What will a fresh output cap at Groningen mean for the gas market?

A further cut in gas production at the Netherlands' Groningen field is likely following today’s recommendation from mining association Staatstoezicht op de Mijnen (SoDM) that the Dutch Ministry of Economic Affairs (MEA) impose a further output cap on the field.

The SoDM said that in light of the most recent earthquake at Zeerijp on January 8, the annual production cap at Groningen should be reduced to a maximum of 12 bcm per year over the course of the next four years. This would cut annual production from Groningen – Europe’s largest gas field, and once the key swing supplier in winter - by nearly half from the last cap of 21.6 bcm. It represents a cut of around 70% since the first cap was imposed in 2014.

How can Europe replace 10 bcm of Groningen gas production, which equates to about 2% of the European market?

Massimo Di-Odoardo, Principal Analyst, Gas & LNG, at Wood Mackenzie said: “Upside potential from Norway will be limited until 2019, when new gas from Aasta Hansteen will be commissioned.

"Material additional imports from Russian into northwest Europe are dependent on the development of Nord Stream 2, as the Yamal-Europe and Nord Stream pipelines are currently running close to full capacity.

"Conversely, Europe could benefit from a rebalancing global LNG market that will result in more LNG available for imports through to 2020.”

Mr Di-Odoardo added: “Regardless of whether alternative supply will be available, the pace of reducing low-calorie gas production at Groningen will depend upon the ability of transmission system operators in northwest Europe to switch customers to high-calorie gas.

"It is likely that Groningen’s production will reduce gradually over the next four years, limiting the impact on security of supply and prices.”

The SoDM’s recommendation has other implications, including the remaining value of the field and on receipts to the Dutch treasury.

Prior to today’s announcement, Wood Mackenzie estimated Groningen’s remaining value at US$19 billion (NPV10, January 2018).

Jamie Thompson, an analyst with Wood Mackenzie’s North Sea Upstream Research team, said: “This could be significant for the partners in Groningen’s operating consortium, Nederlandse Aardolie Maatschappij (NAM), which includes Shell (30%), ExxonMobil (30%) and Dutch state participant Energie Beheer Nederlands (40%). Groningen has been a dependable source of cash flow for over 50 years for Shell and ExxonMobil, and ranks in both their top 10 assets globally by value."

He added: “However, it is the effect on the Dutch state that will be felt most acutely. A cap of 12 bcm per year could diminish the remaining government take by over US$5 billion over the life of the field, and is further compounded by the remaining value Energie Beheer Nederlands stood to realise.”