Groningen L-gas output ‘temporarily’ cut to 27bcm

Low-calorific natural gas (L-gas) production from the Groningen field in the Netherlands has been “temporarily” reduced to 27 billion cubic metres for the 2015 gas year (1 October 2015-30 September 2016) by the council of state – the Netherlands’ highest general administrative court.

Production up to 33bcm will only be permitted in the event of a relatively cold 2015 gas year, the court said in a statement. A court spokeswoman told ICIS that this would mean a year with temperatures similar to those in 2012, but could not give precise details.

The start of the 2015 gas year has been relatively mild with Dutch L-gas consumption and exports towards Germany and Belgium totalling 5.83bcm as of 16 November, which compares with 6.76bcm in the same period of 2012.

The court’s decision on Wednesday is an “interim relief measure” that will remain in place until six weeks after the Dutch economy minister takes a new decision on the production limit for gas year 2015.

In the ruling on Wednesday, the court said the minister had failed to justify setting the production cap at the maximum level needed to secure supply in a cold winter, 33bcm, which would mean that in the event of average or below-average temperatures, more gas would be extracted than was necessary for security of supply. The onus is now on the minister to revise the production cap in line with the court’s decision.

The court’s temporary cap of 27bcm is based on the production needed in an average year. In the event of a cold year – which would boost L-gas consumption across northwest Europe – the field’s operator NAM would be permitted to produce up to 33bcm.

The court also confirmed to ICIS that no change to the present 30bcm cap for the 2015 calendar year had been made.

The court hearing was organised in response to 41 objections to the government’s January 2015 decision to reduce the annual production ceiling from 42.5 billion cubic metres (bcm) to 39.4bcm, but the hearing also considered the subsequent June 2015 decision to further curtail production to 30bcm for the 2015 calendar year and 33bcm for the 2015 gas year, running from 1 October 2015.

On 10 and 11 September, the complainants argued that the government needed to place more importance on the safety of citizens than on security of supply and the economic value of the gas. The court agreed with this argument on Wednesday, saying that “when weighing the interests involved the minister must show that ‘necessary precautions’ have been taken, given the seriousness and nature of the consequences of gas extraction”, adding that “the studies on which [the minister’s previous] decision was based concluded that less gas extraction would mean a lower seismic risk”.

The appellants also argued in September that the current production plans should not have been approved by the government before a full assessment into the impact of gas extraction had been carried out and that gas extraction should therefore be halted, or much more heavily restricted. The court ruling on Wednesday said that the minister was “entitled to make the decision he did on the basis of the studies available to him at that time”.

The court also upheld a decision taken in April 2015 to ban production from the Loppersum cluster of fields except when it is necessary for security of supply. The Loppersum region – which is particularly vulnerable to earth tremors – has accounted for 1.5bcm of the 23.7bcm produced so far in 2015.

Market response

Since 12 November, when the court announced that it would issue its decision on 18 November, key TTF contracts for delivery in 2016 have gained more than €1.00/MWh due to short-covering and speculation among market participants. A total of 94TWh was traded at the hub on Tuesday which was the greatest single-day volume since 18 March 2015.

Before the decision on Wednesday morning, trade data seen by ICIS showed that December ’15 and Q1 ’16 were both trading slightly weaker than Tuesday evening’s ICIS closing assessments. Since the decision, prices have fallen further with December ’15 trading at €17.25/MWh shortly after 10:00 London time, compared with Tuesday’s €17.788/MWh ICIS assessment. Q1 ’16 and Summer ’16 contracts have so far followed a similar trajectory.

“This was pre-decision stress probably, so in the end the market level yesterday was already anticipating a lower cap,” one trader said in explanation of the bearish move at the TTF. “The [previous] high prices were just to hedge against a total field closure,” a second market source said.

Looking ahead

The economy ministry said this week that a decision on the L-gas supply strategy for 2016 and beyond will be made “around” 18 December, but the government will now be forced to adjust any plans it was drawing up in line with the court’s decision.

The government has said it is considering two potential strategies for the future supply of L-gas in the Netherlands and northwest Europe. The first would stick with the current annual ceiling-based approach to gas extraction with the cap determined by how much gas can safely be produced in conjunction with the reinforcement of buildings in areas affected by earth tremors.

The second potential strategy would entail scaling back Groningen production as much as possible by maximising the use of other gas sources: boosting production from small high calorific natural gas (H-gas) fields in the Netherlands and increasing H-gas imports from abroad and maximising the quality conversion of this gas through nitrogen blending. Lower and more variable production from the Groningen field would then be used to cover peak L-gas demand.

The field’s operator NAM published an updated risk assessment on its website this week – but dated 7 November – in which it said that the risk to houses under a 33 billion cubic metre/year production scenario did not exceed 1 in 10,000. This, the report said, is consistent with the safety criteria outlined by the Meijdam Committee – a commission set up to advise the economy ministry on the risks posed by earthquakes in Groningen and how to deal with them.

The ministers now-overruled 33bcm annual cap that was in place for the 2015 gas year was based on the minimum production needed in a cold year, as outlined in a study conducted by grid operator GTS in 2013.

The Dutch operator has since updated this analysis, at the request of the economy minister, and has lowered the minimum production now needed in a cold year to 30bcm. The court decision on Wednesday has made it clear however that the minister needs to make a much stronger case for setting the production cap at the same level as that needed to secure security of supply in a cold year. This would appear to make any future cap at or above 30bcm unlikely. The Dutch economy ministry did not respond to a request for comment by 11:00. jake.horslen@icis.com