Musings: A Dutch Gas Bubble Could Create Global Indigestion

Making up for the potential €3.5 ($4.8) billion drain on the Dutch treasury over the next 3-5 years is the first order of business for the government. Expectations are that some of the lost income will be recouped by increased imports and exports that will find their way through the Dutch energy hub. The expectation that Groningen’s gas volumes would be cut has already boosted local gas prices, which should not be a surprise, but also a pain for citizens and businesses. The biggest beneficiary of the Dutch cut will be Gazprom (GAZ.BE), which sees being able to sell an additional 175 Bcf of gas to Europe, thus earning an additional $1-2 billion in revenues, and further strengthening Europe’s dependency on Russian gas. Oil-price-linked gas imports will keep energy prices in Europe high providing an environment in which slightly cheaper Russian pipeline gas can capture a greater market share.

Another unique aspect of Groningen that may alter the European market is its gas quality. The Groningen field produces low-calorific gas, used extensively in central heating boilers and for domestic cooking. Europe has limits in processing capacity to convert high-calorific gas into low-calorific gas through the addition of nitrogen. This raises the issue of how easily the lost Groningen gas output can be replaced with high-calorific imports. This increases the possibility of a two-tiered gas market for low- and high-calorific natural gas, at least for a while, until conversion capacity is installed, further complicating the European gas market.

The Netherlands faces another challenge from the Groningen production reduction, which is the potential impact on pricing of seasonal flexibility. The field is used in conjunction with two smaller fields – Norq and Grijpskerk – for storage of gas for winter demand. In a report on the impact of Groningen production on seismic activity following the August 2012 earthquake, the State Supervision of Mines made the following observation: “higher magnitude earthquakes seem to occur with a delay of six to nine months following a winter peak production period.” If this observation holds up under further examination, it raises the possibility of a greater impact from restrictions on peak production. This means Groningen’s flexibility to supply seasonal supply could be reduced. The industry will not know how, or if, production restrictions might impact supply for some time.


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Luke  |  February 14, 2014
I know virtually nothing about geology but it would seem that filling the void with water would stabilize the underground structure.


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