Great Groningen: Politics may trump economics at giant Dutch gas field

For the residents of the surrounding region, the production of gas from the Dutch Groningen field has turned into a never-ending nightmare, with the continued threat of serious earthquakes creating a climate of fear.

"It was like a bomb going off," one resident said following the 3.4-magnitude earthquake that hit Groningen on January 8.

The quake -- like those that came before it -- was triggered by gas production from the giant onshore field that has been supplying gas to households and industry in the Netherlands and elsewhere in Northwest Europe since 1963.

The biggest since 2012, the quake made gas extraction at Groningen the most pressing challenge for the coalition government that has only held the reins of power since October.

The starkest reaction to the quake -- which has already led to more than 3,000 insurance claims for damage to property -- has come from Prime Minister Mark Rutte who said that the safety of residents was "the only thing" to take into account when deciding a new policy.

Economy minister Eric Wiebes was more circumspect, pointing out that citizens could not be left to freeze and companies go bust -- security of supply and jobs in the Dutch gas sector had to be considered.

But it is difficult to see how the government can come up with a policy that works for everyone. Another big quake, with the potential to cause loss of life, for example, would be a major political blow to the government, so a "do-nothing" policy is out of the question.

But forcing a significant reduction in production at Groningen would hurt the Dutch treasury, whose revenues from gas production have fallen to under Eur2 billion in 2017 from an estimated Eur13 billion in 2013, and leave the Netherlands (and its neighbors which are supplied with Groningen's low-calorific gas) scrambling for alternative sources of supply.

And let's not forget -- there are no guarantees that reducing production will mean no more earthquakes. The January 8 quake came despite the fact that Groningen output was slashed to just 24 Bcm/year in 2017 from as much as 54 Bcm as recently as 2013.

Plus, the field's operator, NAM, said on January 18 that the strength of the January 8 quake did, in fact, fall within the parameters of the safety protocol for gas production at Groningen.

NAM, a 50-50 joint venture between Shell and ExxonMobil, urged the state gas regulator not to be swayed by public opinion when putting forward its recommendations on Groningen to Wiebes.

But if Wiebes went for a compromise and recommended only a small reduction in the production cap, that would do little to appease citizens' groups, which are becoming more organized and vocal in their opposition to operations at the field.

Could the gas issue even become high profile enough to topple the government? It's not impossible.

LOWER PRODUCTION

NAM -- for its part -- was quick to offer some remedies that it believes would reduce the risk of quakes, including stopping production at six parts of the field -- Overschild, De Pauwen, Ten Post, Leermens, 't Zandt and Eemskanaal.

According to S&P Global Platts estimates, shutting in gas production at those six sites would reduce total Groningen production by 1.2 Bcm (or about 5% of the total 23.6 Bcm produced at Groningen last year).

That would -- in fact -- bring production almost into line with a proposal from November last year by the new government to cut total Groningen production by 1.5 Bcm by 2021. Only a lot more quickly.

It is also noteworthy that on the day of the earthquake, total Dutch gas production was 157 million cu m, the highest daily level since February 2017, according to data from Platts Analytics' Eclipse Energy.

Dutch gas production -- including Groningen and other smaller fields -- rose quickly from just 122 million cu m/d on January 3 to 157 million cu m/d within just five days.

Could that sudden variation in production have had anything to do with the tremor?

Whatever the science, the government will likely want to be seen to be acting decisively, and more importantly, quickly.

It is ultimately the responsibility of Wiebes to decide how much gas can be produced from Groningen. He has said he and his team would work "feverishly" to come up with a plan -- potentially as soon as March.

S&P Global Platts estimates that a further cut of 7 Bcm/year in the Groningen production cap would be feasible without the need to add new H to L-gas conversion facilities.

But there is no reason to believe that Wiebes won't order a bigger cut in the spirit of prioritizing the protection of Dutch citizens.

NAM may well feel aggrieved if it is forced to lower production further, although Shell CFO Jessica Uhl in November last year said she was "less concerned" about the financial implications of lower output than ensuring production safety.

Uhl said Shell was focused on "getting the situation to work for all the important stakeholders."

"More needs to be done so that all the stakeholders feel things are going in the right direction, that production going forward is safe," she said.

How this manifests itself in the coming weeks will be very much the focus of attention from all corners of the European gas market, and Shell's reaction might be a little different if a big output reduction is ordered.