Dutch Gas Production Cut Limited by Quality, GasTerra Says

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A proposed reduction in natural gas output at Groningen in the Netherlands, Europe’s biggest field, will probably be limited by the nation’s ability to convert imported fuel into the right quality for domestic use, GasTerra BV said.

Groningen production needs to be about 33 billion cubic meters a year during a cold winter, given the nation’s ability to transform imported high-calorific gas into low-calorific fuel used by Dutch households, according to Chief Executive Officer Gertjan Lankhorst. The company is the sole marketer of the field’s output.

The European Union’s biggest gas producer progressively cut Groningen output as earthquakes damaged buildings in its most northern province. The government will decide before July on an 11 percent output cut in this year’s target to 35 billion cubic meters (1.2 trillion cubic feet). Low calorific gas is only produced in Groningen, neighboring Germany, or obtained by adding nitrogen to the high-calorific fuel.

“At the moment, the limiting factor for Dutch production is not so much our contracts, but what the market needs in terms of low-calorific gas,” Lankhorst said Thursday in an interview at the World Gas Conference in Paris. “The capacity of German production and the capacity of the nitrogen installations is such that you need a certain volume of production that is higher than our contractual commitments.”

The Dutch Economy Minister Henk Kamp said in February Groningen production would be capped at 16.5 billion cubic meters in the first half of 2015, leading European gas prices to jump. Groningen output, which accounts for 55 percent of the nation’s total, fell 32 percent in the first five months of the year, according to Nederlandse Aardolie Maatschappij, or NAM, the Royal Dutch Shell Plc-Exxon Mobil Corp. joint venture that owns 60 percent of the field.

Conversion Expansion

Germany produces about 10 billion cubic meters of low-calorific gas a year and the Netherlands has the capacity to convert 20 billion cubic meters, according to the Ministry of Economic Affairs and GasTerra, owned by Shell, Exxon and the Dutch state.

While the government announced last month it would expand the capacity of gas conversion facilities by 50 percent, the works won’t be ready before 2019.

“I’m sure new decisions made by the Dutch ministry will be based on three elements: safety, security of supply and government income,” Lankhorst said. “Based on that balance, I’m sure there will be a decision that will make it possible for us to comply with all our contractual obligations.”

Buy-Back

GasTerra earlier this year bought back gas it had already sold after the government proposed new limits. The Groningen City-based company expects more clarity on output for the years to come by the end of the year, Lankhorst said.

“The gas business is a long-term business. It’s not good when you don’t know how much you can sell just a few months before the delivery period starts and that was the case earlier this year, so indeed we had a little trouble there but not problems we could not overcome,” he said. “I don’t expect the surprise that we had in February to happen again.”

Government curbs are accelerating the decline of Groningen production, which was already forecast to tail off due to field depletion. GasTerra can no longer sign long-term supply deals and neighboring countries that depend on low-calorific gas from the Netherlands already have plans in place to switch their grids to the quality used in most of the EU.

“Even without the caps, production from Groningen would decline anyway, maybe some five years later, but that would happen in all projections,” Lankhorst said. “The customers already knew that the termination of the contracts was related to the decline in the Dutch gas field production.”

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