Production from the Groningen natural gas field in the Netherlands will be reduced over the next three years after local communities raised safety concerns, the Dutch Minister of Economic Affairs Henk Kamp said Friday.
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The field is a major supplier of gas to customers in Northwest Europe in the winter months, owing to its flexible delivery profile, and a big source of revenue to its operators, the US' ExxonMobil and Royal Dutch Shell, and the Dutch state. Groningen gas output will be slashed to a maximum of 42.5 billion cubic meters/year of gas in 2014 and 2015, and further cut to 40 billion cu m in 2016, Kamp announced in a statement on the government's website. Groningen, in the northeast of the Netherlands, produced nearly 54 billion cu m in 2013.
Traders expect the gap to be filled by Russia, which added some 20% to its exports to Western Europe in 2013 and still had export capacity available. As a result, prices at the Dutch TTF gas hub rose briefly before sinking back Friday.
One trader in the UK said market participants had "realigned" their positions to price in the production cut from the gas field, following a knee-jerk reaction to the news before it became official. He said Russian gas flows would likely "fill the gap."
But while Russian gas is typically cheaper, it has to come from further afield, and it flows with a flatter profile over the year, making it of less value in a sudden cold snap. So high-deliverability storage on the consumer's doorstep is likely to be in greater demand. SAFETY CONCERNS
Residents living near the Groningen field have raised safety concerns after a number of earth tremors.
"To ensure the safety of those living above the Groningen natural gas field, we are reducing production in those areas most at risk and limiting total production levels," Kamp said.
The decision was made in response to Dutch oil and gas company NAM's gas extraction plans for the area over the next few years, and is based on 14 studies and recommendations from the State Supervision of Mines.
The Netherlands' gas revenues amount to about Eur13 billion ($17.7 billion) a year, of which more than Eur10 billion comes from the sale of gas from the Groningen field, according to the ministry.
Around Eur1.2 billion will be made available over the next five years for strengthening local buildings and infrastructure.
Because of the importance of the field as a revenue earner, the Dutch government introduced a "small fields policy" years ago, obliging gas marketer GasTerra to source gas from other fields, especially during the summer, so that the high-swing capacity could be prolonged and reserved for winter, when prices rise, ensuring a longer production life for the field.
According to state producer EBN, however, there are still hundreds of billions of cubic meters of gas awaiting exploitation in the Dutch sector of the North Sea.