Despite sanctions, Germany and Russia forge ahead in energy deals

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Russian-German energy cooperation goes back a long time, and remains a vital part of the two countries’ economic ties. While the recent crisis in Ukraine has strained political relations, shared ventures in the lucrative energy industry continue regardless.

When German families spend cosy nights in their gas-heated homes this winter, they can once again thank the natural gas fields of northern Russia.

Some 4,000 kilometres away in western Siberia, German and Russian firms are jointly at work to produce and transport fuel. It is a vital source for Germany from the country’s largest energy supplier.

Last year, Russian imports covered 31 per cent of Germany’s oil and gas needs at a cost of 22 billion euros (25 billion dollars).

Energy cooperation is the backbone of German-Russian economic ties and is largely independent of the two countries’ often strained political relations. Despite sanctions imposed on Russia over Moscow’s role in the Ukraine conflict, several mega deals in 2015 have bolstered the energy cooperation.

At the centre of such deals are a few actors who enjoy a long history of doing business together. Natural gas began flowing to Germany from the former Soviet Union in 1970.

In St Petersburg on Monday, the German chemical giant BASF and its subsidiary Wintershall is to celebrate the 25th anniversary of their partnership with Russia’s state-owned company Gazprom.

Wintershall and Gazprom are linked in a joint venture called Achimgaz that produces natural gas near the city of Novy Urengoi. Wintershall is also a stakeholder in the nearby gas field of Yuzhno Rosskoe, where the German energy utility Eon owns a share.

In addition, Gazprom, BASF and Eon are partners in the Baltic Sea pipeline project to link the Russian town of Wyborg to the north-eastern German state of Mecklenburg-Vorpommern. The pipeline can transport up to 55 billion cubic metres of gas annually.

In early September, these partners agreed on the construction of a second pipeline in the Baltic, a project which also brings the Netherlands’ Shell, Austria’s OMV and Engie of France to the table. On completion of the new pipeline, the partners’ natural gas transport capacity is expected to double.

Earlier this month, BASF and Gazprom agreed on a huge exchange of shares in a deal set to give the German firm further stakes in the gas fields of western Siberia. The Russians gained Wintershall’s gas storage and trading business, a move which places one full quarter of German storage capacity in Russian hands.

The politically sensitive deal had been put on ice in 2014 because of sanctions imposed over Russia’s military presence in eastern Ukraine, but was later revived, bringing Gazprom boss Alexei Miller one step closer to holding the complete operational chain – from production in Russia to the end user in Germany.

Russian oligarch Mikhail Fridman has emerged as a newcomer in German-Russian energy dealings. Last year, he paid 5 billion euros (5.7 billion dollars) to take over the German firm DEA, a subsidiary of the energy utility giant RWE, in a deal that assured him a one-fifth share of Germany’s oil and gas production.

Now Fridman’s firm, LetterOne, is negotiating with Eon to buy up the company’s oil and gas fields in the Norwegian sector of the North Sea, according to press reports.

The Kremlin has repeatedly pointed out Russia’s reliability in meeting its supply obligations to Western Europe.

Amid disputes with the West, President Vladimir Putin has announced aims to re-direct the country’s business towards China, which has nonetheless been slow to get off the ground. Business with Germany and the European Union is much simpler.

Russia is also keen to eliminate the need for Ukraine as a transit country through pipeline development. This has proven easier in the north thanks to the Baltic Sea pipeline, while the southern option of building a pipeline through the Black Sea remains problematic. Miller recently scaled down Gazprom’s plans for a planned Turkish Stream pipeline to the West.

Although EU sanctions against Russia are not slowing down the energy business, companies do regard them as bothersome. The restrictions make deals more expensive and have blocked the transfer of specialized western technology needed to tap into difficult-to-develop oil and gas deposits.

The pain has also been felt at Germany’s BASF, which is to present the results of a survey at Monday’s anniversary event purporting to show that 62 per cent of the public no longer find the sanctions against Russia helpful.

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