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Why the Dutch are Missing Out on the Global Natural Gas Glut

The world may never have produced more natural gas, but that’s little comfort for the Dutch government as it seeks to replace flows from Europe’s biggest field.

Lawmakers in the Netherlands on Tuesday will discuss options to supply their pipeline network, which was built around the relatively poor-quality gas from the Groningen deposit. More than a half century of production there triggered earthquakes, forcing the scaling back of output.

Progressive Decline

Annual gas output from the Groningen gas field under new rules

At first glance, losing one field shouldn’t be a problem for a market flush with supply from Russia and Norway. But the region’s home appliances and heating systems were built around the low-calorie gas Groningen produces. GasTerra BV, which markets all of the field’s gas, says there’s potential for shortages if output is trimmed further because of a bottleneck in units that can convert richer gas from abroad.

“Can we stop gas production in the foreseeable future?” Gerald Schotman, the chief executive officer of Nederlandse Aardolie Maatschappij BV, the Royal Dutch Shell Plc-Exxon Mobil Corp. venture that operates Groningen, asked Monday in a speech. “We all need to keep both feet on the ground. Converting more than 7 million households takes time and active government regulation.”

Four facilities that convert richer imported gas by adding nitrogen are running near capacity during peak periods, according to Anton Buijs, a spokesman for Gasterra, a venture between the state, Shell and Exxon. The facilities, which can cost almost half a billion euros, take years to build, meaning they aren’t an immediate solution.

For more on the Dutch earthquakes click here

Buijs declined to estimate the minimum output needed to fulfill GasTerra’s sales contracts, including for exports. Production from Groningen is currently limited to 21.6 billion cubic meters a year, equal to about 5 percent of the European Union’s total gas consumption.

“Changing the contracts does not change the size of the market,” Buijs said. “People don’t adjust their thermostat because they have a contract, they adjust it because they’re cold.”

Some market-design changes to lower demand from industrial customers during cold snaps might help deal with future supply shortages, said Gerben Hieminga, an energy economist at ING Groep NV. That will probably need to be complemented with speeding up plans to convert appliances in Germany, France and Belgium to use high-calorific gas and electrifying heating systems where possible in the Netherlands, he said in an interview.

“It’s so difficult to lower demand in one or two years to meet the possible production ceilings,” Hieminga said. But there is some scope to boost electrification of heating, especially in less populated areas where there’s more space to install bigger boilers, to take the pressure off Groningen, he said.

In November, a court said the Dutch government had failed to make clearhow it will limit gas demand. On Jan. 8, Groningen was hit by the region’s biggest tremor in more than five years, leading NAM and the mining regulator to call for further cuts. The government, which has budgeted for gas income of 1.9 billion euros ($2.3 billion) this year, expects further clarity on how much extraction can be cut by March.

“Yes, eventually we will use less natural gas in the Netherlands,” NAM’s Schotman said. “But we also need energy supply to be reliable. We don’t want blackouts, we can’t afford that.”

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