Events that have influenced recent gas market development Fifteen years ago, at the be- ginning of the millennium, the world had experienced a decade of economic growth built in part on increased international trade and supported by greater free- dom in global capital markets.

The current drive for a low-car- bon energy solution had its roots in this period too, with the 1992 UN Framework Convention on Climate Change, which commit- ted National signatories to reduce their emissions of Greenhouse Gases. This led to the adoption of the Kyoto Protocol in December 1997, which entered into force in February 2005. This was also the decade of new developments in information technology and web- based communication that were to survive the ‘.com bubble’1 and become the mainstay of many ac- tivities in the world today. During the 1990’s, the gas in- dustry continued to invest for the longer-term, and as we entered the 2000’s gas market growth, which had averaged 2.1% rate over the previous ten years, was set to increase to an average of 2.8%. People active in the gas industry could see the benefits of natural gas and there were optimistic fore- casts about even stronger growth of global and regional gas markets.

An important political event in the Baltic region took place in June 2004, when Estonia, Latvia, Lithua- nia, and Poland joined the European Union along with the Czech Repub- lic, Cyprus, Hungary, Malta, Slo- vakia and Slovenia. This profound enlargement of the European Union has brought further challenges and opportunities for the integration of the ‘Internal Energy Market’, not least for investment in natural gas infrastructure and diversity of im- ported gas supplies for Europe. But, let’s fast-forward a few years to 2007, when a financial crisis was starting to cause some of the world’s largest banks to fall into administration. At the same time commodity prices, including energy, were rising: the follow- ing year, oil peaked at over $140/ barrel (bbl) during the summer. Despite this, as seen in Figure 1, 2008 was the year that global gas demand reached 3000 bcm for the first time. But then, the effects of the global economic downturn started to bite and demand in sev- eral markets collapsed with severe

effects on manufacturing industry and on energy demand, notably in some developed economies. Furthermore, 2009 began in Europe with a disruption of Rus- sian gas supplies through Ukraine. Although this was resolved more quickly than the similar contrac- tual dispute in 2006, the disrup- tion led to concerns about supply security and a renewed interest in geopolitics and the need for energy diversity. Globally, the economic squeeze reduced energy demand even with oil prices tumbling to be- low $40/bbl and natural gas prices falling too. For the first time in re- cent history, annual global gas de- mand decreased significantly (by 2.3% in 2009 compared with 2008). The long-term outlook for the gas industry seemed very chal- lenging, particularly in Europe. Overall, however, the IGU 2030 Gas Industry Study, presented at the World Gas Conference in Bue- nos Aires, looked forward to natu- ral gas increasing its market share from 22% to 25% of global energy consumption, and an even higher percentage if Governments would properly recognise the environ- mental benefits of natural gas. The new decade started opti- mistically, but April 2010 was to be a month of disruption and disasters; Volcanic ash from the eruption of Eyjafjallajökull in Iceland led to the closure of airspace over most of Eu- rope and a few days later the Deep-water Horizon drilling rig explosion killed 11 people, caused the rig to sink and oil discharge in the Gulf of Mexico. The year overall saw a re- surgence of natural gas across the world, while in the US natural gas prices stayed low and production increased to over 600 bcm, support- ed by the increasingly successful exploitation of shale gas onshore.

On 11 March 2011, a 9.0 magnitude earthquake caused a tsunami wave, which severely damaged the Fukushima Daiichi nuclear power plant. There were almost immediate political reac- tions across the world, including a decision by Germany to perma- nently close all its nuclear capac- ity by 2022. Separately, on a socio- political front, popular uprisings and demonstrations spread across much of North Africa and the Mid- dle East in a phenomenon that be- came known as ‘the Arab Spring’. 2011 was the year that the Inter- national Energy Agency (IEA) asked the question “Are we enter- ing the golden age of gas?”. Cer- tainly this seemed to be the case for the global LNG market, which expanded by 10%. The shale gas ‘revolution’ was progressing rap- idly in the USA. With self- suf- ficiency of natural gas in North America established, instead of importing LNG the industry was now signing the first export deals for future US LNG exports broadly priced at ‘Henry Hub plus’.

By May 2012, Japan itself had shut down all its nuclear reactors, but thanks to LNG imports it was able to use natural gas to make up much of the 30% loss of power generation capability. Globally however, international gas trade changed little year-on-year and surprisingly LNG trade actually decreased. Whilst the global gas market had become better connected than ever before the high spot price for LNG and fierce com- petition with coal for power gen- eration was having a dramatic ef- fect. 2013 saw a return to modest gas demand growth of 1.4% in the global energy market. During 2014, probably the most significant event was the de- cline in oil prices from well over $100/bbl to a range of $50-60/bbl by the end of the year. This has profound implications for the nat- ural gas industry and we will look at natural gas price movements late in this article. At the time of writing, authoritative global de- mand data for 2014 is not yet published, but indications are that the gas market has continued to expand, despite a further squeeze in Europe caused by slow economic growth, highly-subsidised renew- able energy and warmer than av- erage temperatures that reduced demand for space heating. Natural gas consumption in the European Union actually decreased by 11% to 409 bcm in 2014, and the industry is seriously considering strategic adjustments for the future.

Throughout all this, the natu- ral gas industry has developed and adapted to change. As the gas busi- ness has grown globally the interac- tions across the world have become increasingly significant, in particu- lar with many more countries in- volved in LNG trade. International relationships and trade in natural gas will be even more important in the future. This is particularly the case in Europe, where the decline in indigenous gas production seems inevitable. Reshaping the gas mar- ket in Europe to be ready for future challenges may well need to take a new course. There will still be ‘mega projects’ in other parts of the world, and there may well still be signifi- cant natural gas resources to be found and developed in some locations in Europe, but we are already seeing a new approach to the gas value chain developing. So that we can explore this phenomenon, I would like to de- scribe briefly the traditional gas business, including some basic technical information, so that we can understand better the invest- ments throughout the gas business and how they have been linked into a value chain. This structure is now starting to behave like a global network, with new delivery routes, new market sectors and new market participants doing business in new ways.

The natural gas value chain Natural gas is a mixture of hydrocarbons, of which by far the largest component is the simplest hydrocarbon, methane (CH4). Methane is an odourless, colour- less, non-toxic gas which is lighter than air. Synthetic natural gas and bio-gas are examples of increas- ingly important components that are being integrated into natural gas systems, but conventional and unconventional natural gas pro- duction, still provides more than 99% of global gas supplies. The gas business throughout the world has involved long-term invest- ment ‘from drill bit to burner tip’ to bring natural gas to final cus- tomers. The IGU diagram (Figure 2) illustrates, in a simplified form, the main components of the tradi- tional gas value chain. Exploration, production and processing Most of the natural gas that has been discovered so far was al- most certainly formed by similar biogenic processes to those that created oil reserves. Over millions of years the residues of decom- posed organic material under in- tense pressures and temperatures, have become hydrocarbon miner- als, including natural gas. These hydrocarbon minerals can be found both in the original source rock where they were formed (including shale formations) and also in more porous reservoir rocks that are the conventional oil and gas fields.

Natural gas also includes some heavier hydrocarbons, such as ethane (C2H6), propane (C3H8), butane (C4H10), and there can be a wide range of different non-hy- drocarbon gases that also occur in the mixture in the reservoir rocks. Indeed, gas production has often been a by-product of oil produc- tion and is then termed ‘associated gas’. Three different types of natu- ral gas production can broadly be categorise by the type of reservoir.

