- Further decrease in the gas production from the Dutch Groningen field is ahead; but hard to find alternatives
- TTF gas prices unaffected for now…
- …but since higher prices are expected in the future, we revised our price forecasts
Decrease in gas production from Groningen gas field
Currently, the discussion on how far the gas production in Groningen (Netherlands) will be reduced continues to dominate the local headlines. The discussions have intensified after an earthquake, measuring 3.4 on Richter scale, hit near Zeerijp on January 8. Both the Dutch State Supervision of Mines (SSM) and Gasunie have already given their advice to the Minister of Economic Affairs and Climate (EZK). SSM advised to allow a maximum gas production of 12 billion cubic meter (bcm) to secure the safety of the people in Groningen. Gasunie advised a minimum gas production of 14 bcm with regards to the security of supply (taking into account a mild winter). The minister already took by their advice and agreed to halt the production at the Loppersum site at the Groningen field.
The minister already indicated that he will order a reduction of the Groningen gas field production towards 12 bcm ‘as soon as possible’. This will follow an earlier decrease from 53.87 bcm in 2013 to 23.58 bcm in 2017. Minister Wiebes will announce his decision by the end of March.
Very large dependency on Groningen gas
The Dutch energy mix is roughly 40% dependent on natural gas. A significant part of that is produced in the Groningen gas field. The rest originates from ‘kleine-velden-beleid’. These are smaller gas fields spread over the Dutch territory, both onshore and offshore. A large part of the Dutch gas consumption is dependent on the Groningen gas as it is low-calorific, which is of a different quality than most imported gas. The gas is mostly used for heating and generation of electricity by the Dutch households, offices, shops, and the rest is being exported to neighboring countries.
Energy savings, attention to energy efficiency, and less exports are the obvious means to lower production in the near term. However, this is easier said than done. The minister has already started talks with the involved countries to see how and when gas exports can be reduced. Besides, the minister sent a letter to two hundred large energy consumers ordering them to switch to high calorific gas or a renewable alternative within four years. According to the branch association of large energy consumers (VEMW), there are several conditions that need to be addressed before the usage of low calorific Groningen gas can be reduced. These conditions concern financing the transition towards the usage of high calorific gas or renewable energy, building the infrastructure of renewable alternatives, signing contracts for gas imports, et cetera. Therefore, four years might prove to be too short to make this conversion happen.
It is only a matter of time before the dependency on Groningen gas will be reduced. However, this will not go as fast as the advised reduction of the Groningen gas production. It is an illusion to think that the production can be reduced from 21.6 bcm to either 12 or 14 bcm in a four-year time. This will raise the risk of gas shortages, especially in the case of a harsh winter.
All alternatives coincide with pros, but certainly also with cons
There are several alternatives for Groningen gas, but all these alternatives come with pros and cons. The disadvantages mostly relate to time (finding alternatives takes a lot of time), financing (most alternatives are costly and some even have a limited lifespan which could lead to a negative yield), and often lack of social and local support. These short insights of the situation is far from perfect. However, it does provide an overview of the most important dilemmas the Minister of Economic Affairs and Climate currently faces.
Renewable energy: The most obvious alternative is renewable energy. Especially as a replacement of the gas being consumed for the generation of electricity and heating in the industry. For power generation in power plants, often high calorific gas is used. A disadvantage is that it will take a long time before there is enough wind and solar capacity to fully replace the share of low calorific gas. Despite the abundant availability of subsidies for renewable energy, a significant number of projects won’t reach the final investment decision. The main reasons behind the lack of materialization are the too optimistic business cases and/or resistance from the local municipality and/or local government. The percentage of renewable energy in the energy mix show a spectacular growth, but they still amount to a small percentage of the total energy consumption.
