What the gas crisis means for the world’s largest chemical company

In 2021, the German chemical company BASF consumed as much gas at its Ludwigshafen site alone as the whole of Switzerland. What the gas crisis means for the company and why it is still raising its annual target.

BASF’s main plant in Ludwigshafen is the largest contiguous chemical complex in the world.

Michael Probst / AP

At first glance it doesn’t match. On the one hand, BASF, the world’s largest chemical company based in Ludwigshafen, is the largest industrial gas consumer in Germany and is therefore particularly affected by the rising gas prices. On the other hand, the group has good ones on Wednesday Results for the first half of the year presented and revised expectations for the full current year upwards.

Customers foot the bill

Despite an economic slowdown in the second half of the year, BASF now expects sales of EUR 86 to 89 billion and operating profit (EBIT) before special items of EUR 6.8 to 7.2 billion for 2022. In the first half of the year, sales increased by almost 18 percent to EUR 46 billion compared to the same period last year, and EBIT before special items rose by 10 percent to EUR 5.2 billion. And this despite the fact that the chemical giant had to pay around 800 million euros more for natural gas for European locations in the second quarter alone than a year earlier.

BASF makes money – despite the gas crisis

Operating result EBIT before special items (million €)

The apparent contradiction is easy to resolve: the demand for chemicals in the current post-corona phase is so great that the group can push through price increases. The increased prices for raw materials and energy could largely be passed on, said BASF CEO Martin Brudermüller at a conference call. In addition, BASF benefited from the strong dollar.

Martin Brudermüller, CEO of BASF.

Martin Brudermüller, CEO of BASF.

Andreas Pohlmann / BASF SE

However, the expectations expressed for the year as a whole are subject, among other things, to the proviso that there will be no production shutdowns due to a gas shortage in Europe. Up until now, BASF has paid high prices for natural gas, but deliveries to all European locations are based on demand. The group does not purchase gas directly from Russia, but buys it from Western European suppliers. But their portfolio also includes Russian gas – in recent years Russia has covered around half of Germany’s total natural gas consumption.

Consumption like Switzerland

The gas supply in Germany is still secured because the throttling of Russian supplies is partially compensated by higher purchases from Norway and in the form of liquefied natural gas (LNG) and because consumption is much lower in summer than in winter. However, should there be supply bottlenecks in winter, the chemical industry would be hit hardest: it accounts for around 37 percent of the gas consumed by industry.

Chemical industry needs the most gas

Energy consumption in industry in Germany (2020, billion kWh)

BASF, in turn, is the largest single consumer. According to Brudermüller, the group consumed around 48 terawatt hours (TWh) of natural gas in Europe in 2021. The headquarters in Ludwigshafen alone accounted for 37 TWh of this, which roughly corresponds to the annual consumption of Switzerland. Around half of the gas consumed in Ludwigshafen in 2021 was used to generate electricity and steam, the other half as a raw material, in particular for the production of ammonia, acetylene and synthesis gas.

The group operates its largest so-called Verbund site in Ludwigshafen. It includes around 200 plants on an area of ​​more than 10 square kilometers, connected with 2850 km of pipelines. Around 39,000 employees manufacture thousands of products here. In a complex, optimized system, by-products from one plant become raw materials for the other plant. At the heart of the network are two steam crackers, in which crude petrol (naphtha) is cracked with the help of steam. Numerous value chains start here, for example in the form of preliminary products for plastics, paints, solvents, pesticides or vitamins.

Below 50 percent is the end

As long as the natural gas supply in Ludwigshafen does not fall below about half of the maximum requirement, BASF can continue to operate the network with reduced load, according to the company. However, if it sinks “significantly and permanently” below that, the entire site must be shut down. The crackers would also be affected because of the close interdependence, although they are low gas consumers compared to other plants.

On Wednesday, Brudermüller was confident that things would not go that far. The “emergency level”, the third and last stage of the federal government’s gas emergency plan, envisages rationing and an allocation of gas. Since June, Germany has been in the second stage, the “alert level”.

However, according to the CEO, BASF is currently assuming that even if the emergency level is declared, it will still be able to get enough natural gas to be able to maintain operations in Ludwigshafen with reduced loads. In recent months, Brudermüller has repeatedly warned of the dramatic consequences for the entire economy should things turn out differently. Important value chains, for example in the food, pharmaceutical and automotive industries, depend on products from Ludwigshafen. However, the BASF boss admitted on Wednesday that no one could guarantee that there would be no shutdown.

The special alarm plan

BASF has reduced gas consumption since March 2022 through short-term measures such as technical optimization and switching to alternative fuels. In Ludwigshafen, heating oil can replace around 15 percent of the natural gas required to generate electricity and steam.

In addition, due to the high gas prices, the group reduced the production of ammonia and supplemented it with acquisitions. In the case of ammonia, the production of which requires a lot of gas and which is mainly used for the production of fertilizer but also, for example, for polyamides for the car industry, this replacement is relatively easy on the world market, in contrast to other production methods. Therefore, ammonia plays an important role in risk prevention plans.

In the event that the federal government invokes the emergency level, BASF has prepared a “special natural gas alarm plan” that provides detailed information on how to react to a natural gas cut or pressure fluctuations. As long as there is still enough gas for reduced continued operation of the network in Ludwigshafen, the concrete load reduction of individual plants would depend on the quantity of gas actually available, the supply of the substitute fuel oil and other factors.

As a globally active company, BASF could also partially compensate for a loss of European capacity through higher plant utilization at non-European locations in the USA and Asia, where hardly any problems with the gas supply are expected.

An era comes to an end

In the longer term, BASF intends to only use gas as a raw material and to completely abandon oil and gas for energy production. To do this, however, the group needs huge amounts of electricity from renewable energies. With this in mind, he has invested in an offshore wind farm owned by Vattenfall, and more are to follow.

A major challenge here is international competitiveness. For decades, one of the locational advantages of BASF and many other German industrial companies was the plentiful supply of comparatively cheap Russian pipeline gas. This is now likely to dry up, alternatives such as LNG are more expensive, and the switch to renewable energies will take time. In addition, according to the VCI, gas prices in Europe have risen much more sharply than in the USA or Japan since 2021. If, in the wake of the Ukraine war, the expected economic slowdown comes along, it could also become more difficult to pass on the high prices to customers.

You can contact the Berlin business correspondent René Höltschi Twitter follow.


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