• ‘Dry gas fields’ requiring very little processing of the reservoir fluids needed to achieve
• pipeline quality gas;
• ‘Condensate gas fields’ in which the heavier natural gas hydrocarbons can be separated as
• natural gas liquids (NGLs); and
• Oil fields with ‘associated gas’, sometimes with a natural gas

cap that can be produced sepa- rately or temporarily re-injected to enhance oil production. Development plans and in- vestment decisions depend on the expected relative revenue streams from the gas and liquid hydrocar- bons, but even for dry gas fields the reservoirs themselves can vary in fundamental characteristics like the permeability of the reservoir rock. Extremely tight formations (for example shale gas reservoirs) require stimulation to enable the natural gas to be produced. Natural gas is abundant, but the reservoirs that are simple in struc- ture and closest to markets tend to be developed first. This means that investors may face a choice between developing remote conventional gas reserves or more difficult unconven- tional gas that is closer to the market and requires use of new technology. In practice both types of investment has occurred; as new technology is developed and proven the tech- niques can be applied more widely and the global economic reserve base increases.

Natural gas occurs in other forms, most notably as methane hydrate crystals. This is potentially a vast future source of natural gas, but for which at present production technology has not yet found an economically viable solution. Once produced the natural gas is likely to need some processing. If it is dry gas with very few impurities then it might be sufficient to check the gas quality and make sure that it is adjusted to the correct pressure and temperature for the next stage of its journey. More likely, however, is that it will also be necessary to treat the ‘wet’ gas that has come from the upstream reservoir to deal with one or more components that need to be removed to satisfy the gas quality requirements for on- ward transportation. International and national high pressure pipelines The locations of natural gas reserves are more diverse than for oil, but even so a large proportion of natural gas needs to be transported from the producing countries and regions with more gas than is need- ed internally like Norway, Russia, Qatar, the Caspian area and North Africa to the consuming countries and regions with demand that can- not be satisfied by indigenous gas

supplies, such as Japan, China and the European Union. International high pressure pipelines provide direct links from producers to consumers. Good relationships with any transit country (through which the pipe- line passes) are essential to main- tain high reliability of gas supply. Technically, these high pressure pipelines are immense feats of en- gineering that continue to be the main way by which vast interna- tional flows of gas are transported. Because the pipeline usually locks the gas producer into a particu- lar route to a certain market, the commercial and political condi- tions both in the transit countries and in the downstream market are crucial. This leads investors to fa- vour projects that are backed by long-term contracts in which one party has a strong market position midstream or downstream. Globally, however, there is, in total, far greater investment in gas transmission pipelines tak- ing place within individual coun- tries, for example in the USA and in China. The shale gas revolution in North America changed indig- enous supply patterns and led to many new onshore pipeline pro- jects to enable higher levels of gas production to be brought to mar- ket. In the USA, however, several of the main shale gas formations are relatively well positioned, ei- ther with good proximity to the final market or in economic reach of existing infrastructure. In con- trast, the geographical challenge to deliver indigenous natural gas to the main consuming areas has been far more demanding in Chi- na. The final length of the second West-East Pipeline linking gas production in the west to con- suming areas in the east was over 8,700 kilometres, including both east and west sections and eight branches, making it probably the world’s longest natural gas pipe- line. Construction of a third West- East Pipeline, to bring additional supplies from Turkmenistan as demand for natural gas in China continues to grow, is scheduled for completion before the end of 2015.

Liquefaction, LNG shipping and regasification Gas liquefaction, so that nat- ural gas can be more easily trans- ported by ship (or occasionally by road tanker) to the market where it is then regasified, has become almost as important as pipelines as a means of international deliv- ery of natural gas. Liquefaction involves pre-treatment to remove oil condensates, purify the natural gas from pollutants like sulphur or carbon dioxide, remove any traces of heavy metals and control the moisture level. Then the processed natural gas is refrigerated to reach a temperature down to approxi- mately minus 161 degrees Celsius.

This refrigeration process involves compression, condensation and expansion of refrigerants that ex- change heat with the natural gas until it becomes a liquefied natural gas (LNG) occupying 1/600th of the volume. A large enough LNG fleet of ships (or road tankers) is essential to prevent bottlenecks developing in the supply chain. Since January 1959 when the Methane Pioneer set off for Europe with its modest cargo of liquefied natural gas from the Louisiana Gulf coast of the USA, international LNG trade has developed a global fleet that now amounts to over 380 active ships, the largest carrying up to 266,000 m3 of LNG. Annual worldwide de- liveries are equivalent to well over 300 bcm of natural gas, about 10% of global consumption. Some countries have long been reliant on LNG, and like Japan and Korea have based successful downstream markets on a range of LNG supplies, but with the growth of international gas trade many more countries now have LNG re- ception terminals and there is a flourishing market in LNG deliver- ies and diversions to the markets with highest value. This flexibil- ity is of course only possible when there are sufficient ships available (a diversion may well result in a longer route) and sufficient capac- ity in the regasification terminals to where a ship might be diverted.

The capacity in the regasification terminal comprises not only the delivery slot to enable the ship to be unloaded, but also short-term storage of the unloaded LNG and regasification (in which LNG is warmed up) before compressing the natural gas into a national or local transmission pipeline. LNG is set to be an exciting growth area, with bold and inno- vative solutions being applied both upstream and downstream. An example of upstream innovation is the Shell operated Prelude gas field development off the NW coast of Australia. Rather than pipe the produced gas to the shore, the pro- ject involves a very large liquefac- tion ship that will float above the gas field and load LNG into con- ventional LNG carriers for onward delivery to market. Downstream, there are many more innovations in the LNG market, as illustrated in Figure 3, which is taken from the IGU 2015 LNG Review. The ‘re-export’ market from receiving terminals is evolving to distribute LNG as a fuel to further downstream mar- kets. Thus supplying off-grid net- works with gas and fueling the heavy trucking business (e.g. in China, the USA and Europe) and bunker business for barges notably in Europe. In the not too distant future we might also see the deep sea shipping fleet becoming an im- portant market for LNG.

Storage The ability to liquefy natural gas means that it can be stored and made available at very high delivery rates, but the process of liquefaction and storing LNG is often expensive. In many parts of the world gas demand is very sea- sonal and the storage of very large volumes of gas that are needed (for example for residential space heat- ing in northern hemisphere win- ters) is best achieved underground in natural geological formations, particularly if such structures can be found near the local pipeline grid that serves the centres of gas demand. Most of these structures used to be oil or gas reservoirs, which benefit from unproduced ‘cushion’ gas as well as confidence that the natural integrity has been proven for containing reservoir fluids at high pressures. Occa- sionally the geological conditions are right for gas storage in highly permeable rock that benefits from a hermetically sealed cap, like the sandstone formation in Latvia that allowed the development of the 4.4 bcm (2.3 bcm working volume) Inčukalns Underground Gas Stor- age (UGS) Facility, one of the largest in Europe. In all forms of UGS an im- portant component of the storage facility is the ‘cushion’ gas that remains in the store so that a rea- sonable withdrawal rate can be achieved. The ‘working gas’ in the store is injected (compressed) into the UGS on top of the cushion gas and it is this working volume that is taken out for the heating season or for other commercial reasons during the storage cycle.

Another form of UGS, which offers potentially higher delivery rates albeit sustainable perhaps over a number of weeks rather than throughout the winter months, is salt cavities. Here, the storage cavities of the optimum shape and size are leached out from the un- derground salt formation. The ability of storage facilities to add flexibility to the gas net- work and to help balance the in- puts and off-takes of gas suppliers is extremely important. Increased

use of intermittent renewable en- ergy sources creates more stress on energy grids. The ability of fast- response gas storage to respond to within-day fluctuations is allowing new dynamic ways to use storage, particularly for portfolio optimisa- tion and improvements in overall efficiency in liberalised markets. In comparison with the dif- ficulties of storing electricity or stockpiling coal, natural gas pro- vides very efficient and highly ef- fective ways of storing potentially vast amounts of energy with mini- mal impact on the environment and with the ability for rapid re- sponse through already connected networks. In aggregate this may also provide sufficient flexibility for national or regional ‘strategic’ purposes.

