Dutch gas dreams have ended with a bang after Dutch independent regulator SodM presented its recommendation to the Dutch government to cut existing natural gas production at the Groningen field from 21.6 bcm to a historical low level of 12 bcm.
The Netherlands (until the mid-1990s, one of the world’s top natural gas producers and exporters), holding an ambition of becoming the main European gas roundabout, can now start to lick its wounds, as not only gas production at Europe’s largest continental gas field is set to end soon, but the government budget is also hit.
Global markets and energy transition can’t be blamed, but only a simple physical phenomenon: earthquakes. The latter hasn’t only shaken houses, but has also broken down the defensive walls of international oil giants Shell (NYSE:RDS.A) and ExxonMobil (NYSE:XOM) and the Dutch government. A popular uprising in the Groningen Province (Northeast Netherlands), combined with an offensive of green movements, has built up a momentum strong enough to end the Netherlands’ pivotal role in global gas.
Still, the real discussion is far from over. Not only does the Dutch government need to assess the SodM recommendations, but it also must set up a rational and feasible strategy to wean the Dutch economy and its citizens from natural gas in the coming years. This will be an enormous task.
Removing natural gas from Dutch society is shaking its societal structure, as more than 7 million households are on the gas network, and almost all industries in the Netherlands rely on gas supplies. At the same time, due to the fact that Groningen gas opened up the European continent to a gas-based future in 1953, existing long-term contracts with customers in Germany, Belgium and the north of France have still to be fulfilled. The government and its main stakeholders, Gasunie en GasTerra, will have to discuss a reduction in export volumes and contracts the coming years. Some even have called to put a point on the horizon to end exports totally. The cost of this all will be enormous. After decades of a Dutch disease, an earthquake migraine is the only thing that is left.
Today, the reaction of Dutch minister of Economy Eric Wiebes was clear: he did not reject the recommendations of SodM, but reiterated that a timeframe for a production cut to 12 BCM is not yet available. He stipulated that he’ll do the utmost to do reach this goal, but based on rational assessments and what will be possible. In recent years, the Dutch government has already cut production several times, after earthquakes shook the region, damaging thousands of homes and buildings.
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For the government, the situation is very difficult right now. As the main shareholder of the Groningen gas concession, it’s legally bound to contracts and to provide security of energy supply. At the same time, as a party in the conflict, the government now also needs to solve the earthquake issue, and repair material and immaterial damages in Groningen.
The overall situation for the Netherlands has become a nightmare scenario. As the Dutch government has stepped up efforts for an aggressive energy transition plan, natural gas always has been seen as a transition fuel. The availability of cheap and secure gas supplies was one of the main cornerstones of this strategy. This fundamental factor, however, now is falling apart. Availability of Groningen gas could be threatened severely, while the government budget will be hit further.
At the same time, the cost of energy for Dutch companies and households will increase substantially. If pushing forward a further weaning of gas strategy in the Netherlands, as some political parties and NGOs are pushing for, is very costly. Reports have emerged that taking off a Dutch house from the gas grid and putting renewables as new source will cost between 12-28,000 euros. This excludes additional taxes on electricity, to counter subsidies and investments in renewables production and new grids in the country.
For the short term (5-10), looking at the financial costs of a quick kill of Groningen natural gas production, the only other option to smooth the energy transition is to continue gas usage — this time to be supplied by new gas import volumes from Norway, Qatar or Russia. However, Norway (pipeline) and Qatar (LNG) aren’t easy to put in place. But Russian gas supplies are available, and will increase even more due to Nord Stream 2.
Increased Russian gas supply is being considered by several parties in the Netherlands, Germany and Russia, as they’re already investing in Nord Stream 2, or even have former management in place at Gazprom. For the Dutch government and the European Union, however, it’s a big slap in the face. To acknowledge that their long-term strategy to diversify supply of energy to counter becoming dependent on Moscow has now been proven to be a farce, and will be a nightmare scenario. This however, will be undoubtedly the case in the next decade. Russia, threatened by more EU sanctions and in a conflict with the Netherlands regarding the MH17 airplane disaster over Ukraine, now will be the savior of the NW-European gas dependency.
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Again, Dutch and European energy strategies and politicians are showing a lack of foresight that is above imagination. With a global gas glut, and new emerging gas exporters such as Egypt, Cyprus, Israel and Australia, diversification could have been put in place already for years.
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Still, European arrogance and Dutch lack of urgency will now lead to renewed talks with the Russian Bear. Gas, the ultimate weapon of Russia to divide Europe, will be used again to support Putin’s influence. A Dutch gas field disaster could open up a new Pandora’s box. Nord Stream 2 and other Russian pipeline dreams will be discussed, but in a totally different spotlight.
By Cyril Widdershoven
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