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The Netherlands – reinterpreting its role in the energy industry

26. 02. 2019
10:16

For the past decades the Netherlands has enjoyed secure energy supply and self-sufficiency as a result of an abundance of natural resources on its territory. Large natural gas reserves have brought this small Western European country not only energy security but also considerable wealth through export opportunities and state income. The Dutch gas industry is changing, however, and as a consequence the Netherlands will have to figure out how it will go forward post large-scale gas production.

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The Netherlands – reinterpreting its role in the energy industry

Dutch gas: a promising goldmine


As afore mentioned, the Netherlands is a natural gas rich country. Most of the gas fields are located offshore in the North Sea and onshore in the three North Eastern provinces of Friesland, Drenthe and Groningen. The latter contains the largest reserves as it houses one of the ten largest natural gas fields in the world. Proved natural gas reserves as of January 2016 amassed to a total of approximately 26.9 Tcf (IEA, 2016).

Though exploratory activities had started previously, the true beginning of Dutch gas production lies in the year 1959, when the biggest Dutch natural gas field was discovered in Slochteren, a municipality located in the province of Groningen in the Northeastern part of the Netherlands. The discovery was led by the NAM (Dutch Petroleum Company), a joint venture created in 1947 between the Dutch-British Shell (now Royal Dutch Shell) and the American Exxonmobil with the Dutch government as a shareholder. The Groningen gas field was not the first Dutch gas field, and the NAM had been drilling for resources already in 1948; but the 1959 discovery proved to be a turning point. At the time of its discovery, the field’s reserves were unknown but after ensuing research and exploration it proved to contain about 2800 bcm of natural gas, making it the biggest natural gas field in Western Europe. Its discovery led to the central decision to transition from coal to gas by building a national gas grid in the 60’s and furthermore seemed to be a blessing for the relatively poor region of Groningen, which was marked by depopulation and unemployment.

Source: http://www-static.shell.com/static/nam-nl/images/concessiekaart.gif.

Gas production in the Groningen field quickly started in 1963 but was later paused in an effort to ‘save’ its resources. Reasons for this were the increased attention towards the ‘security of supply’ question after the 1973 oil crisis, and the realization that nuclear power was not going to be the final solution in the future. Focus was thus initially put on smaller gas fields in the Netherlands. It was not until around the 2000’s that large scale production of the Groningen gas field started up again after the smaller fields were emptied (Geuns, Juez-Larré, & de Jong, 2017).

The Groningen gas field thus turned out to contain much larger reserves as initially expected. As a result, the Netherlands has been able to export a considerable share of this gas. The exports are primarily going to Germany, France, and Belgium; in 2017 the Netherlands exported a total of 27 billion bcm to these three (Karin Brans, 2018). The expectations for economic prosperity for the Northern provinces were soon tempered however. Due to the Dutch mining law, natural resources found in Dutch soil are state property. With a gas price connected to the oil price since 1964, one can imagine what a steady source of income this has been for the Dutch state. The natural gas has proven to be a goldmine, bringing in billions of euro in state revenue used for infrastructure projects and social security.

 

Source: https://www.oxfordenergy.org/wpcms/wp-content/uploads/2017/05/The-Dutch-Gas-Market-trials-tribulations-and-trends-NG-118.pdf

 

Unwelcome consequences and declining gas production


While the gas extraction in Groningen has proved to be advantageous for the Dutch economy it has also brought negative effects to the inhabitants of the Groningen province. Most importantly, the act of extracting the natural gas has led to soil subsidence due to the porous nature of the sandstone in which the gas is located. When the gas is extracted, and with it the pressure within the soil, it subsides, which in turn leads to earthquakes. The latter has been an increasingly prominent problem in the last decade as production increased from 20 billion bcm in 2000 to 50 billion bcm in 2011 (Sjoerd Huismans, 2018).

Groningen has experienced seismic activity in its gas regions since 1986 but their degree and frequency have increased along with production. In 2012 Groningen experienced the heaviest earthquake so far, with a magnitude of 3.6 on the Richter scale. In 2013 there was an earthquake with a magnitude of 3.2, and in 2017 there were 18 instances of earthquakes with a magnitude higher than 1.5 (Dagblad van het Noorden, 2017).