Local transmission and distribution The energy carried though a typical gas transmission pipe is far more than can be transmitted through the biggest high voltage electricity cables. Gas in the trans- mission system is at high pressure (typically 50-80 bar) and, depend- ing on the final use, may pass through a series of pressure reduc- tions, metering and quality checks leading to low pressure distribu- tion pipeline systems with their own pressure and flow controls and final metering at the supply point of the end consumer. Technology is enabling gas operations and gas markets to develop in ways that should lead to further efficiency improvements in grid operation and utilisation. Smart grid tech- nology as well as Smart metering still have a long way to go but have already demonstrated significant fuel savings through grid optimi- sation at Transmission level. The regulatory focus in com- petitive supply markets tends to be on the pipeline systems, with regional groupings of energy regu- lators aiming to enable third party access (TPA). In Europe, of course, we have ACER, the Agency for the Cooperation of Energy Regulators, which is instrumental in encour- aging a consistent approach to all

the gas transmission grids in the EU. Other regional regulatory ini- tiatives aim to foster competition and introduce incentives particu- larly for the interconnection or expansion of gas infrastructure in less developed markets. Whilst transmission and dis- tribution pipelines can become relatively safe cash-generating as- sets in a mature market, the ini- tial investment typically requires large capital input for a low-mar- gin business that is not provid- ing an economic return until the market has grown, and may take decades to reach payback. Initial downstream investment is often at least partially in public ownership, with the distribution (pipeline) ac- tivity in the same company as the local monopoly gas retail business. Clarity about government policies for public and private ownership is essential to avoid problems for po- tential investors. The regulatory regime must also be clear, so that the access conditions are under- stood and the tariff structure does not distort the market. LNG provides an alternative approach to the local distribu- tion of natural gas, by LNG road tanker (sometimes referred to as a virtual pipeline). As the markets expand for natural gas as a land vehicle fuel, either as LNG or CNG (Compressed Natural Gas), as well as fuel for ships, the use of these ‘virtual pipeline’ routes could add greater flexibility and security to the energy system as well as ena- bling locations to be serviced that might otherwise be sub-economic.

Utilisation The economic availability of natural gas combined with its quali- ties of efficiency, quality, reliability, convenience and responsiveness to the consumers’ needs make it an ideal choice for a wide range of uses in many part of the world. High efficiency gas boilers are the mainstream residential gas appliance in many countries. Commercial customers also pre- fer natural gas for space heating, either directly or as the fuel for a Combined Heat and Power system. Gas is also an ideal fuel for district heating systems and makes an excellent partner with intermit- tent renewable energy sources like wind and solar power. Industrial gas demand requires a more competitive offering in rela- tion to other fuels, but the proven high efficiency appliances that al- ready exist for natural gas could be a springboard for further growth in the manufacturing sector. Natural gas is also a useful feedstock for the petrochemical industry, and there are indica- tions that this use is developing in some producing nations as an alternative to exporting LNG or constructing a new international pipeline.

Whilst at a relatively low level, the use of natural gas as a trans- port fuel is possibly the most rapid- ly growing sector across the world. There are encouraging signs both onshore, with compressed natural gas fuelling millions more cars, trucks, busses and lorries, and off- shore with LNG-fuelled ships be- ing favoured over more polluting rivals in environmentally sensitive areas like here in the Baltic Sea re- gion. The Gas Target Model for Eu- rope, published by the Agency for Cooperation of Energy Regulators in January 2015, includes projec- tions of new uses of gas in the EU across four main areas, which are closely linked either with renew- able energy or LNG: • Natural Gas Vehicles (NGVs) using CNG or LNG; • Water transportation; • Power to Gas (P2G) technologies, using surplus renewable energy; and • Virtual Pipelines (Truck loading of LNG). With the right political support and economic stimulus, Fig- ure 5 shows that the contribution from these sectors could be very significant on a European scale within just five years. Globally, however, the use of natural gas for high efficiency, low-emission power generation re- mains the largest and most impor- tant growth sector, but the pros- pects vary across different regions of the world. How much and how rapidly the global gas market will grow is dependent on fundamen- tal economics, which in turn are influenced by political attitudes to energy and to climate change.

Wholesale gas prices and how they are formed? Natural gas prices, and how they are formed, influence the economic viability of investment and market development. One as- pect of the IGU Committee work over the last ten years has been to monitor wholesale gas price trends. There are several aspects to this work, which are described in detail in the 2015 Report by the IGU Strategy Committee. Whilst the global energy markets are better connected than ever before, the average wholesale natural gas prices at the beginning of this year at Henry Hub in the USA were under $3/million British thermal units (mmBtu), Europe was around $7-8/mmBtu and Japa- nese LNG over $15/mmBtu.

Figure 6 shows how natural gas prices rose in these three mar- kets during 2007 and 2008, and then collapsed following the oil price fall in summer 2008. Whole- sale gas prices are formed in dif- ferent ways throughout the world. Where price formation is based on traded gas markets, as in the USA and the United Kingdom, an adjustment to the perception of available supply and demand for natural gas is quickly reflected in the wholesale price. Price forma- tion that contractually links the natural gas price to an index of a competing fuel (e.g. crude oil as in many Japanese LNG purchase con- tracts, or oil products as in many Russian international sales con- tracts) both delay and dampen the changes. By the summer of 2009 natural gas wholesale prices across the world had ‘bottomed- out’, but with the oil-indexed prices re- maining significantly higher than the traded gas market prices.

Then, in 2010 divergence into three clear pricing areas occurred, with the US shale gas surplus keeping Henry Hub prices low and, with no physical ability to export the surplus gas (instead the USA exported some displaced indig- enous coal) while the gas prices in Europe and Asia were pulled up

by the higher oil price and the in- creased gas demand. IGU has carried out several sur- veys to determine how the methods of gas price formation have changed over the last decade. During this time there has been a slow move- ment away from ‘oil’- indexation and an increase in gas market based pricing where this is technically pos- sible. Regulatory and government determinations of wholesale gas prices still remain important, par- ticularly in less developed markets, but the types of regulatory controls are themselves changing to more cost- reflective methods. The trend towards wholesale natural gas prices being based on the prices in traded gas markets has been driven by the expansion of gas-on-gas competitive markets in which consumers have been able to seek suppliers with the lowest price offerings. At the same time, the contractual linkage of the nat- ural gas price to relatively high- priced oil products has placed the agreements with traditional large gas supplying countries like Russia under considerable pressure. With the fall in oil prices the differen- tial between oil-indexed and gas hub traded prices is now changing. But already in Europe2 overall, as shown in Figure 8 there has been sufficient confidence in the traded gas markets to link more than 60% of the physical wholesale gas sales to the prices at gas hubs in com- petitive markets.

A partnership with renewable energy There is a growing realisa- tion that natural gas can be a per- fect partner for renewable energy. There are, however, difficult chal- lenges in making investment deci-

sions in capital intensive projects when the plant is not expected to operate most of the time. Some bespoke projects already successfully combine gas and re- newable energy because of the lo- cal circumstances, but in general an energy market design is needed to ensure that there can be widespread and large-scale implementation. The way natural gas is priced can also influence whether the best environmental choice are made, and this can work both ways. Where the wholesale natural gas price is too high then efficient low emission gas-fired CCGTs can- not compete with cheap coal-fired plant, whereas if the gas price were unusually low (as occurs in parts of the Middle East, for example) then worthwhile renewable energy pro- jects face undue economic barriers. Governments or their agen- cies have an important role to help the market achieve the best eco- nomic solutions for sustainable and secure development of the energy system. Among the things that IGU has recommended are:

• to encourage investment in re-search and technology to deliv-er their political objectives;
• to avoid picking winners and losers, but rather to incentivise those industries that deliver re- sults (e.g. better to have a ‘cost for carbon’ than ongoing sub- sidy of a particular source ofenerg y);
• to ensure that there are no un-due subsidies or taxes that dis-tort the market; and
• to see first if the removal ofexisting incentives or obliga- tions would be a more efficient solution than adding a new in- centive or obligation on energy companies.There are already signs that, with such good practice, the world might be turning a corner and get- ting CO2 emissions on a downward trend. In March 2015, the IEA an-

nounced that global anthropogenic CO2 emissions had stabilised in 2014 while world GDP increased (by 3%). This was the first time in 40 years that the global economy grew without increasing emissions, and was attributed to changes in ener- gy consumption patterns in China and OECD countries. Increased use of solar and wind energy no doubt contributed to this success, but the continuing shale gas revolution in North America combined with the expansion of the Chinese natural gas market were probably decisive factors that have enabled CO2 re- ductions from the world’s two dom- inant energy consumers. Adapting gas business models to the changing energy world Investor groups associate companies with a particular part of the natural gas value chain be- cause the risks, required skill sets, and critical success factors vary considerably. Often there are dif- ferent laws and fiscal systems gov- erning the upstream, midstream and downstream components. To manage the commercial risks, however, companies have often sought to integrate along the value chain, particularly if there are is no developed trading hub availa- ble to enable them to manage price and volume risks.

