Playing for time at Groningen -- the ball returned to Dutch government's court

Natural gas in the Netherlands remains a divisive issue, with the public perception of the once much-favored fuel turning increasingly negative because of the damage caused to buildings by producing gas at the super-giant onshore Groningen field.

It was the job of the country's top administrative court this week to rule on whether the previous Dutch government's policy to cap gas production from Groningen was adequate or whether the risk of further earthquakes in the area from gas drilling had been underplayed -- or potentially worse, not properly assessed.

At stake is the future level of production from the EU's biggest gas producing field where output has already fallen since 2013 from some 54 Bcm to just 24 Bcm.

Any further cut in output could have a particularly negative impact on an already increasingly import-dependent Dutch market.

The Voorlichting Raad van State -- or Council of State -- was presented back in July with evidence from a wide range of entities including the field operator NAM, environmentalist groups and public bodies representing the region's citizens.

It was the court's responsibility to weigh up all the differing positions and work out who might be right, who might be wrong and what impact all this might have on the Dutch economy.

Its conclusion? Well, in the end, it decided on Wednesday to knock the ball back into the government's court, ruling that the ministry should go back to the drawing board and do another study on the possible risks of Groningen production to the surrounding population and property.

In the meantime, the existing quota of 21.6 Bcm will stand for the current Gas Year that started in October, disappointing the environmentalists and citizens' groups.

But at least, they said, the court acknowledged that the decision taken in April by now ex-economy minister Henk Kamp was flawed.

"The minister based his decisions on the impossibility of assessing the risks of gas extraction for people in the earthquake zone," the court ruled.

"However, he failed to convince [us] of the accuracy of this position. The minister should in any event have studied the options for mapping out the risks in greater depth, or better explained why he consented to the extraction level of 21.6 Bcm without such a study," it said.

The court effectively ruled that the economy ministry -- now headed by Eric Wiebes -- must carry out a study, and it is this study that will be key going forward.

In the past, NAM itself has been commissioned to carry out work on the link between Groningen production and damage to buildings.

In March this year, NAM said there was "no clear link" between the recent increase in earthquakes around the Loppersum area with gas production.

"Study of the (very reduced) gas production around Loppersum and the accompanying pressure change in the substrate does not show a clear relation to the tremor," NAM said in the report published March 31.

It was the increase in tremor activity at Loppersum that triggered the Kamp move to cut the quota further.

The number of earthquakes across the Groningen field with a strength of more than 1 on the Richter scale had more than halved since 2013, from 77 in 2013 to 36 in 2016.

But, since October 2016 the number of tremors in the area around Loppersum has increased to 0.22 tremors per sq km, close to the legal density limit.

With NAM refuting a link, it will come down to who carries out the new study effectively ordered by the court.

"It's going to have to be a sufficiently neutral and reputable organization that the conclusions will be acceptable to the court, and difficult for either side to challenge," Jonathan Stern, leading gas analyst at the Oxford Institute for Energy Studies, told S&P Global Platts.

A further cut could then follow depending on the results of further study of the risks from production.

What happens then will determine whether production drops further -- and the new government has already suggested it wants to see the quota cut to 20.1 Bcm by 2021.

Further reductions could conceivably follow, leaving the Netherlands more reliant on imported gas.

But this might not be as bad for the Dutch as it seems. The International Energy Agency said in its World Energy Outlook published this week that the market had been well able to cope when output from Groningen dropped by over 40% between 2013 and 2016.

"The loss of some 30 Bcm in the European gas balance was smoothly compensated for, triggering no major price reaction," the IEA said, conceding however that it clearly helped that it happened at a time when plenty of gas was available on the international market.

All eyes now will be on the conclusions of the new study and the way those conclusions are interpreted by the government.

Given past experience, keeping all stakeholders happy may prove to be the biggest challenge of all.