Is gas independence from Russia impossible?

This question leads many users. “I have the impression that no one is aware that Germany has signed contracts with Russia for crude oil and gas. This means that Germany has to continue to pay for crude oil and gas, whether it buys products from Russia or not. Putin is happy with this stupidity “, One user wrote under the BR24 article. On Twitter, a woman asks in response to a ZDF report on the partial EU oil embargo (still in planning at the time): ‘We don’t do that either Do you have long-term oil contracts with Russia? So that would be a breach of contract?’ What The benefit of the oil embargo then? And should we pay for the oil without taking it? Stop nonsense and let people use oil and gas for our industry and our people!”

But is this true? Do German companies have to pay for Russian oil and gas somehow – even if they are no longer allowed to buy it? The short answer is no. In principle, it is true that some companies – especially in the case of gas – are bound by long-term contracts that stipulate minimum quantities. But in the event of war, different rules than usual apply, two energy experts and a lawyer for #Faktenfuchs say.

In this case, the rules will not be set by companies and their lawyers, but by politicians. Especially when the government imposes an import ban (“ban”), companies can invoke this ban when renegotiating, retracting or terminating contracts.

The share of Russian oil and Russian coal has fallen sharply since the beginning of the war

The examples of coal and oil show that it is possible to achieve greater independence from Russian energy supplies. At the beginning of April, the heads of state and government of the European Union agreed to ban the import of Russian coal. This was followed by a partial oil embargo at the end of May. With success: now only eight percent of German coal and 12 percent of our oil comes from Russia. This emerges from the second progress report on energy security.

So exit is possible. Because there are also contracts in the case of coal and oil, even if they tend to be less long-term than gas imports. In the case of coal, for example, as the Economy Ministry wrote in its report, the initial plan was to allow existing contracts to expire and not be extended. Existing contracts entered into before April 9, 2022 may continue to be implemented until August 10, 2022. New purchase contracts have been prohibited since April 9, 2022 without a transition period.

Gas is progressing more slowly: by mid-April, the share of Russian natural gas shipments was reduced from 55 percent to 35 percent. The federal government aims to further reduce this share to 30 percent by the end of the year and be “largely” independent from Russian natural gas by the summer of 2024. Then only about ten percent of natural gas should come from Russia.

Gas contract details unknown

Basically, the question of whether this is the case, and how companies exit contracts in accordance with the contract, depends on how the termination or cancellation of the contract is organized. These details are unknown because most companies do not explicitly discuss the exact agreements for reasons of competition. The Federal Ministry of Economics does not know the details either, a spokeswoman for #Faktenfuchs said over the phone. However, long-term contracts with fixed minimum purchase quantities (the so-called “receipt or payment terms”) are not uncommon, especially in the gas market.

George Zachman, an energy market expert at the Center for European Economic Thinking Bruegel, explains why in an interview with #Faktenfuchs: Because expensive infrastructure is often built specifically for the gas trade (think Nord Stream pipelines) the supplier and buyer usually stick together Some are in long-term contracts. Only then, according to Zachmann, will it make sense for companies like Gazprom to invest in expensive pipelines and gas fields. According to Zackman, buyers – in Germany mostly domestic gas suppliers and large industrial companies – benefit from the ability to plan and can be sure that Gazprom will not suddenly sell gas to the highest bidder on the open market.

However, since no customer can know exactly how much gas they will need in ten, 20 or 30 years, according to Zackman, most contracts also provide some degree of flexibility. For this purpose, the minimum amount of gas that the buyer must purchase in a certain period of time is determined. In addition, gas can be purchased flexibly as needed. The price of gas is not fixed up front, but is variable and usually depends on the so-called spot market price – that is, the price at which gas is traded on the European Gas Exchange. In Europe, the price of the TTF Center, a virtual trading venue in the Netherlands, is crucial, explains Christoph Maurer, managing director of Consentec, an energy consultancy.