Throughout the gas chain the investor assesses and manages the risks in the hope of achiev- ing a return on their investment. Commercial risk relates primarily to the investment and operating costs and the volumes and prices of gas. Political and regulatory un- certainties can be the determin- ing factor as to whether or not the commercial risk is acceptable.

Whatever the prevailing ide- ology and legislative systems, suc- cessful natural gas development and continued industry growth needs to be based on co-operation and mutual commercial prosperity all along the value chain. Business models, however, continue to change. Physically, the gas industry still relies on large infrastructure to create the back- bone of the business, but increas- ingly there are many smaller pro- jects that, joined together, create an even stronger market. We can image this as a large single chain being slowly replaced by a woven mesh that is both more flexible and more resilient for the benefit of the final customers. Within this mesh there should be room for local en- ergy sources, whether synthetic natural gas, bio-methane or shale gas, as well as a diversity of tradi- tional and conventional deliveries of LNG and pipeline gas.

In conclusion: the Baltic Sea re- gional gas market in focus The gas market in the Baltic Sea region is quite diverse internally, but until re- cently it was characterised by a lack of connectivity with the rest of Europe and a lack of supply diversity in most countries. There have already been some investments made to address these issues, notably with the LNG reception terminal at Świnoujście in Poland and the Klaipėda floating LNG storage and regasification facil- ity in Lithuania. Since 2010 Finland has had an LNG production facility in operation at Porvoo in the South of the country. Plans for LNG terminals at the port of Turku and at Tornio in BSR Policy Briefing 1 / 2015 the North aim to bring LNG directly to Finland, making the gas and fuel markets more versatile and supplying LNG for vessels operating on the Baltic Sea. There are several other LNG im- port, storage or redistribution pro- jects under consideration, including a large-scale terminal at Inkoo near the landing point of a proposed Bal- tic Interconnector offshore pipeline linking the Estonian and Finnish gas markets. A further dimension would be a St Petersburg LNG facility. This idea was re-launched last year as a project in which the plant’s output would be supplied to the Kaliningrad area and also used for bunkering and

small LNG cargoes in the Baltic Sea region. Encouraged by the new SECA (Sulphur Emission Control Areas) rules, ferries are changing fuel to LNG. In Sweden (Gotenburg), fer- ries have already switched to LNG as bunker fuel, being much more environmentally friendly than the Marine Fuel Oil that was previously used In addition to the well-known Nord Stream offshore pipeline de- velopment, there have also been enhancements to the onshore pipe- line systems to allow reverse flow from Germany to Poland, and to in- crease the capacity to Denmark and Sweden. Plans for further intercon- nection seem limited because of un- certainty about future gas demand growth in the region. Transporting gas as LNG may well allow better economic options in such cases. In Poland, where natural gas is recognised as an environmentally advantageous replacement for coal- fired power generation and where indigenous shale gas production remains a real possibility, the na- tional demand for natural gas is ex- pected to rise significantly. In some countries in the Baltic Sea region however, the national energy plans suggest that natural gas consump- tion is expected to be displaced by renewable energy. Each country may well have a different optimum balance, but we can learn two les- sons from what is happening in the rest of Europe and indeed through-out the world. Firstly, gas markets that are better connected can sup- port each other at times of stress or disruption of the energy markets, and secondly the increase in the use of intermittent renewable energy sources requires a reliable low-car- bon partner such as natural gas. For a sustainable future it is important to retain, and better to grow, the share of gas in the energy mix.

Technology continues to de- velop and to provide solutions for the variety of energy challenges faced in the region. Here you are at the cutting edge, breaking new ground with the Klaipėda floating LNG terminal in Lithuania, exploit- ing bio-gas potential for vehicle transport in Sweden and creating Synthetic Natural Gas from wood in Finland. Developments in the fuel and bunker market already make this the primary local growth area Notes:

for LNG. Further developments in utilisation of gas in all its forms will help to expand the global market and establish natural gas new sec- tors with overall benefits for energy efficiency and the environment. We live in a complex world of change, with wide ranging risks that are faced by countries and com- panies. Here in the Baltic Sea re- gion, as in the rest of the world, we need to strive for closer cooperation and to improve our shared commer- cial and technical understanding of what is needed to facilitate invest- ment in the gas market. This will help to deliver a secure low-carbon energy future for us all. Let the dynamic evolution continue! Published in BSR Policy Briefing 1 / 2015, Centrum Balticum, www.centrumbalticum.org 

The article of Maria Gracheva examines the characteristics of Germany’s trade with the countries that along with the FRG are the members of the Council of the Baltic Sea states. The analysis is based on the statistics of German federal statistical office (Statistisches Bundesamt) in the period of 1992-2014. The author considers such indicators as the share of Baltic states in the German foreign trade turnover, the volumes of Germany’s trade with the particular countries, the trade’s breakdown into the commodity groups. The main Germany’s trade partner countries and the key trade growth/downturn drivers among Baltic countries are identified. Special attention is paid to the peculiarities of the commodity structure of the Germany’s trade with the particular countries, including their comparison with the relevant indicators of the total German foreign trade. The main commodities of the Germany’s export/import to/from Baltic countries by the three-digit classification are analysed as well as the roles of the particular countries as the German buyers and suppliers. Some important facts of the period of 2008-2014 are registered, such as the decline of the oil/gas import from Norway and Russia and the growth of the oil products’ import from Russia. The data of German- Baltic trade’s reduction in the first quarter of 2015 are presented and explained chiefly by the negative dynamics of the Russian import due to the termination of the compensation by means of the oil products. The author comes to the conclusion, that in two-three years already Russia can come down to the Germany’s second-class trade partners, and within the Baltic region the main beneficiaries thereon will be Poland, Sweden and Norway. 

The Baltic States are important trade partners of Germany: in 2014 their share in the foreign trade turnover of Germany amounted to 13.3%, including 12.2% in exports from Germany and 14.6% in imports into the Federal Republic of Germany (the rest of European countries accounted for 56.0% of the German turnover, including 55.8% of exports and 56.4% of imports)[1].

 

Pic. 1. Role of the Baltic States in the foreign trade of Germany

 

(Share of import from the Baltic States in the cumulative import to Germany

Share of export to the Baltic States in the cumulative export from Germany)

 

In 1992-2008 indicators of the Baltic countries showed a relatively constant growth: from 8.8 to 14.2% of turnover, including a growth from 8.1 to 13.4% of exports from Germany and a growth from 9.6 to 15.0% of imports into Germany (see. Fig. 1), while the share of the rest of European countries declined (turnover – from 66.1 to 58.5%, exports from Germany – from 68.9 to 61.1%, and imports into Germany – from 63.1 to 55.4%). Since 2009, there has been a downward trend in the role of both the Baltic States and other European countries in the foreign trade of Germany (the importance of the countries of Asia – primarily China, by contrast, has increased). Information on the volumes of German trade with individual countries of the Baltic region is presented in Tables 1 and 2.

