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Viktor Katona

Viktor Katona

Viktor Katona is an Group Physical Trader at MOL Group and Expert at the Russian International Affairs Council, currently based in Budapest.

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The Abrupt Demise Of Dutch Gas

Netherlands

The largest and oldest-producing gas field in Western Europe, the Groningen field, is on the verge of being shut down. If that happens, it will entail the tumbling of Netherlands' indigenous gas production, making it a net gas importer. This is a bitter pill to swallow for producers in the Netherlands, EU’s leading gas producer up to now, given that the Dutch led the world in the 1970s in natural gas exports volumes (the ramp-up in exports was so massive that the Dutch government implemented export caps to put some freeze on it). For Dutch locals, however, this might represent a long-awaited victory and a sign that governments can pay heed to their concerns, if sufficient pressure is applied. It remains to be seen whether an abrupt end to gas production in the Netherlands is in anybody’s interest.

Graph 1. Total Consumption, Domestic Gas Production and Natural Gas Imports and Exports in the Netherlands 1960-2016.

(Click to enlarge) 

Source: Statistics Netherlands.

Residents from the Groningen area, joined by environmental groups, are asking for the complete closure of the Groningen, citing frequent, albeit low magnitude, earthquakes as a significant nuisance. The phenomenon is no novelty, with 80 000 damage claims totaling €1.2 billion having been filed with the government and NAM, the operator of the Groningen field, a joint venture between Royal Dutch Shell and ExxonMobil. Earthquakes became more frequent in past years due to the collapse of empty underground pockets close to the surface, due to the depletion of the Groningen field following 54 years of exploitation (see Graph 1). The Groningen field has left a hefty sociopolitical imprint on the region – its rapid development in the 1960s brought about the term “Dutch disease”, which infers the lopsided development of a country’s economy. Moreover, domestic appliances in adjacent countries, like France, Germany or Belgium, which were buying and consuming Groningen gas for decades, have been adapted to the low-calorific Groningen gas (due to its 14 percent nitrogen content). Related: Low Oil Prices Lead To Fastest Mature Fields Decline In 25 Years

Although earthquakes have been felt around the field since 1991, with most of them within the 0.5-1.5 magnitude interval, it was the August 2012 earthquake near Huizinge (ML of 3.6) that triggered an administrative response. Thus, despite its historical and symbolic value, since 2014 the Dutch government has been capping Groningen production in order to minimize the risk of further earthquakes. After 2013, during which 54 BCm of gas were produced, 2014 saw a 42.5 BCm cap, 2015 – 30 BCm, in 2016 it was first lowered to 27 BCm, then to 24 BCm and this April the Dutch Ministry of Economic Affairs ordered that the cap should be set at 21.6 from Gas Year 2017 (October 2017 – September 2018).

Not only did the Dutch government cap the production, it also obligated NAM to essentially shut down the Loppersum part of the Groningen field, representing about 10 percent of total capacity, on the grounds that it constitutes the highest earthquake risk. Thus, in a mere three years, Loppersum output was brought down by 16 BCm/year to its current level of 1BCm/year. Although NAM has appealed against previous production caps, the litigations never yielded any positive result for the operator company – it appealed against the latest cap, too, however it is unlikely to do any better. This is all but good news for Dutch gas enthusiasts, as the Netherlands’ gas output has seen an astonishing 42 percent decrease from 2013 (Graph 1). It has to be noted that the frequency of earthquakes has subsided since the introduction of production caps, however, there’s a fine line to be walked so as not to suffocate the gas production. Groningen is not yet on the brink of depletion, as 25 percent of its initial recoverable reserves (cca 0.7 BCm) are believed to still be in place and the field is expected to produce at least until 2040. Related: Will Oil Inventories Continue To Fall Over The Summer?

Gas imports, a virtually unknown phenomenon for the Netherlands in the 20th century, are becoming a staple of Amsterdam’s 21st century energy matrix. As export pipeline capacity from Norway is already at its maximum and is unlikely to grow any further, Russia seems to stand gain the most from the demise of Dutch indigenous gas production. Taking into consideration that the second string of Nord Stream will be coming online by late 2019, Dutch companies will opt for this relatively cheap and flexible source of gas, with volumes increasing from the current 8 BCm/year into double digits well before the end of the decade. LNG imports will also play a more important role (in 2016, the Netherlands imported 0.36 mtpa) as oversupply pushes down prices and inches closer to evening out margins in Asia and Europe, and a rational combination of the two new increasing gas supplies will entail a more complex usage of underground gas storages to balance seasonal fluctuations.

The future might hold many unforeseeable twists of fate for the Netherlands. Although the Dutch government banned the development of shale reserves before 2020, shale gas might become an issue sooner or later. The technically recoverable reserves of shale gas in the Netherlands are believed to amount to up to 700 BCm, the most notable area being the Epen formation in Groningen and Friesland provinces. However, if the locals objected to conventional gas reserves being exploited, shale development will most likely remain a pipe dream. In its quest to remain self-sufficient in energy terms and fulfill its 16 percent renewables quota in gross energy consumption by 2023, the Netherlands will ramp up their wind energy facilities. Approximately half of it (4.5 GW) is supposed to come from offshore plants, for which the combination of shallow water and plentiful wind provides a good foundation. Still, it is a far cry from playing the role gas had in the Dutch economy.

By Victor Katona for Oilprice.com

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Leave a comment
  • peter csicsovszki on July 21 2017 said:
    Nice article. 1 comment: The remaining reserves in Groningen is not ~0.7 BCM but ~0.7 TCM.
  • Viktor Katona on July 25 2017 said:
    @Peter Csicsovszki, Peter, you are absolutely right, my apologies for the misprint.

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