximity of planned maintenance to the Nord Stream pipeline next month. Habeck has repeatedly suggested shipments may cease thereafter. Finland has a role to play in this unfolding drama. Fortum Oyj is Uniper’s parent company and as such might reasonably be expected to chip in on any bailout.
To state the obvious, this underscores the peril of Europe’s long-standing dependence on Russian energy, but more than that, it’s exposing the inherent absurdity in what I’ve described as a coordinated decoupling, wherein both sides have an interest in maintaining gas flows (Europe needs energy, Moscow needs revenue) but are nevertheless keen to sever ties given the irreparable damage done by Vladimir Putin’s decision to invade Ukraine and the attendant sanctions regime.
It’s the furthest thing from obvious that Putin will succeed in doing anything other than bringing economic hardship to the world’s fourth largest economy. That’s “not nothin’,” as they say, but it’s not a long-term strategy. Russia will never again be viewed as a dependable supplier to Europe, and having crossed that Rubicon (among others), I suppose it makes sense that Putin should maximize his leverage while he still can. But that leaves open myriad questions about Russia’s long run economic fortunes. Presumably, the country will want to sell its energy to the West again at some point, post-Putin, and that door will close forever in a few years once Europe has time to secure alternative supplies.
In the meantime, Uniper won’t be the only thing getting a bailout. Germany will surely have to deliver more stimulus to protect households given the likelihood that the energy crunch becomes a full-on crisis by year-end.
But that leaves open myriad questions about Russia’s long run economic fortunes. Presumably, the country will want to sell its energy to the West again at some point, post-Putin, and that door will close forever in a few years once Europe has time to secure alternative supplies.
… and/or manage to push through with nuclear/renewables.
As to Russians – f*ck them. They wanted to again be a medieval theocracy as opposed to some decadent European power. Let ’em have what they wished for.
I am wondering what the odds are of concerted action by EU buyers to suppress price of oil and gas. Like what Europe is trying to organize for Russian crude.
Would and could a similar buyers’ cartel be organized for NG or LNG? Seems difficult to do for LNG imports, but for domestically produced gas might be more feasible?
Energy stocks are bifurcated, with high European exposure names holding up better than high US exposure names.