German Industry Slowly But Surely On The Move
Germany will increase its influence in Europe’s energy sector over the next years, as a mix of external diplomatic activities and strong political cooperation with the industry are hinting at a growing role of Berlin in South-East Europe, amid little or no competition from other EU countries.
This became clear over the last days, when German officials met with the governments of Bulgaria, Romania, and Moldova.
While Angela Merkel’s team is doing a great geopolitical effort, a simultaneous advantage of German technology will soon turn evident. Present investments will pay out.
Indeed, in the last hours, Wingas toured Europe to promote gas, Siemens bet on new management, and Wintershall strengthened its ties from Russia to Norway, passing through the United Arab Emirates, and Libya.
Despite these developments, the coming months will be crucial. The Government will present its strategy to get rid of 22 million tons of CO2 by 2020. The role of gas in Germany will then become clear, as Berlin will have to decide whether it wants to keep pushing renewables domestically, also without binding targets on a European level.
EXTERNAL GERMAN LEADERSHIP PART 1 - POLITICS IN EASTERN EUROPE
Not having much success at home, German energy companies are increasing their influence and promoting their technologies abroad. As shown by the recent visit of Foreign Minister Frank-Walter Steinmeier to Bulgaria and Romania, German firms are well supported by a strong energy diplomacy.
The remarks of Bulgaria’s Prime Minister Boyko Borissov are an indication in this direction. From his words, it clearly emerges that Germany dictates European energy policies - European funds are almost considered German funds.
‘The Prime Minister familiarized the German Foreign Minister with Bulgarian energy projects and expressed satisfaction with the support pledged for their implementation’ Bulgaria’s Council of Ministers wrote on Monday after the meeting between Borissov and Steinmeier.
Despite the slight confusion, there is some form of truth in his statement. As of January 2015, out of the five Directorates composing the DG Energy, two are directly held by Germans. Mechthild Wörsdörfer and Klaus-Dieter Borchardt control the directorate for Energy policy, and Internal energy market respectively. In this sense, despite what some experts define as an under-representation of Germany in the European Commission, there are two Germans controlling the two most important units of the Directorate-General.
This leverage via Brussels is only part of the story. Berlin also shows its leadership through direct ties.
For instance, the official visit to Romania showed that German investments are well seen in many countries. Keeping in mind Germany's creditor role, this comes as little surprise.
According to the IMF’s report published in October 2014, among the top 18 global economies, Germany is indeed the 1st country in terms of current account balance as a percentage of GDP. Berlin is a creditor, and it will remain so in Bulgaria, Romania, and Moldova for many years to come.
‘The discussions highlighted the relations of strategic importance between the two countries, and the ways to strengthen them on multiple levels’ reads the note released on Monday after Steinmeier’s meeting with Romania’s Prime Minister Victor Ponta.
On Wednesday, Ponta also took part in a meeting of “Romania - Germany parliamentary Friendship Group”. The parties discussed economic cooperation, and security issues - the creation in Romania of NATO Forces Integration Unit and of the Multinational Command at division level.
‘Romanian Prime Minister … thanked the German partners for their support in promoting dual education that will provide skills that the labor market in Romania needs and he encouraged German companies to expand and diversify investments in Romania, including geographically’ the Romanian Government wrote on its website.
Similarly, on Wednesday, Moldova’s Prime Minister Chiril Gaburici met German Ambassador to Moldova Ulrike Knotz, restating the centrality of Germany in Eastern Europe.
“I hope we will have more German investors and investments in Moldova in such sectors as energy efficiency and energy production from renewable sources” Gaburici commented.
EXTERNAL GERMAN LEADERSHIP PART 2 - POLITICS SUPPORTING BUSINESS
Earlier this week, Germany’s Economics Minister visited the United Arab Emirates with a trade delegation. On this occasion, Sigmar Gabriel promoted co-operation between Germany’s Wintershall and ADNOC, the state-run oil company of the Emirate.
“The United Arab Emirates are an important partner for Germany… I strongly believe that Emirati and German companies will profit equally when both sides are prepared to learn from each other and to make use of their own skills for the common good. ADNOC and Wintershall are a good example of this” Gabriel said on Monday.
EXTERNAL GERMAN LEADERSHIP PART 3 - TECHNOLOGY, AND FORWARD-LOOKING APPROACH
Poor results have been registered by Germany's top energy companies - RWE reported a 45% decline in full-year profit, and E.ON a net loss of 3.2 billion euros in 2014 compared to a profit of 2.14 billion euros a year earlier. This might seem a catastrophe, but this is not actually the case.
