As Russia cuts gas, German industry grapples with painful choices

FRANKFURT, June 23 (Reuters) – German companies that power Europe’s biggest economy are considering painful output cuts and resorting to dirty forms of energy previously considered unthinkable as they adapt to the prospect of running out of Russian gas.

The reduction in Russian deliveries has accelerated German industry’s efforts to find alternatives to keep factories running and limit the economic cost.

Chemicals giant BASF (BASFn.DE) is looking at which factories might cut production first and rival Lanxess (LXSG.DE) might delay the shutdown of some coal-fired power plants.

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As Gazprom (GAZP.MM) cut flows through the Nord Stream 1 gas pipeline from Russia to Germany by 60% last week, Proctor & Gamble (PG.N) supplier Kelheim Fiber weighed a decision to spend millions to upgrade its gas-fired plant to run on oil.

The 86-year-old Bavarian supplier of viscose fibers used in hygiene products and filtration has asked the state to help fund the renovation which would cost at least 2 million euros ($2.10 million) .

“The economic situation has continued to deteriorate and our available reserves are rapidly running out,” said executive Wolfgang Ott.

“Oil has only one advantage: the supply is secure,” he added, saying that a modernization of the plant would take 6 to 8 months.

Ott added that the group was also in talks on lines of credit from state lender KfW (KFW.UL), which has drawn up a support package for businesses hit by a gas price spike.

Aurubis (NAFG.DE), Europe’s leading copper smelter, said it was also looking for substitutes, but adapting power plants was expensive and time-consuming.

The companies are among the country’s energy-intensive companies paying €17 billion for energy every year.

Until the start of Russia’s invasion of Ukraine on February 24, they focused on reducing carbon emissions in line with Germany’s efforts to meet EU climate goals.

Today, the top priority is survival, even if that means slowing down efforts to fight global warming.

German Economy Minister Robert Habeck, a member of the Greens, said greater reliance on coal as an energy source would lead to an increase in Germany’s carbon footprint.

“There’s no way that can please anyone walking through today’s world with their eyes open,” he said.

Burning oil for electricity, like coal, is highly polluting and was largely phased out of Europe a decade ago.

Historically, oil and gas cost more and coal was the cheapest way to run a power plant. Today, all energy is expensive and markets are volatile, making calculations extremely difficult. European electricity and gas prices hit record highs in response to concerns over Russia’s invasion of Ukraine.

HOW WILL IT BECOME?

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The country’s energy regulator on Tuesday outlined plans to reduce the use of industrial gas through a tendering system that would encourage manufacturers to consume less.

“Hundreds of thousands of companies are working on it (to save energy),” said Siegfried Russwurm, president of German industry association BDI.

BASF, the world’s largest chemical company by sales, is working on contingency plans for its site in Ludwigshafen, Germany’s biggest consumer of industrial electricity which accounts for more than 1% of the country’s total demand .

Provided supply does not fall below 50% of the site’s maximum natural gas demand, BASF could continue to operate Ludwigshafen, which spans around 200 production sites and needs 6 terawatt hours of electricity. each year, but at reduced capacity.

The exact reduction would depend on the availability of gas, as well as oil as a substitute, BASF told Reuters, but said if supply were to fall significantly below 50% for an extended period, production would have to be shut down.

BASF said prioritizing which factories closed first would follow discussions with customers and politicians and that some of its products were essential for food production, the pharmaceutical industry and automakers.

“If things go wrong, we have to discuss with the Federal Network Agency which factories we should close,” the company said, declining to comment further on its Ludwigshafen emergency plan.

At small specialty chemicals maker Lanxess, which spun off from Bayer (BAYGn.DE) in 2005, management is looking for ways to avoid closures.

One option is a possible delay of a planned phase-out of the coal-fired power plants it still operates at its German sites in Leverkusen and Krefeld.

This, he said, would hurt his carbon footprint.

“But if we exclude ourselves from the market in terms of products, we will have to close the factories and hundreds of jobs will then be threatened.”

($1 = 0.9506 euros)

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Reporting by Patricia Weiss, Christoph Steitz, Jan Schwartz; Additional reporting by Dmitry Zhdannikov; Editing by Josephine Mason and Barbara Lewis

Our standards: The Thomson Reuters Trust Principles.

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