Because of the shallow depth of the resources, these relatively small earthquakes have major repercussions. As a consequence of the subsiding soil and seismic activity many home owners in the Northeastern region of the Netherlands are dealing with damaged houses, which considerably decreases the value of their property. The NAM has reserved funds for reinforcing homes, but they have proved to be insufficient for the almost 200.000 houses that need it. Besides the earthquakes, concern about climate change and the wish to transition away from conventional fossil fuels also fueled public protest and political debate about Dutch gas production.

 

Source: ANP (https://www.businessinsider.nl/nam-wijst-verantwoordelijkheid-toekomstige-gaswinning-groningen-af/)

 

Those at the helm of the social dissent and public protests are the inhabitants of the affected regions that have seen marginal benefits from the economic activity of their province. A big part of the frustration is the fact that while the Netherlands as a country thrives from the supply and revenue of this region, only about 1% of the proceeds is invested back into the three Northern provinces that hold the resources. This contrasts with the economic center (Amsterdam-The Hague-Rotterdam) of the Netherlands which benefits from large investments into, for example, infrastructure projects (Sjoerd Huismans, 2018).

Another source of frustration has been the fact that the NAM has denied the correlation between gas production and earthquakes until 1993. Moreover, when relevant authorities admitted the relation between seismic activity and gas production, the potential consequences were initially not taken into account; the Dutch ministry of Economic Affairs was one of those glancing over the potential consequences (Geuns, Juez-Larré, & de Jong, 2017).

Part of the reason for this is that halting gas extraction is not a beneficial financial prospect for the state as decreasing extraction means decreasing state revenues. Not only will the Netherlands miss out on export revenue, the fact that the majority of the Dutch houses are specifically equipped to use the low-calorific high pressure Groningen gas means that these houses cannot simply switch over to foreign high-calorific gas. Because of this, a nitrogen plant will have to be built in order to converse foreign gas and make it compatible with domestic equipment in old houses. This will be expensive and will have to be paid by Dutch tax payers. The same goes for countries dependent on Dutch gas such as Belgium (Karin Brans, 2018).

Because of the increased frequency of the earthquakes, the Dutch government grudgingly decided to cut production in the Groningen gas field numerous times in the past years. Where in 2013 53 bcm of gas was extracted, this was lowered in subsequent years down to 28 bcm in 2015-2016 and a little over 20 bcm in 2017-2018 in order to lower the occurrence of earthquakes (NAM, 2018). The state’s focus since 2015-2016 has been to maintain a production level on the point of secure domestic supply and ability to fulfill its export obligations. In turn, the lowered production has led to considerably lower resource income for the Dutch state. In 2013 natural gas income accounted for 9% of state income for a total of 15.4 billion euro, in 2015 this was 3% for a total of 5.3 billion euro (CBS, 2016).

Besides the Dutch state, the Groningen gas field has turned from a goldmine to a liability for Royal Dutch Shell and Exxonmobil. Compensation claims from house owners and costs of house-strengthening programs have severely upped the non-technical costs for the joint venture and have only been anticipated to increase in the future if production were to continue. This combined with the social unrest has made it difficult for the Dutch government to endorse the gas production in light of environmental and safety concerns. In January 2018 another earthquake with a 3.4 magnitude caused considerable damage in Groningen. Consecutively, in March 2018 the government announced that production in Groningen will be completely halted as soon as possible on the basis of safety concerns. Factually as soon as possible means by 2030, as this is when the Netherlands’ contractual export obligations end. The estimated amount of gas left in the ground by then is 500 bcm (Beukel & van Geuns, 2019).

 

What Now?

 

As a result of halting domestic gas production the Netherlands will go from exporter to importer, which means that it will be more reliant on foreign supply. The lower supply flexibility in turn means that it will be more difficult for the Dutch state to react to either high or low seasonal demand change. Besides investing into LNG and the development of renewable sources, Russia seems to be the only supplier with the capacity to fulfill Dutch energy needs.

In the long term, the Netherlands would like to severely decrease its domestic fossil fuel consumption in favor of renewable energy. In order to encourage this, the Dutch state has forbidden the installation of gas infrastructure in newly build housing blocs (exemptions can be granted), has replaced the traditional obligation to be connected to the gas grid to the right to be connected to it, and increasingly encourages households already connected to transition away from gas by offering subsidies (Beukel & van Geuns, 2019). This is the most ambitious gas-restriction plan in the world, but so far some important aspects of this plan are yet unclear such as financing.