Long-term contracts make up a large part of the gas supply

Like I said, companies don’t keep a low profile when it comes to the minute details of contracts. However, there are still a few characters leaking to the public. For example, Oliver Roeder, press spokesman for energy company Uniper, told #Faktenfuchs in writing that Uniper has signed long-term gas contracts with specified delivery volumes with Gazprom. Such long-term contracts continue to form the “backbone of German gas supply”. According to Uniper research, “about 70 percent of German gas consumption is currently covered by long-term contracts.” In addition to Russia, there are also such agreements with countries such as Norway, the Netherlands and Azerbaijan.

One thing is clear: there are long-term contracts and they make up a significant part of gas imports, of which Russia is an important supplier. But is the conclusion reached by many users correct? Can’t you escape these payment obligations, too?

This is the argument of at least some of the energy companies themselves, for example, Uniper states that its long-term contracts with Gazprom do not provide for a “unilateral right of termination and there is no possibility of suspending these contracts”. “Contracts must be honored and cannot be terminated without a corresponding right of termination. Unilateral termination will immediately result in claims for compensation,” a spokeswoman for the VNG gas trading group wrote on demand.

There has been no ‘rules-based environment’ since the war

But: With the onset of the Russian war of aggression, one could at least argue that German companies were no longer operating in a “rules-based environment,” as energy consultant Christoph Maurer says. Lawyer Andreas Knoll, who advises companies investing in Russia for the international consulting firm Rödl & Partner, has a similar view.

So what do you do? Energy expert George Zackman sees unilateral termination of contracts or suspension of payments conceivable. After all, Russia does not do it differently: “We actually got every week for the past few weeks that Russia simply broke contracts with this very flimsy argument that we should pay in rubles, which is not found in either contracts. ” This happened in Poland, Bulgaria, Denmark, and the Netherlands, among other countries.

His opinion: “We can no longer refer to these long-term contracts from Russia at all. It has become a purely political game. And if now this is a political game, then it no longer matters what is in the contracts between companies.

In such a case, of course, it is possible for the Russian side to appeal to the arbitral tribunal either to fulfill the contract or to obtain damages. But should that happen, German companies could invoke “force majeure” or “disrupt the basis of business,” says attorney Knoll. This can be argued, particularly in the case of government bans that make payments illegal to businesses. And even if Russia were to be awarded justice by an arbitral tribunal, it would not be clear who should enforce the arbitral award.

It’s more of a political question than a legal question

However, everyone who spoke to #Faktenfuchs agrees on one point: when it comes to the issue of energy independence from Russia, it’s not legal, but political issues that are crucial. To date, Germany is still about 35% dependent on Russian gas supplies. As long as the energy supply cannot be secured in any other way, companies will pay the price and hope that Russia will continue to do so.

If the conflict escalates, efforts are currently being made to find a face-saving solution for both sides. This was the case, for example, when Russia suddenly insisted on ruble payments for gas supplies. At that time, it was agreed that German companies would make payments to the Gazprom Bank account in euros, which would then exchange euros for rubles.

conclusion: It is true that many German gas customers have long-term contracts with Russia. These contracts often specify minimum purchase quantities that must be paid for in any event. However, such contracts do not necessarily oppose the embargo, as the coal and oil embargo against Russia shows. In such a situation, ban companies from buying, will default on payment. This could lead to Russian lawsuits over contract performance and damages. These international private sector contracts are usually negotiated before an arbitral tribunal. If it comes to this, companies – especially in the case of a ban – can invoke force majeure or disrupt the basis of the business, says Andreas Knoll, a lawyer who advises German companies investing in Russia. Even if Russia were right, it would still be unclear who should implement the decision.

In any case, it is doubtful whether these issues will be negotiated at the legal level. According to various experts, they are more likely to be politically determined. Because in relation to Russia, German companies have long since stopped operating in a “rules-based environment,” says Christoph Maurer, managing director of energy consultancy Consentec.

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