Expert: Russia to remain crucial feedstock supplier despite spat with Brussels | Business| Economy and finance news from a German perspective | DW | 05.04.2019
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Expert: Russia to remain crucial feedstock supplier despite spat with Brussels

Relations between Moscow and the EU have hit their lowest level in decades. But feedstock industry expert Fares Kilzie says the bloc's current energy diversification attempts will not leave Russian firms stranded.

There's hardly anyone who knows more about the German petrochemical industry's enormous need for resources than Russian entrepreneur Fares Kilzie. In the early 1990s, he was based in Germany helping companies such as Bayer and Süd-Chemie secure petrochemicals from Russia.

After 2001, Kilzie went back to Russia and eventually founded the Creon consultancy helping European companies understand the Russian energy market. 2016 saw the establishment of the Creon Energy Fund in Luxembourg, which provides guidance for investing safely in Russia.

DW met up with Fares Kilzie in Berlin to talk about the future of Russian energy supplies to Germany and the European Union as a whole.

DW: Talking about EU-Russian business relations these days, also in the energy and feedstocks sectors, is a bit like walking through a minefield, following Russia's falling out of grace with the West over its perceived role in the Ukraine conflict, would you agree?

Fares Kilzie: In my business life, relations between Russia and the EU have never been worse than they are today. But I have to add that we experience this bad state of relations mainly in Brussels, and we don't see it in Berlin. Russia and Germany are still having a very constructive dialogue even while relations between Russia and the EU in general are in a bad state. Dialogue between Moscow and Berlin is strong, despite heated arguments being exchanged sometimes.

Russia has been a very reliable supplier of hydrocarbons for Germany all along, concerning both natural gas and oil. As for oil, Rosneft has been one of the major oil suppliers in Germany, and Gazprom the main provider of gas — maybe Novatek will become a third important player with LNG [liquefied natural gas].

Creon Group's Farez Kilzie

Creon Group's Fares Kilzie says diversification in the energy and feedstock markets is a logical process as countries aim to spread risks

I gather from your answer that you don't believe the good times for Russian oil and gas suppliers to the EU are coming to an end. But don't increased attempts in Berlin and Brussels to diversify supplies and thus reduce dependence on Russian sources tell a different tale, especially when it comes to natural gas deliveries?

When it comes to debates about reducing the amount of pipeline gas coming to Germany from Russia, I was one of those who expected that to happen even before the crisis in relations with the West started. I was in contact with German feedstock buyers, and they were telling me as early as the 1990s that they would have to diversify their supplies. So I know this approach very well. I believe it's a good one, because risks have to be spread when it comes to feedstocks.

Many analysts insist Germany — and other recipients in the EU — could have easily done without the controversial Nord Stream 2 gas pipeline. What's your take on this?

Touching on the current Nord Stream 2 controversy, Russia in this project is only assuming the role of a technical partner, meaning it lays the 1,200 kilometers of the pipeline to Germany and supplies the gas, but any decisions beyond that have to come from Germany. In my eyes, the project is very important for the chemical industry in Germany. Parts of the industry are already migrating from Germany as there are at times not enough feedstocks for the industry. In order to create new products and jobs, you also need large amounts of gas at a reliable price — and you need it now, not in five or 10 years. Russia is offering this opportunity of getting more by 2020.

But isn't it rather risky for public joint stock company Gazprom to keep focusing almost exclusively on its pipeline business?

In Russia, I've been know as a critic of Gazprom for exactly that. Many see Gazprom as the holy cow of Russia, generating a big share of the country's income, so that seems to make it untouchable. There have been a lot of changes in Gazprom's management structure over the past two months and there's more to come. We've always said in the Russian media that Gazprom is inefficient, not using the latest technology and moving very slowly toward the gas refining business.

Infografik Karte Gaspipelines Europa Nord Stream EN

I never shy away from the fact that this sort of miscalculation could lead to trouble in the future. Only time will show how it will fare by focusing only on its pipeline business and not expanding its activities to LNG. But we'll only have an answer to this in five or six years from now. My personal opinion is that they made the wrong decision also by trying to convince the Russian president that the shale gas story in the US would be ending soon — it's not ending. On the contrary, it's taking geopolitics to another level.

In the second quarter we expect to have equilibrium between the price for pipeline gas and that for liquefied natural gas, which is very good for the market.

According to the European Commission, the EU's gas demand is around 480 billion cubic meters and is projected to remain stable in the coming few years before going down as a result of the bloc's climate protection policies and the increased use of renewables. So, aren't today's investments in gas deliveries shortsighted anyway?

Let's face it, gas is one of the most environmentally friendly products that we have at the moment, with relatively low CO2 emissions. It's very easy to handle. We'll see a lot more electrical cars in the future; we'll see more wind farms and solar energy facilities. Right now, though, the German feedstock problem is that neither wind nor solar can replace the physical hydrocarbon to produce ethylene for example.

As soon as there are reliable pipeline supplies, the chemical industry will start investing. BASF (Wintershall/DEA) and others are trying to secure the feedstocks as soon as possible so as not to lose out in the competition with Asian or even US producers. Several million jobs are affected, directly or indirectly, as we're talking about construction chemicals, paint chemicals, chemicals for the auto industry and so on. Half of any ordinary car is made of petrochemical components (polycarbonate, polyethylene etc.), so you have a wide range of products that are needed here.

Private Russian energy company Novatek is looking to establish a foothold in Europe including Germany where it aims to open a regasification facility in Rostock by 2022 - and this against the background of the German government having promised the US administration it would build two LNG terminals of its own to also receive American gas …

Novatek is also looking at the Spanish market, the Italian and Moroccan markets, and it's looking to build regasification facilities in order to supply gas to customers, who have no access to pipeline gas. Rostock, with its long-term trade ties with St. Petersburg, can play a major role for the German economy. It's a gateway to Germany. To have a regasification facility there, coupled with reliable gas supplies from Novatek to serve the German market is a nonpolitical thing. It's only a small-scale regasification unit.

The Novatek activities in Germany can't really be seen as a threat to any other LNG supplier because of the low volumes to be involved.

For 25 years, Fares Kilzie has been helping European companies doing or wanting to do business in Russia. He's the founder of Creon Group, an independent investment and management association focusing on the energy and chemical industries in Russia and the Commonwealth of Independent States (CIS). The Creon Energy Fund invests in Russia together with European technology partners.

The interview was conducted by Hardy Graupner.

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