 

Table 1. Trade between Germany and the Baltic States in 1992-2014.

Country/ group of countries	1992-2014
	Turnover, Germany			Export from Germany			Import into Germany			Balance for Germany
	Bln euro	%	position	Bln euro	%	position	Bln euro	%	position	Bln euro	%
Poland	919,9	3,07	1	518,2	3,18	1	401,7	2,95	2	116,5
Russia	855,2	2,86	2	387,8	2,38	2	467,4	3,43	1	-79,6
Sweden	580,3	1,94	3	342,2	2,10	3	238,1	1,75	4	104,1
Denmark	472,7	1,58	4	260,7	1,60	4	212,0	1,56	5	48,7
Norway	431,0	1,44	5	125,1	0,77	6	305,9	2,25	3	-180,9
Finland	280,7	0,94	6	150,1	0,92	5	130,6	0,96	6	19,5
Lithuania	51,9	0,17	7	32,3	0,20	7	19,6	0,14	7	12,6
Latvia	29,2	0,10	8	19,6	0,12	8	9,6	0,07	8	10,0
Estonia	26,2	0,09	9	18,8	0,12	9	7,4	0,05	10	11,4
Iceland	16,0	0,05	10	6,7	0,04	10	9,3	0,07	9	-2,6
Total Baltic States	3.663,1	12,24		1.861,4	11,41		1.801,7	13,23		59,7	2,22
Whole world	29.926,6	100,00		16.307,5	100,00		13.619,1	100,00		2.688,4	100,00

Note: The Baltic States are presented in descending order of their turnover with Germany in 1992-2014.

 

Table 2. Main partner countries of Germany in its trade with the Baltic States in 1992 and in 2014.

Indicator	Country	1992		Indicator	Country	2014
		Bln euro	%			Bln euro	%
Turnover Germany – Baltic States	Sweden	14,7	24,9	Turnover Germany – Baltic States	Poland	87,5	32,1
	Denmark	14,0	23,7
					Russia	67,7	24,8
	Poland	8,4	14,3
	3 main countries, total	37,1	62,9		2 main countries, total	155,0	56,9
	Turnover Germany – Baltic States, total	59,0	100,0		Turnover Germany – Baltic States, total	272,8	100,0
Export from Germany to the Baltic States	Sweden	7,5	26,9	Export from Germany to the Baltic States	Poland	47,7	34,4
	Denmark	6,6	23,8		Russia	29,3	21,1
	2 main countries, total	14,1	50,8		2 main countries, total	77,1	55,5
	Export from Germany to the Baltic States, total	27,8	100,0		Export from Germany to the Baltic States, total	138,9	100,0
Import from the Baltic States to Germany	Denmark	7,3	23,5	Import from the Baltic States to Germany	Poland	39,8	29,7
	Sweden	7,2	23,1
					Russia	38,4	28,7
	Norway	4,7	14,9
	3 main countries, total	19,2	61,6		2 main countries, total	78,2	58,4
	Import from the Baltic States to Germany, total	31,2	100,0		Import from the Baltic States to Germany, total	133,8	100,0
Balance for Germany – cumulative surplus	Sweden	0,3	90,0	Balance for Germany – cumulative surplus	Poland	8,0	32,0
					Sweden	7,4	29,6
	1 main country, total	0,3	90,0		2 main countries, total	15,4	61,7
	Cumulative surplus for Germany, total	0,3	100,0		Cumulative surplus for Germany, total	25,0	100,0
Balance for Germany – combined deficit	Norway	-1,8	47,6	Balance for Germany – combined deficit	Norway	-10,7	53,7
	Denmark	-0,7	19,2
	2 main countries, total	-2,5	66,8		One main country, total	-10,7	53,7
	Combined deficit for Germany, total	-3,7	100,0		Combined deficit for Germany, total	-20,0	100,0

Note. The main partners are listed as countries in descending order with the largest volume of trade, export, import and balance, which together accounted for more than 50% of the respective indicators in 1992 and 2014.

 

Within the whole period of 1992-2014, Germany’s main partners among the ten Baltic States were the following four countries – Poland, Russia, Sweden and Norway, including:

- Poland, Russia, Sweden – in turnover and exports from Germany,

- Russia, Poland, Norway – in imports to Germany,

- Poland and Sweden – in surplus for Germany,

- Norway – in deficit for Germany.

 

For more than twenty years there have occurred major shifts: in 1992, the most important contractors were Sweden, Denmark, Norway and Poland; now Denmark is not among them, and Sweden and Norway have been overshadowed by Poland and Russia.

In 1992-2014 Germany formed a surplus in trade with the Baltic countries totaling 60 billion euros, but its share in the German foreign trade surplus as a whole (2.7 trillion euros) was only 2.2% – much lower than the corresponding figures of turnover (12.2 %), exports from Germany (11.4%) and imports to Germany (13.2%). This situation is due to the sustained deficit in German trade with Norway and Russia (these countries are on the second and third places after the Netherlands in terms of the German trade deficit). In 1992-2003 the German-Baltic trade balance was variable with a predominance of the negative balance for Germany. Since 2004 it has become steadily positive for Germany (mainly due to a rapid increase of surplus in the trade with Poland).

Key countries to determine the dynamics of the German trade with the Baltic States are shown in Tables 4 and 5. The most powerful driving forces in general over the last 22 years were Poland and Russia (they were the main factors of growth both in exports from Germany, as well as in imports into Germany, and in 1992-2014 provided respectively 37 and 28% of growth of the German-Baltic turnover). Sweden and Norway took the second place (with growth of 10% and 9%).

 

Table 4. Key forces – countries of the German – Baltic trade in 1992-2014, 1992-2000 and in 2000-2008.

Country/group of countries

Total change 2014/1992

Change 2000/1992

Change 2008/2000

Export from Germany

Import into Germany

Export from Germany

Import into Germany

Export from Germany

Import into Germany

Growth

Growth share

Growth

Growth share

Growth

Growth share

Growth

Growth share

Growth

Growth share

Growth

Growth share

Bln euro

%

Bln euro

%

Bln euro

%

Bln euro

%

Bln euro

%

Bln euro

%

Poland

+43,5

+39,2

+35,5

+34,6

+10,3

+34,3

+7,7

+23,5

+26,2

+35,3

+13,9

+24,3

Russia

+26,1

+23,5

+34,5

+33,6

+10,8

+33,1

+25,7

+34,5

+22,4

+39,1

Sweden

+6,0

+20,1

Growth in the Baltic countries

+111,1

+100,0

+102,7

+100,0

+30,1

+100,0

+32,7

+100,0

+74,3

+100,0

+57,3

100,0

 

Table 5. Key forces – countries of the German – Baltic trade in 2008-2014 and 2012-2014.

Country/group of countries

Change 2014/2008

Change 2014/2012

Export from Germany

Import into Germany

Export from Germany

Import into Germany

Growth

Decline

Growth share

Decline share

Growth

Decline

Growth share

Decline share

Growth

Decline

Growth share

Decline share

Growth

Decline

Growth share

Decline share

Bln euro

%

Bln euro

%

Bln euro

%

Bln euro

%

Poland

+7,0

+65,4

+13,9

+85,2

+5,9

+62,1

+6,7

+77,7

Russia

-3,0

-76,4

-8,8

-99,5

Norway

-3,1

-82,0

-7,0

-59,7

Growth in the Baltic States

+10,7

+100,0

+16,3

+100,0

+9,5

+100,0

+8,7

+100,0

Decline in the Baltic States

-3,9

-100,0

-3,8

-100,0

-8,8

-100,0

-11,8

-100,0

Note. The main factors are countries listed in descending order with the largest increase/reduction of export/import, which total share in the growth/decline of the corresponding indicators was more than 50%.

