Dutch Suggest 44% Cut to Output at EU's Biggest Gas Field

(Bloomberg) -- The Dutch mining regulator recommended cutting production at Europe’s biggest natural gas field by 44 percent to prevent earthquakes in the north of the country, a move that caused prices for the commodity to jump the most in six weeks.

Staatstoezicht op de Mijnen told the government that ministers should restrict output at the Groningen field to 12 billion cubic meters (423 billion cubic feet) “as soon as possible,” according to a statement on Thursday. Economic affairs minister Eric Wiebes reiterated Thursday that he will decide on the field’s future by the end of March.

“The 12 is really my goal,” Wiebes told reporters in The Hague. “But exactly how long that will take and how that will be done, which sacrifices need to be made by which parties, is something I will come back to at the end of March.”

Tremors have continued to shake the northern Netherlands since 2014, when the government started reducing flows from the field. The latest cap was set at 21.6 billion cubic meters a year, which is equivalent to almost 5 percent of the European Union’s total gas demand. The field supplies the Netherlands, parts of France, Germany and Belgium.

“Despite the uncertainties we can say with some certainty that with this production level we can meet the safety criteria,” SodM Inspector-General Theodor Kockelkoren said. “It will take a year before the impact becomes visible but after that period a relatively quiet period in terms of tremors should follow.”

The Dutch authorities are trying to balance the need to limit earthquakes that shake the area as the aging reservoir is depleted against demand for the gas, whose properties will be difficult to replace in the region

Annual production at Groningen needs to be at least 14 billion cubic meters in a mild year to ensure security of supply, Dutch gas network manager Gasunie Transport Services said Thursday. It will need to be at least 19.5 billion in the year to October. The expected reduction of 0.5 to 2 billion cubic meters this gas year doesn’t indicate future needs, which will be set out in the government’s plan, Wiebes said on Thursday in a letter to parliament.

Dutch natural gas for summer delivery jumped as much as 3.6 percent to 17.33 euros ($21.56) a megawatt-hour. That’s the most since Dec. 12 and the highest level since Jan. 16, according to broker data compiled by Bloomberg. It reversed gains by 1:48 p.m. in Amsterdam, slipping 0.5 percent to 16.65 euros.

The non-binding advice from the mining regulator only considers safety and not security of supply and will be hotly debated as the economy minister prepares the government’s decision. Nederlandse Aardolie Maatschappij BV, a venture of Royal Dutch Shell Plc and Exxon Mobil Corp., operates the field and is bound by current production limits until the government makes a final decision.

Dutch Suggest 44% Cut to Output at EU's Biggest Gas Field

Replacing Groningen gas won’t be simple because the field supplies a grade of lower-energy feel that the distribution grid across the Netherlands and northern France is optimized to use. Production started more than half a century ago at the field. Building conversion facilities to transform richer gas from Russia or Norway into a grade suitable for the distribution grid would be a lengthy and expensive process, especially considering the loss of billions of euros in gas sales. 

Should Groningen output need to be cut in half, “that’ll be a big shock for low-calorific gas,” Andree Stracke, chief commercial officer at RWE AG’s supply and trading unit, which has a contract to buy Dutch gas, said in an interview in Vienna Tuesday. “There is room to go down further, and this is creating definitely a gap on the supply side. There are certain customers that are dedicated to low-calorific gas.”

Dutch Suggest 44% Cut to Output at EU's Biggest Gas Field

Last November, the highest Dutch court ruled that the government had failed to sufficiently justify the extraction caps. Shell last week said it revoked a liability statement for NAM in 2017, leading to accusations it wouldn’t compensate for damage caused by the earthquakes.

“We were surprised by people thinking it was our intention to walk away from legal and societal obligations,” Shell Chief Executive Officer Ben van Beurden said Thursday in London. “We are completely behind NAM, we are completely behind Groningen.”

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