Germany’s mega-deal with Norway to replace Russian gas [Gas in Transition]
Germany finally took the plunge and entered into a mega-deal with Norway to replace Russian gas that extends well into the next decade. So far, Germany has been cautious not to enter into any major gas supply deals that go beyond 2030, in line with the REPowerEU policy. But concerns about energy security and the impact on its heavy industry have made it more willing to lock-in longer-term gas supplies.
German state-owned energy firm Securing Energy for Europe GmbH (SEFE) and Norway's Equinor announced on December 19 a long-term gas deal that will provide about a third of German industry gas needs. Equinor will be supplying about 10bn m3 annually to SEFE between 2024 and 2034, with deliveries commencing in January. The deal is valued at €40bn ($44bn), based on long-term TTF gas prices at the time of the deal. About 75% of this gas is destined for the German market, with the rest to be re-sold to other markets. Most of the gas will be transported using existing subsea pipelines and will be indexed on the TTF and THE gas trading hubs.
The deal also envisages the possibility of extending the supplies for a further five years during which Equinor could deliver to SEFE about 6bn m3 annually.
The signing of the supply contract by Equinor CEO Anders Opedal and SEFE CEO Egbert Laege. Image credit: SEFE
Until June 2022, SEFE operated under the name Gazprom Germania, holding Gazprom’s gas assets in Germany, including gas storage facilities. SEFE was nationalised in November 2022 and its clients are mainly large industrial facilities and utility companies. SEFE is Germany’s second biggest gas importer after Uniper.
In 2023, 43% of gas delivered to Germany came from Norway. The new deal will take the share of Norwegian gas to Germany's gas supplies to about 60%, similar to the level of Russian gas imports pre-Ukraine. In 2023 Germany consumed about 83bn m3 gas.
It strengthens energy cooperation between Germany and Norway and it is seen as a "win-win" for both countries, but also Europe. This intensified following severance of Russian gas supplies following the invasion of Ukraine. Norway has now replaced Russia as Germany’s main gas supplier.
This level of dependence on a single gas supplier has raised concerns that, having moved away from Russian gas, Germany risks creating a new dependency, even if the two countries are closely aligned politically. However, last year Germany signed a number of LNG supply agreements that ensure gas supply diversification.
Undoubtedly the long-term nature of the new deal increases security of Germany’s gas supplies significantly and reduces reliance on LNG imports and the spot market, which are subject to market volatility and higher prices. It is a return to supply stability.
German industry
This gas deal was partly driven by the dire straits into which Germany’s industry descended in 2023 and the need to ensure longer-term security of gas supplies. The deal will cover a major component of German industry’s gas needs, about one-third, both for energy use but also as feedstock.
Germany’s production of chemicals, fertilisers, steel and other heavy industry goods slumped to multi-year lows in 2023, on average down more than 5% year/year, as high energy costs impacted production and competitiveness. According to a recent study, German industrial energy prices are double those in the US and China.
Despite the massive drop from the highs in 2022, the average electricity and TTF gas prices in 2023 were still over three-times higher than the pre-crisis average in 2019. These continue to be about two-times higher in early 2024.
High costs and the slump in industrial production led to an 11% drop in electricity consumption in Germany year-on-year in 2023 – by far the highest drop in Europe.
These problems contributed to making Germany the worst-performing major economy in the world in 2023. Rising rates and high energy costs led to 0.3% contraction. Problems continue, with Germany making a gloomy start to 2024, and with its fractious government coalition lurching from crisis to crisis
In addition to the gas deal with Norway, early November the German government agreed a new five-year electricity price package that should drive energy costs lower in 2024 and go some way into restoring German industry competitiveness. This included cutting the tax on electricity for industry to the minimum permitted by EU law.
But in a ruling mid-November the German constitutional court found that the new subsidies violate the country’s ceiling on new credit – known as ‘Germany’s constitutional debt brake’ - leaving the government with a big hole in its budget, making it difficult to proceed with the electricity price package and other subsidy measures to support German industry. The German government is still to agree on a new budget for 2024. Already, some analysts forecast that German GDP will shrink by another 0.4% in 2024.
As a result, a growing number of German energy-intensive manufacturing companies have gone back to planning to shift parts of their activities abroad. Almost 60% of them said the security and cost of energy was the main reason to move activities overseas.
The new gas deal should provide some relief in 2024, at least in terms of gas supply security and prices.
Hydrogen
SEFE’s deal with Equinor includes the option of replacing natural gas with potential deliveries of low-carbon hydrogen from 2029 – produced from natural gas – contributing to energy transition.
This provides SEFE with the opportunity to become a “long-term off-taker of low-carbon hydrogen from projects that Equinor is planning in Norway.”
It also contributes to the EU's goal to import about 10mn mt/yr of hydrogen by 2030, as part of its climate targets to cut emissions by 55% by 2030 and achieve net zero by 2050.
SEFE CEO Egbert Laege said "by signing the agreements for gas and hydrogen supply, we have teamed up with a strong European supplier that brings us a big step closer to our common goal of decarbonizing the energy sector while at the same time providing energy security."
This will contribute to efforts by Germany and Norway to develop longer-term cooperation between the two countries’ companies in the field of hydrogen.
Following a feasibility study, in November 2023 a report was published by Norway’s GASSCO and the German Energy Agency to construct a subsea pipeline to transport hydrogen hydrogen from Norway to the German market. This is included in the EU's list of Projects of Common Interest, which will enable it to receive EU funds and accelerate its implementation.
Other major German energy companies, for example RWE and VNG are interested in purchasing significant volumes of hydrogen from Equinor.
The feasibility study also concluded that hydrogen production at the scale envisaged by the two countries starting in 2030 could be realised based on low-carbon hydrogen, produced from natural gas with CCS with an ultra-low carbon intensity. Hence the inclusion of low-carbon hydrogen in the SEFE-Equinor gas deal.
These developments are the result of an agreement signed in January 2022 between German Chancellor Scholz and Norwegian Prime Minister Støre to strengthen German-Norwegian cooperation “around the energy transition and to establish a long-term and structured dialogue in the field of industry and energy. The aim is to achieve shared climate goals, create new green industries and jobs and strengthen energy security.” The two countries also pledged to cooperate more closely in the fields of renewables, hydrogen, battery technology and offshore wind.