 

In certain periods the following countries were the main trade partners:

- In 1992-2000: for exports from Germany – Poland and Sweden (growth factors), for imports into Germany – Russia and Poland (growth factors);

- In 2000-2008: for exports from Germany – Poland and Russia (growth factors), for imports into Germany – Russia and Poland (growth factors);

- In 2008-2014 years in general and in 2012-2014 in particular: for exports from Germany – Poland (growth factor) and Russia (recession factor), for imports into Germany – Poland (growth factor), and Norway (recession factor).

Poland would return as a source of positive pulses after each case of decrease of the indicators of its trade with Germany in 1992-2014. Russia, too, managed to do this for 20 years, but in the last two years it has dramatically changed its role, becoming the brake of the German-Baltic trade instead of its accelerator. The share of Poland in the foreign trade turnover of Germany rose from 1.3% in 1992 to 4.3% in 2014, the corresponding indicator for Russia rose from 1.1 to 3.3% (maximum – 4.0% – was achieved in 2012).

As for the remaining six of the Baltic countries, among them are two larger counterparts of Germany – Denmark and Finland, and four smaller – three post-Soviet states (Lithuania, Latvia, Estonia) and Iceland. Both in 1992-2000 and in 2000-2008, all six countries were factors of growth for the trade between Germany and the Baltic States (being inferior to a group of four countries mentioned above). But in 2008-2014 only the new European trio played a positive role, while the “old Europeans” generated negative pulses (Finland and Iceland – in both directions of trade, Denmark – for imports to Germany). As a result, the total share of Lithuania, Latvia and Estonia in the foreign trade turnover of Germany rose from 0.1% in 1992 to 0.4% in 2014, thus indicating that the growth rate of Germany’s trade with these countries turned out to be the highest within the Baltic region.

Distribution of the indicators of the German trade with the Baltic countries and the whole world for four product groups, that are classified in accordance with the increase in the degree of processing of the goods (and, consequently, increase of the share of value added in the value of goods), is presented in Tables 6 and 7.

 

Table 6. Structure of the goods of the German – Baltic trade in 2014, % of turnover between Germany and the Baltic States

Indicator/goods group (code, name)			Poland	Russia	Sweden	Norway	Denmark	Finland	Lithuania	Estonia	Latvia	Iceland	Turnover Germany – Baltic States, total
Export from Germany	1-4	Food	1,5	0,4	0,5	0,2	1,0	0,3	0,1	0,0	0,1	0,0	4,2
	5	Raw materials	0,2	0,0	0,1	0,0	0,3	0,0	0,0	0,0	0,0	0,0	0,6
	6	Semi-processed goods	1,6	0,2	0,3	0,1	0,3	0,2	0,0	0,1	0,0	0,0	2,8
	7-8	Finished products	14,1	10,4	7,0	2,9	4,5	2,8	0,8	0,5	0,5	0,1	43,6
Import into Germany	1-4	Food	1,7	0,1	0,1	0,2	1,2	0,0	0,1	0,0	0,0	0,0	3,5
	5	Raw materials	0,3	10,2	0,3	6,1	0,3	0,0	0,0	0,0	0,0	0,0	17,3
	6	Semi-processed goods	1,2	3,7	0,8	0,6	0,2	0,6	0,1	0,0	0,0	0,1	7,3
	7-8	Finished products	10,8	0,7	3,8	0,4	2,3	2,0	0,3	0,1	0,1	0,0	20,7
Turnover Germany – Baltic States, total*			31,4	25,7	12,9	10,5	10,2	5,9	1,5	0,8	0,8	0,3	100,0

* excluding returned, replaced and not allocated by commodity groups goods.

Note. The Baltic countries are presented in descending order of their turnover with Germany in 2014.

 

Table  7. Structure of the goods of the German – Baltic trade and the overall German foreign trade in 2014, % of export/import/turnover of certain countries, Baltic States and the whole world.

Indicator/goods group (code, name)			Poland	Russia	Sweden		Norway		Denmark			Finland			Lithuania	Estonia	Latvia	Iceland	Baltic States, total	Whole world
Export from Germany	1-4	Food	8,4	4,0	6,8		7,4		16,4		8,4			11,6		7,7	10,2	12,1	8,2	6,0
	5	Raw materials	1,2	0,3	0,9		0,4		4,4		0,4			0,4		0,5	0,9	0,2	1,2	1,6
	6	Semi-processed goods	9,0	1,7	4,4		3,2		5,1		6,1			3,5		10,1	4,3	2,3	5,5	5,6
	7-8	Finished products	81,4	94,0	88,0		89,1		74,1		85,1			84,5		81,7	84,6	85,4	85,1	86,9
	Export from Germany, total		100,0	100,0	100,0	100,0		100,0			100,0			100,0		100,0	100,0	100,0	100,0	100,0
Import into Germany	1-4	Food	11,9	0,6	2,8	2,8		28,6		1,1			21,2			6,0	14,8	17,2	7,1	8,5
	5	Raw materials	2,4	69,6	5,8	83,6		7,7		0,6			2,5			9,8	9,1	2,7	35,6	11,6
	6	Semi-processed goods	8,7	25,2	16,0	7,8		5,9		21,0			16,1			14,0	11,0	68,4	15,1	8,7
	7-8	Finished products	77,0	4,6	75,4	5,8		57,8		77,3			60,2			70,2	65,1	11,7	42,2	71,2
	Import to Germany, total		100,0	100,0	100,0	100,0		100,0		100,0			100,0			100,0	100,0	100,0	100,0	100,0
Turnover of Germany	1-4	Food	10,0	2,0	5,3	4,2		21,2		5,1			15,1			7,4	11,5	15,2	7,6	7,1
	5	Raw materials	1,7	39,7	2,8	58,1		5,7		0,5			1,1			2,5	3,2	1,7	18,0	6,0
	6	Semi-processed goods	8,9	15,1	8,8	6,4		5,4		12,8			8,1			11,0	6,2	42,4	10,2	7,0
	7-8	Finished products	79,4	43,2	83,1	31,3		67,6		81,6			75,6			79,1	79,1	40,8	64,2	79,9
	Turnover Germany – Baltic States, total*		100,0	100,0	100,0	100,0		100,0		100,0			100,0			100,0	100,0	100,0	100,0	100,0

* excluding returned, replaced and not allocated by commodity groups goods.

Note. The Baltic countries are presented in descending order of their turnover with Germany in 2014.

 

The main part of the German-Baltic trade (52.6% of the turnover) is in:

- German exports of finished products into Poland (14.1%), Russia (10.4%) and Sweden (7.0%),

- Import of finished products from Poland (10.8%) and raw materials from Russia (10.2%).

 

A substantial component is also import of raw materials from Norway (6.1%). In other cases, the share of product groups by country does not exceed 5%. Germany has a positive balance in the German-Baltic trade of food and finished products, and a negative balance – in the trade in raw materials and semi-processed goods. The total surplus for Germany consists mainly of excess surplus in finished products (Poland and Sweden) over the deficit of raw material (Norway and Russia).

The structure of German exports to the Baltic States and the overall German exports are very similar: the maximum difference (the share of food) is only slightly more than two percentage points. German imports from the Baltic States, by contrast, strongly deviates from the overall German import: on the one hand, by the shares of raw materials and semi-finished goods (the German import from the Baltic States has, respectively, 24 and 6 percentage points more than the overall German import); on the other hand, by the share of finished products (the German import from the Baltic States has 29 percentage points less than the overall German import). As a result, the basis of turnover of Germany with the world and with the Baltic States is the same – products with a higher degree of processing, namely finished products (64 and 80%, respectively), but the value of the goods with a low and medium degree of processing – raw materials and semi-finished products – in the German – Baltic trade is much larger (28%) than in the foreign trade of Germany as a whole (13%).