Import of gas: If it is not possible or accepted to raise local production – either from small local fields, or from the recently discovered gas field above the isle of Schiermonnikoog – then the minister could decide to increase the gas imports. However, this option faces technical, economical and geopolitical disadvantages. Imported gas has a different quality: high calorific. To convert this to low calorific gas, nitrogen needs to be added. Existing nitrogen factories are running at their maximum capacity. This implies that, in order to convert imported gas, more nitrogen factories need to be built. The costs will be several hundreds of millions of euros with at least several years to build. The question is whether we should invest such amounts of money in factories which should play a decreasing role in the energy mix, according to the Paris climate goals. On top of that, buying gas at the international market is more costly than locally producing gas, besides the fact that the transportation of gas is also costly and triggers even more carbon emissions.
If we decide to import gas, the cheapest option is gas from Russia, and –from a capacity perspective – perhaps from Norway. Especially gas from Russia is controversial, as Europe tries to lower its energy dependency on Russia. For the Netherlands, it is even more delicate due to the MH17-affair and the implied sanctions against Russia. This makes Russian gas, from a geopolitical perspective, not desirable.
Another option could be Liquified Natural Gas (LNG) from Qatar, Australia and/or the US. The price of LNG is currently significantly higher (+/- 50% as a result of strong Asian demand), and this does not even include the cost of transportation. Nevertheless, we expect that LNG prices will trade somewhat closer to the TTF gas price in the coming months when seasonal demand (especially in Asia) drops. A great disadvantage of LNG is that it needs to be transported over long distances. The natural loss of some of the LNG during shipping, as well as the carbon emissions as a result of transportation, can result in a higher climate impact than locally produced gas. Besides, extra dependency on countries like Qatar could add geopolitical risks. Finally, gas imported from the US may be controversial as it will likely contain shale gas. Some people find it even more controversial, as shale gas is produced using injection of chemicals in the ground.
Other alternatives: There are other alternatives. For heating, one can think of geothermics, heat pumps, and biomass. Geothermics is a technology which is becoming more and more mature. It uses the same techniques used by gas production, and therefore may not reduce the risk of earthquakes. Thus, it may not receive local support. Solid procedures and early local engagement can be crucial for geothermal energy to strive. Heat pumps can be a good alternative for a traditional gas boiler. Even in the hybrid gas/electricity models, gas usage and carbon emissions can be significantly lowered.
The Dutch renewable energy contains roughly 50% biomass. This is used for both heating and generating electricity. Nevertheless, biomass is somewhat controversial, as not everybody sees biomass as a form of renewable energy, unlike the European Union who labelled it as such.
For electricity generation, one could also decide to increase the share of coal in the mix. However, this conflicts with the objectives to close the remaining Dutch coal fired power plants before 2030, as agreed upon in the latest coalition agreement. Such a measure is needed to meet the European goals for carbon emission reductions. Another alternative – unpopular but carbon emission free –could be nuclear energy. However, this is very costly and has its own disadvantages. Therefore, this alternative seems very unlikely.
No price effects seen yet, despite the expected production cut
Although it is clear that the minister will reduce gas production from the Groningen gas field as soon as possible, Title Transfer Facility (TTF) gas price futures are hardly affected. TTF is the Dutch gas trading hub. TTF is – together with National Balancing Point (UK) and Zeebrugge (Belgium) – the most important European gas benchmarks. Therefore, Groningen gas production can have a huge impact on the TTF gas price. The reason investors ignore the upcoming decision by the minister can be partly explained by the fact that the final outcome is not clear yet. Furthermore, it will take quite some time before gas production reaches 12 bcm.
Another probable explanation can be that the market foresees enough alternatives, and that the decline in supply will be met by a decline in demand (of low calorific gas). It is good to keep in mind that, besides supply, gas prices are also driven by demand related factors. Seasonal patterns can therefore be important for price direction. A period of harsh winter weather could lead to a temporary, but significant, price rally.
We revise our TTF gas price forecast. Partly because market speculation, as a result of lower gas production, can lead to more support for gas prices, especially after 2019. But also following our anticipation of higher prices for other commodities, like oil and coal. Besides, prices for carbon emission rights will continue its uptrend. This combination of factors can lead to more support for gas prices. Therefore we raised our forecast for TTF gas from 18 EUR/MWh for the year end to 20 EUR/MWh. Furthermore, we raised our forecast to 24 EUR/MWh for the end of 2019 (from 18 EUR/MWh).