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Groningen Earthquakes: When will NAM stop producing gas and ‘de-book’ the reserves?

Printed below is an English translation of an article by Dutch newspaper NRC Handelsblad suggesting that future costs for the *NAM may be higher than the benefits and if so, NAM joint owners Shell/Exxon may stop producing from the Groningen gas field and ‘de-book’ the reserves.

Rising costs and declining production end gas extraction by NAM in Groningen into a realistic scenario, think Lucia van Geuns and Jilles van den Beukel.

Plan for gas reduction brings NAM Exit Closer

After the earthquake in Zeerijp (January 8) a plan is now being worked out to reduce the extraction of Groningen gas. Minister Wiebes (Economic Affairs and Climate, VVD) aims to reduce production as quickly as possible from 21.6 to 12 billion cubic meters per year.

He has informed 200 large-scale users – including companies in the chemical and food sector – that they have four years to switch from this Groningen gas.

As a result of the TNO scenarios from 2017 on the future of gas in the Netherlands, it was noted that the moment at which the Netherlands can turn a net exporter into a net importer of gas was estimated too soon. Now, however, it seems quite possible that this will take place around 2021 (the most conservative TNO scenario).

Nevertheless, ‘Zeerijp’ can hardly be called a surprise. From the Groningen extraction plan it can be concluded that the annual probability of such an earthquake of magnitude 3.4 or larger is estimated at approximately 25 percent. The question is how well the Netherlands is prepared for all possible scenarios. Until now, we have always been raided by events since the quake at Huizinge (2012).

Not only the uncertainty in the future seismic intensity and the social unrest in Groningen play a role. We also think that it is not a given that the shareholders of NAM (Shell and ExxonMobil, each for half) will continue gas production here in the long term. You can think of ten or twenty years, but also one or two years.

Estimates of future costs are now rapidly rising. The amount of seismic energy released per unit of gas produced has been gradually increasing for decades. It is likely that this trend will continue.

Also read: Groningen can win safely in five years

At NAM, the focus is now shifting from keeping production and profit up to the level in the short term, in order to be able to cope with it under the best possible conditions.

The relatively conservative risk assessment no longer remains in the background. NAM is now clear about it: the only way to completely exclude an earthquake like Zeerijp is to reduce production to zero. With a halving of production, however, the probability of such a quake, according to the NAM, will not exceed roughly halved.

Shell and ExxonMobil are not charitable institutions. As soon as stopping for them becomes financially more attractive than continuing production, they will stop. On the one hand, it will depend on how gas prices and production develop, on the other hand on prognoses about the costs of damage, depreciation and strengthening of houses.

For the NAM (which receives about 10 percent of the proceeds and carries 36 percent of the costs), this turning point is reached much earlier than for the state. That the profit distribution of NAM to shareholders has gradually dropped to zero in recent years is a wiped sign.

At this moment Groningen still has a large amount of proven reserves in the books of Shell and ExxonMobil. Proven reserves in this field – roughly a quarter of the original reserves – require a reasonable certainty that they can be produced. If a substantial part of these proven reserves is written off, this indicates that the point of exit has come closer.

Given our great dependence on gas, this is not a tempting scenario for the minister. The concession seems, in the current situation, unsaleable to another gas producer. Possibly the only way to continue gas production is a takeover by the state. In practice, this would only be possible if the NAM continues to function with the state in the current way – for example via the public company EBN – as the sole shareholder.

It is time to prepare ourselves for such scenarios.

Lucia van Geuns is energy consultant at The Hague Center for Strategic Studies (HCSS); Jilles van den Beukel is a geophysicist and energy analyst. Both previously worked for Shell.

ARTICLE ENDS

*Nederlandse Aardolie Maatschappij BV., is a joint venture between Royal Dutch Shell and ExxonMobil each owning a 50% share in the company.
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