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23/03/2015

L'histoire se répète - Gas in Groningen, Coal from Limburg?

 
The production of natural gas in the Netherlands lies under pressure. Frequent earthquakes caused by decades of gas extraction in Groningen have severely damaged many buildings, which gave rise to a debate on safety and the distribution of our (gas-financed) wealth. Many parties demand that gas extraction in the region will be strongly cut back, but is this really an option?
 

It was 1976 when the last coal mine in the Netherlands officially closed. The main reason obviously was the discovery of natural gas in Groningen (Slochteren) in 1959, and its growing exploitation since then. Extracting gas was cheaper and working conditions in the gas industry were far more favourable than the conditions for mine workers. Since the closure of mines in Limburg, several incidents have taken place where buildings and houses became damaged by movements of the ground underneath, which were believed to be caused by deep underground mining activities earlier on.

The intensity of the debates back then, in the Dutch parliament, when the at the time prime minister Joop den Uijl decided to close down the mines, seems now to be even higher when reading and listening to the current debate on Groningen gas. Because of this debate and the opposition in Groningen the image of gas is not improving, or to put it more accurately, it goes down every day.

Some figures on gas from the Netherlands, to place in perspective (source: Financieel Dagblad):

  • Volumetric sales of Dutch gas by Gasterra decreased by 9% to 81.3 billion cubic metres (bcm) compared to 2014, of which 40% was consumed in the Netherlands and 60% abroad
  • The revenue of GasTerra - the exclusive seller of Groningen gas - was just over EUR 19.5 billion in 2014, a reduction of 19.7% compared to 2013
  • It is estimated that in Groningen around 1000 bcm of gas is still in the ground, which at a price of EUR 0.25/m3 represents a value of EUR 250 billion
  • Extraction from the Groningen field is currently limited to 39,4 bcm for 2015, and might be further decreased to 35 bcm/year
  • Every bcm less extracted by the NAM in Groningen implies a reduction of EUR 200 million in gas revenues to the Dutch state.

What are alternatives for the Dutch state?

Because of the cold relation between Europe and Russia, which also involves Kremlin-controlled Gazprom, an increase in Russian gas supplies cannot be expected. The dispute and following cancellation of the controversial South Stream pipeline late 2014 has confirmed that Europe aims to decrease its dependency on Russia for its energy supply.

Then what about our 'small fields policy'? An increase in the extraction of gas in the North Sea and on the Dutch continental shelf could compensate for the decrease in the production of the Groningen field. But extracting this gas is difficult nowadays as the return on investment from exploiting smaller, more remote fields is decreasing. There are however companies with a specialty in extending the lifecyle time of a concession, for example Chevron and Petrogas.

Another stream of gas is LNG. Rotterdam's Gate Terminal could be more utilised, importing and storing LNG from various countries. Also the Eemshaven is still seen as a feasible location for a large LNG terminal. However, using LNG will significantly increase the costs of our gas supply.

It seems that security of supply will be no issue if it comes to limiting production from the Groningen field. Minister of Economic Affairs Henk Kamp already disclosed a new policy on this topic, that foresees a role for the Groningen gas as a final source to balance supply and demand, instead of a primary source of gas supply - similar to a lender of last resort. This will relieve the pressure to extract large volumes from Groningen, when other sources would be available to match the demand.

The importance of gas

The chairman of Gasterra, Gertjan Lankhorst, warned against developing a highly negative image of the natural gas sector. He stated that such an image would not be good for the Netherlands internationally, a country with a high reputation in the gas industry striving to maintain its position as a major gas hub in North-Western Europe. Current issues in Groningen will have to be dealt with adequately by the Dutch government - no more loose promises to house owners which have been struck by the earthquakes of past years. Also, new policies should be communicated not only in Dutch parliament but to our international allies and partners in such way that confidence in the Dutch management of the gas sector is restored.

We should at all costs avoid that history will repeat itself in a way that Groningen needs to be fully closed down, like the Dutch state mines back in the seventies. Economic reasons prevailed at the time for closing down this activity, and working conditions for the miners weren't great either. However, the current situation in Groningen is clearly different. The magnitude of economic impact for the business sector and the state budget is much higher when gas production would come to a halt, and there are no issues with the working conditions in gas production. Hence, closure is not an option at this point. The government should develop a comprehensive recovery plan for house owners and work on a sustainable relation with the Groningen region in general, but decades of government negligence in the Groningen region and the geological uncertainty of the gas field makes that the latter will prove to be a very difficult task.

Sia Partners

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