Germany Warns of Lehman-Like Contagion From Russian Gas Cuts

Germany warned that Russia’s moves to slash Europe’s natural gas supplies risked sparking a collapse in energy markets, drawing a parallel to the role of Lehman Brothers in triggering the financial crisis.

With energy suppliers piling up losses by being forced to cover volumes at high prices, there’s a danger of a spillover effect for local utilities and their customers, including consumers and businesses, Economy Minister Robert Habeck said Thursday after raising the country’s gas risk level to the second-highest “alarm” phase.

“If this minus gets so big that they can’t carry it anymore, the whole market is in danger of collapsing at some point,” Habeck said at a news conference in Berlin that was called at short notice. “So a Lehman effect in the energy system.”

Europe’s largest economy faces the unprecedented prospect of businesses and consumers running out of power. Russian President Vladimir Putin gradually cut supplies over months in apparent revenge for sanctions against Ukraine’s invasion. Last week, the standoff reached its peak after severe cuts in the main gas line to Germany. This put at risk the winter reserves.

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The increased alert will tighten market monitoring and certain coal-fired plants may be restarted. At the current rate of gas inflows, Germany would need 116 days to reach its target to fill 90% of storage capacity, which would mean it would take until mid-October to do so—a time of year that households would usually start consuming more gas for heating.

Also, the alert stage gives government the option to enact legislation that allows energy companies to transfer cost increases to homeowners and businesses. Habeck stated that he would wait to adjust prices until the market responds. BASF AG, a chemical giant, announced that production may be reduced as gas prices rise later Thursday.

“It will be a rocky road that we have to travel as a country,” he said. “Even if we don’t feel it yet, we are in a gas crisis.”

The European benchmark for Dutch gas futures rose 7.7% to reach a peak of 137 euro ($144) per megawatt hour in Amsterdam. These contracts gained over 50% after Gazprom PJSC, a state-run energy giant, reduced flows to the Nord Stream pipeline.

Germany, which relies on Russia for more than a third of its gas supplies, enacted the initial “early warning” phase at the end of March, when the Kremlin’s demands for payment in rubles prompted Germany to brace for a potential cutoff in supply. The third and highest “emergency” level would involve state control over distribution.

The crisis has spilled far beyond Germany, with 12 European Union member states affected and 10 issuing an early warning under gas security regulation, Frans Timmermans, the European Union’s climate chief, said in a speech to the European Parliament.

“The risk of a full gas disruption is now more real than ever before,” he said. “All this is part of Russia’s strategy to undermine our unity.”

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Habeck, who is also vice chancellor, said Russia’s move to cut gas deliveries through the Nord Stream pipeline makes it all but impossible to secure sufficient gas reserves for the winter without additional measures. He indicated he’s concerned that the Nord Stream link may not return to normal capacity after a 10-day maintenance period starts on July 11.

Germany has been trying to get gas-storage facilities full, but only modest progress has been made. The reserves are at 58%, with energy companies trying to meet a goal of 90% capacity for November.

The daily fill rate dropped by about half on Wednesday to the lowest level since early June, according to figures from Germany’s network regulator, known as BNetzA. This rate would mean that it would take over 100 days for the country to meet its target. It would also put the country into traditional heating season.

“Although the supply of gas is still secured in the short term, companies across all sectors are extremely concerned,” Peter Adrian, the president of the DIHK industry lobby, said in an emailed statement.

“Given these dark clouds that are gathering, we must now make a joint effort to do everything to save gas for the winter,” he added.

The government could trigger an emergency level, and BNetzA can implement rationing. Bonn-based agency said that leisure facilities would experience supply disruptions, but consumers and vital public services would not be affected.

Gas is a crucial part of Germany’s energy mix and more difficult to replace than Russian coal and oil, which are being phased out by the end of the year. This fuel is essential for heating homes as well as for industrial processes within the chemical, pharmaceuticals, and metals industries.

Germany took steps to ensure supplies. This included taking over a Gazprom local subsidiary. The company was then renamed Securing Energy for Europe GmbH. The country is also building infrastructure to import liquefied natural gas from the US and other suppliers, but those won’t be ready until later this year.

The government has made available credit lines to KfW, a state-owned lender that guarantees gas injections at storage locations in order to stabilize the market.

This summer, an auction model will be established to help industrial gas customers save fuel. The fuel can then go into storage. According to Bloomberg, the plan calls for major industrial gas users or suppliers to post offers at Trading Hub Europe. Trading Hub Europe will offer the best deal in case there are bottlenecks.

“The curbing of gas supplies is an economic attack on us by Putin,” said Habeck. “It is obviously Putin’s strategy to try to fuel insecurity, drive up pricesAnd divide us as a society. We will fight back against this.”

—With assistance from Chad Thomas, Zoe Schneeweiss, Andrew Reierson, Ewa Krukowska and Angela Cullen.

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