European companies on the brink of bankruptcy as the energy crisis deepens
Government bailouts add a new twist to the energy chaos that is making life difficult for Europeans
The unfolding energy crisis in Europe is beginning to weigh on a growing number of the continent’s oil, gas and utility companies.
Uniper, the struggling German natural gas utility giant, recently deposit a bailout request to the government after facing significant financial challenges, according to Finnish majority owner Fortum.
For weeks the company had been in regular talks with the government over a possible bailout, recently warning that it was to be rescued “within days”. Uniper faced enormous pressure after Russia began cutting its gas flows to Germany, the biggest gas importer. Over the past month, the energy giant has only received 40% of Russian contract volumes, prompting the company to seek replacement volumes.
“We are pleased that the German Parliament has now approved a ‘toolbox’ that will allow immediate relief from the effects of the gas supply crisis,” said Markus Rauramo, President and CEO of Fortum. “Secondly, we look forward to the German government quickly beginning to implement these tools to stabilize the situation in the energy sector and in particular at Uniper, as we continue discussions on a long-term solution.”
Uniper had started tapping into the gas it had been storing for the winter since Moscow cut deliveries. As a result, its storage facilities are only 58% full, down from just 60% the previous week.
Harald Seegatz, vice chairman of the supervisory board, noted that the utility has reduced gas volumes at its storage sites to ensure customers receive their electricity and to bolster Uniper’s liquidity conditions.
“It is clear that Uniper cannot wait weeks, but needs help in days,” he said. Told Bloomberg. “We cannot wait weeks to do something. This would have a huge impact on the business and also on the employees. The government has said it wants to avoid this situation, but the fact is that we cannot waste time.
Due to the latest developments, German industry is collapsing and economists predict that Europe’s largest economy could slide into recession.
“The impact of a gas shortage on the German economy could be profound. Not only is Germany one of the most industrialized countries in Europe, but its industry is also relatively energy intensive. But the price impact of rising gas prices will come long before any potential gas rationing, and securing electricity and gas contracts has become increasingly difficult for German companies,” wrote Erik. -Jan van Harn, global economics and markets macro strategist at Rabobank, in a Remark.
According to the bank, its base case calls for a contraction of 0.2% in the third and fourth quarters and an annual decline of 0.22% in 2023.
ING is also poised for a recession, despite slightly better-than-expected industrial production in May. That much, writing Carsten Brzeski, global head of macro at ING, it’s a question of how long the economy will be paralyzed in recessionary territory.
“Needless to say, there are currently more downside than upside risks to the outlook,” Brzeski wrote.
“It’s probably time to dig into all these different estimates of the economic impact that a total ban on Russian gas and oil could have on the economy.”
The rest of Europe in trouble
Other European markets have seen several energy providers shut down over the past 12 months.
United Kingdom, 28 companies have closed since June 2021 due to the dramatic increase in the cost of wholesale gas which has haemorrhaged businesses. These entities could not increase customer prices due to the UK government’s energy price cap. This resulted in the transfer of around 2.6 million households, or around 9% of the UK population, to another public service.
In the Czech Republic, electricity supplier CEZ CP is asking for up to $3.04 billion to ride out the storm.
Experts warn that Italy could see similar trends. Earlier this year, several Italian energy distributors suspended operations and stopped honoring contracts due to high electricity prices.
Moreover, the government imposed a 10% windfall profit tax on energy companies to fund a $4.9 billion package that provides inflationary relief to businesses and consumers. Whether or not this will add to the financial pressure on the sector heading into the second half of 2022 remains to be seen.
Although companies are expected to improve their results, Michel Sznajer, portfolio manager at Ecofin, explained in a note that many companies are not making more money. But they pass the extra costs on to their customers.
That said, ING analysts say governments in the region will most likely install price caps on energy prices, just like the UK, France, Hungary and Romania are other jurisdictions. that have instituted retail or wholesale price limits. In addition, Portugal and Spain have introduced caps on wholesale gas prices for power plant consumption.
“While windfall taxes tend to reduce corporate bottom lines and impact corporate stock valuations, energy price caps are probably the most dreaded tools governments can impose. utilities to protect consumers from soaring prices,” ING experts said. said.
According to Bloomberg DataEuropean energy and utility companies have racked up more than $1.7 trillion in debt to cover the cost of soaring crude oil and gasoline prices, up 50% from before the coronavirus pandemic.
The global energy crisis in Europe
New research from Rystad Energy suggests that Europe is set to face an electricity crisis much sooner than expected, mainly due to Russia’s invasion of Ukraine, related sanctions and rising temperatures.
With summer already proving to be a tough time amid declining gas flows and liquefied natural gas (LNG) cargoes reaching capacity limits, industry watchers are looking to winter .
“In April, we expected the coming European winter to be a difficult time for consumers and governments. Our updated scenarios show that Europe will likely head into the storm much sooner than previously thought and that the region will be underprepared for the chaos it will bring,” wrote Vladimir Petrov, Senior Analyst at Rystad Energy, in a research note.
Sznajer also noted recently that the weather is adding to an extremely tight electricity market, with “very hot and dry weather” putting hydropower under pressure.
“Usually in the summer the UK usually fills up with natural gas storage particularly and unfortunately with the current climate we are in a situation where demand is above expectations and unusually high and therefore somewhat limits the possibility to store more and more gasoline for the winter,” he said in a note.
As Europe begins to prepare for a harsh winter and prices are likely to soar as a result, experts warn that energy rationing cannot be ruled out.
Speaking at the Aurora Spring Conference in Oxford, Shell CEO Ben van Beurden declared this rationing may need to be considered before cold temperatures and snowstorms overwhelm the continent.
“It will be a really tough winter in Europe. Some countries will do better than others, but we will all face a very significant escalation in energy prices,” van Beurden said, adding that the worst scenarios would probably involve Europe having to ration its energy consumption.
With the UK entrenched in a ferocious heat wave this week, temperatures have reached 40 degrees Celsius for the first time on record, cooling demand will increase.