The structure of German exports in each of the Baltic countries is characterized by a common main feature – a strong dominance of finished products (ranging from 74.1% in Denmark to 94.0% in Russia; average Baltic and average world indicators are, respectively, 85.1 and 86.9%). At the same time, six countries have an additional focus: on food – Denmark (16.4%), Iceland (12.1%), Lithuania (11.6%), Latvia (10.2%) with the average Baltic and average world level of, respectively, 8.2 and 6.0%; semi-processed goods – Estonia (10.1%) and Poland (9.0%) with the average Baltic and average world level of, respectively, 5.5 and 5.6%. In four countries (Norway, Sweden, Finland, Russia) there are no such focuses.

As sources of the German import certain Baltic countries show considerable specificity. The most striking peculiarity is that of these three importers with an extremely low share of finished products (Russia – 4.6%, Norway – 5.8%, Iceland – 11.7%). For the rest of the Baltic countries this figure ranges from 57.8 to 77.3%, the average Baltic value is 42.2%, the world average is 71.2%. The above mentioned three countries are specialized in: Norway and Russia – raw materials (83.6 and 69.6%, respectively), Iceland – semi-processed goods (68.4%). Russia has an additional emphasis on semi-processed products (25.2%), Norway and Iceland do not have it. Since the absolute volume of imports of semi-processed products from Iceland is very small, the above-noted important role of the Baltic States for Germany as a source of raw materials and semi-processed products is concentrated in only two of the ten countries – Russia (raw materials and semi-processed products) and Norway (raw materials).

Among the other seven importers, who are leaders in finished products, two groups with additional focuses can be distinguished:

• focus on food – Denmark (28.6%), Lithuania (21.2%), Latvia (14.8%), Poland (11.9%) with the world average of 8.5%;

• on semi-processed products – Finland (21.0%), Lithuania (16.1%), Sweden (16.0%), Estonia (14.0%) with the world average of 8.7%.

The concretization of these features in the context of three-digit product classification is presented in Tables 8 and 9.

 

Table 8. Main goods of the German export in the Baltic States in 2014.

Country	Main goods of export from Germany to a country				Main goods of the additional export focus of the country
	Goods (code, name)	Share in the export from Germany to a country, %	Share of a country in the overall German export of these goods, %	Position of the country in the overall German export of the goods	Goods position (code, name)	Share in the export of Germany to a country, %
Norway	885. Passenger cars	19,2	1,3	18
Latvia	885. Passenger cars	12,4	0,1	48	423. Strong alcohol beverages	1,2
Sweden	885. Passenger cars	11,6	2,0	14
Iceland	885. Passenger cars	9,9	0,0	78	206. Fish, shellfish, mussels	2,1
Estonia	861. Equipment for production and distribution of electricity	9,2	0,3	44	669. Oil products	4,3
Finland	885. Passenger cars	8,4	0,6	27
Russia	884. Automobile components	8,3	3,3	10
Poland	884. Automobile components	8,2	5,1	6	669. Oil products	3,7
Denmark	861. Machinery for production and distribution of energy	5,3	1,7	18	204. Meat and meat products	3,9
Lithuania	834. Pharmaceutical products	5,0	0,2	49	395. Other foods of plant origin	1,6

Note: The Baltic countries are presented in descending order of the proportion of the main export commodity in the exports from Germany in 2014.

Table 9. Main goods of the German import from the Baltic States in 2014.

Country	Main goods of the import into Germany from a country				Main goods of the additional import focus
	Goods (code, name)	Share in the import into Germany from a country, %	Share of a country in the overall German import of these goods, %	Position of a country in the overall German imports of the goods	Position of the goods (code, name)	Share in the import into Germany from a country, %
Norway	518. Oil and natural gas	82,0	18,9	2
Russia	518. Oil and natural gas	66,6	30,8	1	669. Oil products	16,3
Iceland	645. Aluminum and aluminum alloys, including waste and scrap	64,3	5,6	8
Finland	708. Paperandcardboard	20,4	19,0	2	608. Semi-finished products of cellulose fiber	5,5
Poland	884. Automobile components	13,2	10,6	3	Fish, shell fish, mussels	2,0
Sweden	708. Paper and cardboard	12,1	21,3	1	608. Semi-finished products of cellulose fiber	4,2
Estonia	815. Items made of wood (apart from furniture)	11,6	2,2	10	607. Lumber	5,7
Lithuania	875. Furniture	10,0	1,3	18	206. Fish, shell fish, mussels	7,1
Latvia	709. Plywood and plywood sheets, chipboards	8,2	2,6	11	383. Oil cake	5,2
Denmark	834. Pharmaceutical products	6,9	2,1	11	204. Meat and meat products	6,7

Note. The Baltic countries are presented in descending order of the share of the main imported goods in the imports of Germany in 2014.

 

Passenger cars belonging to the product group “finished products” are the main commodity items of the overall German exports (0.9%), German exports to the Baltic States (6.9%) and German exports into five Baltic countries (Norway, Latvia, Sweden, Iceland , Finland). “Automotive components”, which are close to the group of passenger cars, are the leader in exports from Germany to Russia and Poland. Only in three cases, the leading role is played by other products, also belonging to the group of “finished products”- equipment for the production and distribution of electricity (Estonia and Denmark) and pharmaceutical products (Lithuania). Five countries (Poland, Russia, Sweden, Norway, Denmark) are in the top twenty of the German consumers for the corresponding main goods, with the highest position – the sixth in export of automobile components from Germany –is held by Poland. Two countries (Estonia and Poland) have the same additional export emphasis on semi-finished products (oil products), and there is no unity for countries with a focus on food.

Oil and natural gas belonging to the commodity group “raw material” are the main position of the overall German imports (9.5%), German imports from the Baltic States (32.9%) and German imports from Norway and Russia. Imports from Iceland to Germany are focused on aluminum (group “semi-finished products”). Specialization on the group “finished products” is characteristic of German imports from the other seven Baltic countries, including: specialization on products related to the processing of wood – from Finland, Sweden (paper and cardboard), Estonia (wood products except furniture), Lithuania (furniture), Latvia (plywood); on automotive components – from Poland, for pharmaceutical products – from Denmark. All Baltic countries are in the top twenty of the German suppliers of the relevant main products, with the highest – the first – positions held by Russia (oil/gas) and Sweden (paper/cardboard). Semi-finished products as an additional import emphasis are closely related to the main item: in Russia – oil products (to oil/gas), in Finland and Sweden – semi-finished products made of cellulose (paper/cardboard), Estonia – lumber (with woodwork).

Norway offers the highest shares in the main goods both in the export from Germany, and in the imports to Germany, but if for passenger cars, the figure is 19.2% of German exports, for oil/gas it is extremely high – 82.0% of German imports. Concentration of German imports on a single goods group is also characteristic of Russia (oil/gas – 66.6%) and Iceland (aluminum/aluminum alloys – 64.3%), while in other countries the figure is in the range of 6, 9 to 20.4%. In fact, German import from Norway, Russia and Iceland is monocultural, and monocultural are items of low-grade processing. Before the crisis, which began in autumn 2008, this one-sidedness did not prevent active growth of imports from these countries, but in 2008-2014 the cumulative decline in German imports from the Baltic States in the context of the four commodity groups appeared to be by about 3/5 due to the reduction of imports of oil/gas from Norway and Russia: Norway had more than ⅓, and Russia – about ¼ of this recession. As a result, imports from Norway in 2008-2014 decreased by 13.8%, while imports from Russia increased by 3.5%. However, this happened only because reduction of Russian imports of oil/gas was more than offset by a rise in imports of Russian oil products.

In the first quarter of 2015 this compensation was no longer valid. Trade turnover between Germany and Russia showed the most negative dynamics among the Baltic countries. Changes in the German-Baltic trade in the first quarter of 2015 compared to the same period in 2014 are presented in Tables 10 and 11.

 

 

 

 

Table  10. Trade between Germany and Baltic States in 2014-2015.

