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30/09/2014

Out with L-gas and in with H-gas in NWE

The Dutch gas production is limited to 42,5 BCM in 2014 and will drop down to 40 BCM in 2015 and 2016. These quantities will be sufficient to meet domestic demand, but a severe drop in export of gas towards neighboring countries is to be expected. In this article Sia Partners elaborates on the impact of this Dutch gas production decline at our neighbors.

 

The first half of 2014 saw a sharp decline in the production of gas from the Groningen gas field, the largest natural gas field in Europe and the main source of L-gas in North Western Europe (NWE). The Dutch gas field operator (NAM) produced 28% less gas compared to the same period the previous year. This is a direct consequence of the production cuts imposed by the Dutch government, following increasing protests due to earthquakes in the Groningen region.

Production is limited to 42,5 bcm in 2014 and 2015 and will drop down to 40 bcm in 2016, as shown in Figure 1. These quantities will be sufficient to meet domestic demand from households, utilities and large industries, but a severe drop in export of gas towards neighboring countries is to be expected. This results in concerns in Belgium, Germany and France, as the majority of the gas supply originates from Slochteren, raising questions about future investment needs in the NWE gas infrastructure.

Figure 1: Expected Dutch gas production

Source: EBN 2014

L-gas in North Western Europe

Following the discovery of the Slochteren gas field (Groningen) in 1959, the Netherlands became the largest producer of L-gas in North Western Europe, accounting for more than two thirds of production. L-gas is a gas that has a low-calorific value, containing lower proportions of higher hydrocarbons, and that has less energy than high-calorific gas (H-gas). It is used mostly in households and industrial appliances. The remaining one third originates from Germany, smaller gas fields in the Netherlands, or is transformed into L-gas by adding nitrogen to high-calorific gas produced in the Netherlands or other gas producing countries such as Norway or Russia. As the majority of the NWE gas supply was low-calorific, many neighboring countries have developed their infrastructure to accommodate this gas quality. Belgium now has two gas zones, one for low-calorific gas, which represents around 30% of the market, and one for high-calorific gas, as these two different gas qualities cannot be transported through the same pipeline. The same applies for Germany and Northern France.

Figure 2: L-gas system in North West Europe

Source: Sia Partners

Since 1959 the focus of the Dutch government regarding L-gas production has been twofold:

  1. To meet its domestic needs with a reliable supply of gas
  2. To optimize the use of its gas reserves.

As a result, and in line with its gas policy, L-gas produced in the Netherlands is primarily used to supply the domestic market, and more than half of all L-gas exports are made from converted H-gas. This trend will be made all the more visible with the planned production cuts from the Groningen gas fields and the incremental production decrease from other gas fields, putting the long term balance between supply and demand of low-calorific gas into jeopardy. Maintaining a good balance will be crucial to maximize the value of the remaining L-gas reserves in the Netherlands.

A necessary transition from L-gas to H-gas...

There have been concerns on the NWE gas market about the impact of the output cuts on gas prices. In reality however no severe price peaks have been observed in the market since the production decline. A possible explanation is that contracts linking foreign gas suppliers with Dutch gas producers are often long term (ranging from 10 to 20 years), which guarantees a certain price stability, and flattens sharp fluctuations on the L-gas market. The main cause for the relative stable gas prices remains nonetheless the general overcapacity that prevails in the NWE gas market.

However, the decrease of Dutch gas production and as such of gas exports will most certainly have an impact on countries importing L-gas from the Netherlands, in terms of infrastructural development. Different scenarios are currently being developed to anticipate on the production decline of the Groningen gas reserves. In the short term, this shortage can be compensated by converting H-gas imported from the Netherlands or other gas producing countries into L-gas. An increase in gas conversion stations and nitrogen production capacity would be needed to facilitate this option. A second scenario would be to increase production flexibility, as the Groningen field will no longer be able to act as swing field, accommodating volatility and changes in gas demand patterns, which implies increasing the storage capacity of H-gas. This would require extensive investments for countries such as Belgium, which currently owns two conversion stations, but don't have any storage facilities.

In the long term however, new transition measures will have to be developed, and investments will be needed to convert parts or the entire gas infrastructure, to enable different quality gas to flow through the networks. Countries need to start thinking about transitioning their infrastructure, from L-gas grids towards H-gas grids.

....but with different impacts and timing in NWE

The question remains as to the timing of these different scenarios, and knowing when transition measures will have to be implemented within the NWE L-gas market, and at the same time guaranteeing the balance between supply and demand of L-gas. The Energy Delta Gas Research consortium (EDGaR) investigated this matter on behalf of the Dutch Ministry of Economic Affairs, together with the major players of the Dutch gas market, Gas Transport Services, NAM and GasTerra. It concluded that short term measures, by converting H-gas into L-gas, would be sufficient to make up for the decreasing production of L-gas for the next 15 years, but that new gas appliances should nonetheless begin to be made compatible with H-gas. Neighboring countries, however, should start transitioning towards H-gas by 2020.

Transitioning from a L-gas to a H-gas infrastructure is a long and complicated process involving many different stakeholders all promoting their own interests, and needs to be carefully planned. This is all the more true for the Netherlands, whose entire gas infrastructure was built around low-calorific gas. The gas infrastructures of countries in North Western Europe are closely interlinked, and all countries should work together to find an optimal solution suiting all parties involved, without penalizing consumers.

Sia Partners

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