European Firms on Verge of Bankruptcy as Energy Crisis Deepens

Government bailouts add new twist to energy chaos that's making life hard for Europeans

The Industrial Park of Hoechst in Frankfurt, Germany, on June 23, 2022. Germany is in the process of activating an emergency plan for natural gas supplies to ward off a crisis this coming winter. Michael Probst/AP Photo

The energy crisis unfolding in Europe is starting to weigh on a growing number of the continent’s oil, gas, and utility companies.

Uniper, Germany’s struggling natural gas utility giant, recently filed a bailout application to the government after facing significant financial challenges, according to Finnish majority owner Fortum.

For weeks, the firm has been in regular talks with the government regarding a potential bailout, recently stating that it needs to be rescued “in a few days.” Uniper has faced tremendous pressure since Russia started reducing its gas flows to Germany, the biggest natural gas importer in Europe.

Over the past month, the energy giant has received just 40 percent of Russian contracted volumes, prompting the business to search for replacement volumes.

“We welcome that the German Parliament has now approved a ‘toolbox’ which will allow immediate relief to the effects of the gas supply crisis,” said Markus Rauramo, president and CEO of Fortum. “Next, we look forward to the German government to start promptly implementing these tools to stabilize the situation in the energy industry and, in particular, at Uniper, as we continue talks on a long-term solution.”

Uniper has started tapping into the gas it had been storing for the winter since Moscow slashed its deliveries. As a result, its storage facilities are only 58 percent full, down from just 60 percent in the previous week.

The logo of German energy utility company Uniper SE is pictured in the company's headquarters in Duesseldorf, Germany, on March 10, 2020. Thilo Schmuelgen/Reuters

Harald Seegatz, deputy chairman of the supervisory board of Uniper, noted that the utility has been cutting gas volumes in its storage sites to ensure that customers receive their power and to bolster Uniper’s liquidity conditions.

“It is clear that Uniper cannot wait weeks, but needs help in a few days,” Seegatz told Bloomberg. “We cannot wait for weeks to do something. That would have a huge impact on the company and also on the employees. The government said it wants to avoid this situation, but the fact is that we cannot lose time.”

Because of the latest developments, Germany’s industry is collapsing, and economists anticipate that Europe’s largest economy could slip into a 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, its industry is also relatively energy intensive. But the price impact of higher gas prices will arrive well before any potential gas rationing, and securing electricity and gas contracts has become increasingly hard for German companies,” Erik-Jan van Harn, a global economics and markets macro strategist at Rabobank, wrote in a note.

According to the bank, its baseline scenario forecasts a 0.2 percent contraction in the third and fourth quarters and an annual decline of 0.22 percent in 2023.

ING is also penciling in a recession, despite the slightly better-than-expected industrial output in May. At this point, it’s a matter of how long the economy will be paralyzed in recessionary territory, wrote Carsten Brzeski, global head of macro at ING.

“Needless to say that currently there are more downside than upside risks to the outlook,” Brzeski wrote. “It’s probably time to dig out all these different estimates of the economic impact a full ban on Russian gas and oil could have on the economy.”

The Rest of Europe Facing Problems

Other European markets have seen multiple energy suppliers shutting down over the past 12 months.

In the UK, 28 companies have shut down since June 2021 because of the dramatic increase in the cost of wholesale gas that has hemorrhaged companies. These entities couldn’t raise prices on customers because of the UK government’s energy price cap. This caused approximately 2.6 million households, or roughly 9 percent of the British population, to be transferred to a different utility.

In the Czech Republic, power supplier CEZ CP is requesting up to $3.04 billion to weather the storm.

Experts say that Italy could witness similar trends. Earlier this year, several Italian energy distributors suspended operations and stopped fulfilling contracts because of high electricity prices.

The government also imposed a 10 percent windfall profit tax on energy companies to finance a $4.9 billion package that provides inflationary relief to businesses and consumers. Whether this will add to the sector’s financial strain remains to be seen heading into the second half of 2022.

Despite the expectation that businesses are padding their bottom lines, Michel Sznajer, a portfolio manager at Ecofin, wrote in a note that many companies aren’t making more money. But they’re passing additional costs to their customers.

That said, ING analysts say governments throughout the region will most likely install price caps on energy prices, much like the UK, France, Hungary, and Romania are in other jurisdictions that have instituted retail or wholesale price limits. Portugal and Spain introduced wholesale gas price caps for power plant consumption.

“While taxes on windfall profits tend to reduce corporates’ bottom line and impact the companies’ equity valuation, energy price caps are probably the most dreaded tools that governments can impose on utilities to shield consumers from skyrocketing prices,” ING experts said.

According to Bloomberg data, European energy and utility firms have racked up more than $1.7 trillion in debt to cover the cost of skyrocketing crude oil and gasoline prices, up by 50 percent from before the COVID-19 pandemic.

The Overall Energy Crisis in Europe

New research from Rystad Energy suggests that Europe is poised to face a power crunch much earlier than anticipated, mainly because of Russia’s invasion of Ukraine, related sanctions, and rising temperatures.

As summer is already proving to be a challenging period amid falling gas flows and liquefied natural gas (LNG) cargoes reaching their capacity limits, industry observers are looking ahead to the winter.

“In April, we expected the next European winter to be a tough time for consumers and governments. Our updated scenarios show that Europe will probably be heading into the storm much earlier than previously thought—and that the region will be underprepared for the chaos it will bring,” Vladimir Petrov, a senior analyst at Rystad Energy, wrote in a research note.

Sznajer also recently noted that weather conditions are adding to an extremely tight electricity market, with “very hot dry weather” placing hydropower under pressure.

“Typically in the summer the UK typically fills up on natural gas storage, especially in, and unfortunately with the current climate, we’re in a situation where the demand is above expectation and unusually high, and therefore somewhat capping the opportunity to store more and more gas for the winter,” he wrote in a note.

With Europe beginning to prepare for a tough winter ahead and prices likely to soar in response, experts say that energy rationing can’t be ruled out.

Speaking at the Aurora Spring Conference in Oxford, Shell CEO Ben van Beurden said rationing might need to be considered before cold temperatures and snowstorms submerge the continent.

“It will be a really tough winter in Europe. Some countries will fare better than others, but we will all be facing a very significant escalation in energy prices,” van Beurden said, noting that a worst-case scenario will likely involve Europe needing to ration its energy use.

With the UK entrenched in a ferocious heat wave this week—temperatures hit 40 degrees Celsius (104 Fahrenheit) for the first time on record—cooling demand will escalate.