Country/Group of countries	Turnover			Export from Germany			Import into Germany			Balance for Germany
	January – March  2014	January – March 2015	Change, 2015/2014	January – March, 2014	January – March, 2015	Change, 2015/2014	January – March 2014	January – March 2015	Change, 2015/2014	January – March,  2014	January – March  2015
	Bln euros		%	Bln euros		%	Bln euros		%	Bln euros
Poland	20,9	23,3	111,2	11,4	12,4	109,5	9,6	10,8	113,2	1,8	1,6
Russia	18,1	12,4	68,4	7,5	5,0	66,1	10,5	7,4	70,1	-3,0	-2,4
Sweden	8,9	9,1	101,8	5,3	5,6	105,4	3,6	3,4	96,5	1,8	2,2
Denmark	7,1	7,1	99,8	4,0	4,4	108,5	3,0	2,7	88,3	1,0	1,7
Norway	7,3	6,5	89,7	1,9	2,1	106,5	5,3	4,4	83,5	-3,4	-2,4
Finland	3,9	4,2	107,5	2,2	2,3	101,1	1,7	2,0	116,0	0,5	0,3
Lithuania	1,0	1,0	104,7	0,6	0,6	104,9	0,4	0,4	104,3	0,2	0,2
Estonia	0,6	0,5	85,8	0,5	0,4	81,0	0,1	0,1	103,6	0,3	0,2
Latvia	0,5	0,5	94,0	0,4	0,3	92,5	0,2	0,1	97,7	0,2	0,2
Iceland	0,2	0,2	100,3	0,1	0,1	126,4	0,2	0,1	88,2	-0,1	0,0
Baltic countries, total	68,5	64,8	94,6	34,0	33,2	97,7	34,5	31,6	91,4	-0,6	1,6
World, total	508,9	528,1	103,8	278,3	293,3	105,4	230,6	234,8	101,8	47,6	58,5

 

Table 11. Factors of growth/recession in trade between Germany and the Baltic States in 2014-2015.

Country/group of countries

Turnover Germany – Baltic States, 2015/2014

Export from Germany into the Baltic States, 2015/2014

Import into Germany from the Baltic States, 2015/2014

Growth

Recession

Share in growth

Share in recession

Growth

Recession

Share in growth

Share in recession

Growth

Recession

Share in growth

Share in recession

Bln euros

%

Bln euros

%

Bln euros

%

Poland

+2,3

+82,3

+1,1

+56,6

+1,3

+81,2

Russia

-5,7

-86,7

-2,6

-95,7

-3,1

-69,5

Sweden

+0,2

+5,7

+0,3

+15,0

-0,1

-2,8

Denmark

-0,0

-0,2

+0,3

+18,0

-0,4

-7,9

Norway

-0,8

-11,4

+0,1

+6,7

-0,9

-19,4

Finland

+0,3

+10,4

+0,0

+1,3

+0,3

+17,4

Lithuania

+0,0

+1,6

+0,0

+1,5

+0,0

+1,1

Estonia

-0,1

-1,3

-0,1

-3,3

+0,0

+0,3

Latvia

-0,0

-0,5

-0,0

-1,0

-0,0

-0,1

Iceland

+0,0

+0,0

+0,0

+1,0

-0,0

-0,4

Baltic countries, total

+2,8

-6,6

+100,0

-100,0

+1,9

-2,7

100,0

-100,0

+1,6

-4,5

+100,0

-100,0

Note. The Baltic countries are presented in Tables 10 and 11 in descending order of their turnover with Germany in January-March 2015.

 

Russia accounted for more than 80% of decline of the German-Baltic trade, including more than 90% reduction in German exports and almost 70% reduction in German imports. The extent of the fall was 31.6% of turnover (including 33.9% for exports from Germany and 29.9% for imports into Germany). Noticeable, but not as dramatic, contraction of trade with Germany happened also in Estonia (-14.2% in turnover due to the decrease of exports from Germany by 19.0%) and in Norway (-10.3% in turnover due to 16.5% decline of imports in Germany). Two other countries – Denmark and Latvia – showed a moderate reduction in trade with Germany. The other five countries had a positive balance, with the biggest step forward made by Poland (it provided more than 80% of the growth of the German-Baltic turnover, including more than 50% of the growth of German exports and over 80% in increase in German imports). As a result, Poland, that was lagging behind Russia in turnover with Germany by 7.4% in 2012, surpassed Russia two-fold on this indicator in the first quarter of 2015.

The main products that led to a sharp collapse of the German-Russian trade:

• for exports from Germany – eight positions from the commodity group “finished products” (50.1% decline in the context of three-digit classification), namely: automotive components (13.7%), passenger cars (9.3%), aerial vehicles (6.8%), trucks (4.9%), machines without sectoral specialization (4.0%), office and computing equipment (3.9%), pharmaceutical products (3.8%), machinery for mining and construction (3.6%);
• for imports into Germany – one position from the commodity group “raw material”, namely: oil/gas (84.4% decline in the context of three-digit classification); the negative trend was reinforced by reduction of imports of semi-finished products, namely oil products (10.7%), which is Russia’s second most important import goods, that previously performed the role of a shock absorber.

The value of Russia as a trading company for Germany decreased markedly. The share of Russia in the export of goods from Germany declined from 2.6% in 2014 to 1.7% in 2015 (only three years ago, in 2012, it was 3.5%). As a German consumer the Russian Federation moved from the 12th place in 2014 to the 15th place in 2015. Russia’s best result was the 11th place in 2011-2012, and the worst – the 20th place in 1999. Russian automotive components descended from the 10th place in 2014 to the 18th place in 2015; Russia’s passenger cars – from the 15th to the 17th. If this trend persists, Russia can find itself already in two years in the third ten export partners of Germany, as it will cease to represent any serious business interest for Germany.

The share of Russia in the import of goods to Germany fell from 4.2% in 2014 to 3.1% in 2015 (the highest level of this indicator was recorded in 2012 – 4.7%). As a German supplier, Russia dropped from the 10th place in 2014 to the 12th place in 2015. In 2011-2013, the country kept the 7th place, in 1999 it was on the 16th place. In 2015, the Russian Federation retained the 1st place for the group “oil/gas” (its share in German imports amounted to 29.1%), but in the context of four-digit classification it kept the championship only for oil with a share of 28.2%, whereas for gas it moved to the 2nd place (with a share of 30.0%), losing to Norway (34.2%). Russia’s role in the import of oil/gas in Germany peaked in 2011 (36.8%); since then it has been steadily weakening, and since 2015 this trend has not been blocked, as before, by the increasing role of Russia in the German imports of oil products (2010 – 10.0%, 2014 – 23.3%, 2015 – 18.9%), and the other Russian products are not comparable with those main products in terms of imports in Germany. In the second ten import partners of Germany Russia will stay longer than in the same weight category for exports from Germany, but the probability of a significant reduction in the influence of Russian business on the German market is very high.

International trade, as well as the nature, abhors a vacuum. Collapsing trade relations with Russia will strengthen Germany’s orientation to other counterparties. Regarding the Baltic States, this would be beneficial, first of all, for Poland, Sweden and Norway: Poland will strengthen its leadership, Sweden will push Russia to the third place in terms of turnover, Norway will close the gap from Russia in terms of imports into Germany.

List of references

Statistisches Bundesamt. Genesis-Online Datenbank. Statistik 51000. Außenhandel. URL: https://www-genesis.destatis.de/genesis/online

 

 

[1] Here and elsewhere – calculated according to the Federal Statistical Office of Germany (Statistisches Bundesamt. Genesis-Online Datenbank. Statistik 51000. Außenhandel. URL: https://www-genesis.destatis.de/genesis/online). Dataareperiodicallyupdated. The Baltic countries are understood as countries that along with Germany are included in the Council of the Baltic Sea States (Denmark, Iceland, Latvia, Lithuania, Norway, Poland, Russia, Finland, Sweden, Estonia).