Besides transitioning to renewable energy sources, the Netherlands plans to bank on its role as natural gas ‘roundabout’ in Western Europe, the concept of which was introduced already in 2006. This plan envisages the Netherlands to continue to earn income from the natural gas business by using its knowledge and infrastructure to transform from an energy exporter to a trading center and transiter. Already more than 10 billion euro has been invested in the infrastructure needed to facilitate this transition (NOS, 2015). Additionally, the Dutch state holds a 9% share in the contested Nord Stream project. After all, in order to become a ‘gas-roundabout’ gas needs to firstly be imported. Good trade relations with Russia are therefore necessary since Norway is already at the max of its exports.  

In times of political tension between Europe and Russia one should ask whether the Netherlands should want to become such a close business partner with Russia, the latter of which is known to use its energy resources as a political tool. On the other hand, has political tension rarely truly impeded energy related business relations in Europe, as can be seen with the Nord Stream 2 project currently dividing Europe. Fact is that the Netherlands will become dependent on gas imports in the near future, and that this dependency will be long term as the Netherland’s renewable energy goals are ambitious but also in a distant future.


 

Bibliography

  • Beukel, J. v., & van Geuns, L. (2019). Groningen gas: the loss of a social license to operate. HCSS Geo-economics. The Hague Centre for Strategic Studies. Retrieved from https://hcss.nl/sites/default/files/files/reports/15.2.19%20Groningen%20gas%20the%20loss%20of%20a%20social%20license%20to%20operate.pdf
  • CBS. (2016, September 16). Aardgas voor bijna 80 procent op. Retrieved from CBS: https://www.cbs.nl/nl-nl/nieuws/2016/37/aardgas-voor-bijna-80-procent-op
  • Dagblad van het Noorden. (2017, December 28). KNMI: 2017 telde meer aardbevingen dan 2016. Retrieved from Dagblad van het Noorden: https://www.dvhn.nl/groningen/KNMI-2017-telde-meer-aardbevingen-dan-2016-22779838.html
  • Geuns, L. v., Juez-Larré, J., & de Jong, S. (2017). Van Exporteur naar Importeur: De Verander(en)de Rol van Aardgas in Nederland. TNO, in cooperation with The Hague Centre for Strategic Studies. Retrieved from https://hcss.nl/sites/default/files/files/reports/Whitepaper%20Nederland%20Gasland-5TNO-HCSS.pdf
  • IEA. (2016, August). Netherlands analysis. Retrieved from IEA: https://www.eia.gov/beta/international/analysis.php?iso=NLD
  • Karin Brans. (2018, January 15). Kan Nederland af van de gascontracten met het buitenland? Retrieved from NOS: https://nos.nl/nieuwsuur/artikel/2212104-kan-nederland-af-van-de-gascontracten-met-het-buitenland.html
  • NAM. (2018). Gas- en Oliewinning. Retrieved from NAM: https://www.nam.nl/feiten-en-cijfers/gaswinning.html#iframe=L2VtYmVkL2NvbXBvbmVudC8_aWQ9Z2Fzd2lubmluZyN0YWItdGFiLXNldHRpbmdzLTkxMDhlODk5NzcyNTRhN2Q4Njg5NWFlMjdlOTM4Y2Rh
  • NOS. (2015, May 22). Nederlandse gasrotonde draait op handel met Russen. Retrieved from NOS: https://nos.nl/nieuwsuur/artikel/2037203-nederlandse-gasrotonde-draait-op-handel-met-russen.html
  • Sjoerd Huismans. (2018). Waarom zijn er aardbevingen in Groningen? Retrieved from NPO: https://npofocus.nl/artikel/7463/waarom-zijn-er-aardbevingen-in-groningen

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Commodity data

26.03.2019
€/MWh okte
Base
37.015
15.3594 %
Peak
38.0067
14.5958 %
Offpeak
36.0233
16.1762 %
26.03.2019
€/MWh elix
Base
32.9233
26.5349 %
Peak
32.8808
15.129 %
Offpeak
32.9658
40.4096 %
25.03.2019
€/MWh ote
Base
32.4425
-7.30825 %
Peak
32.2742
-5.58738 %
Offpeak
32.6108
-8.95068 %

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