At the moment, Germany doesn’t place any of its companies among the top 30 global energy firms in Platts’ ranking. This indirectly paves the way for firms to reorganise themselves. Their relatively small dimensions are synonym with flexibility. Their size intrinsically put them in the position to revolutionise their business. This might bear fruit.
There are German companies in all segments of the industry, and technology is a strategic advantage for Berlin, which could soon further spur their competitiveness on a global scale.
In this context, Siemens is likely to be an increasingly important player in the energy sector.
“With his strong focus on our customers and his experience in leading and in the industry, Willi Meixner is certainly the right person to lead the Power and Gas Division through the challenging market of today and to strengthen our competitiveness for tomorrow", Lisa Davis, member of the managing board of Siemens AG, commented after the appointment of the new CEO of the company’s Power and Gas Division.
Meanwhile, Wintershall is strengthening its position too. After speaking with Gazprom about alternatives to deliveries via Ukraine last week, Russian gas flows through the Nord Stream pipeline have doubled in a matter of hours. At the same time, Wintershall is also trying to increase its subsea know-how.
“Becoming the operator of Vega means that we are building up our expertise as a subsea operator on the Norwegian Continental Shelf. Subsea fields are already a vital part of the oil and gas infrastructure in Norway and we believe they will grow in importance” Bernd Schrimpf, Managing Director of Wintershall Norge, commented after taking over Vega operatorship from Statoil earlier this month.
Meanwhile, gas distribution company Wingas, joint venture of Wintershall and Gazprom, held a serious of meetings in Belgium and Austria.
“So far we have covered demand mainly through supply agreements with the Netherlands and France. We could increase our supplies from Germany in future” Herman De Croo, former Belgian minister for transport and foreign trade, said in a discussion with WINGAS costumers on Thursday.
This also reminds of the Germany’s increasing role in gas trading. Pegas, a partnership between European Energy Exchange AG and Powernext SA, is rapidly increasing the variety of products offered on the exchanges. Pegas is soon becoming the leading pan-European natural gas trading platform.
In February, PEGAS announced it will launch Spot and Future products for the UK’s National Balancing Point (NBP) and for Belgium’s Zeebrugge Beach (ZEE) starting from March 26. It will also launch Future contracts for Italy’s Punto di Scambio Virtuale (PSV).
Finally, E.ON’s spin off, and E.ON Global Commodities’ focus on LNG are part of this forward-looking approach. In this sense, German companies’ relative small dimensions can help them to adapt quickly, and focus on the future, rather than mend their past.
THE CURRENT ENERGY PARADOX
Despite the vitality of the German companies abroad, nationally, they are not going far.
Waiting for the national strategy, the German oil and gas industry keeps urging the Government to come up with a predictable regulatory framework. Over the last months, the industry reiterated its definition of the current regulatory framework - “slippery ice”. But not much has changed in this period, and the lack of decisions is not very well seen by stakeholders.
“The challenge for the German government is to find a way to get rid of 22 million tons of CO2 by 2020. While the federal Ministry introduced the Climate Action Programme last November, it is not until the Ministry comes forward with the publication of its White Book in May that we will have a clear idea on how this reduction shall be achieved” Cillian O’Donoghue, Account Manager at Fleishman Hillard Energy Practice, told Natural Gas Europe.
Germany’s energy strategy will have to deal with its Energy Paradox - coal is backing up renewables, offsetting the positive environmental consequences of the significant subsidies for wind, and solar energy.
“This is not a cost-effective or efficient way to meet its CO2 targets, which would rather be to create an investment framework that promotes lower carbon technologies like gas at the expense of coal. The Emissions Trading Scheme is unlikely to deliver this incentive, at least in the short run and thus the German government may need to explore additional complementary measures to the ETS, such as an Emissions Performance Standard in its plans” O’Donoghue added.
NEXT STEP
German energy companies will keep looking abroad. It is likely they will focus on providing new services, and reinforcing strategic ties. In this context, initiatives like the joint research program between Germany’s Stiftung Mercator and Istanbul Policy Center might soon mushroom. This would further increase German weight.
Sergio Matalucci
Sergio Matalucci is an Associate Partner at Natural Gas Europe. Follow him on Twitter: @SergioMatalucci