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Groningen Earthquakes: Dilemma heaped upon dilemma

Printed below is an English translation of an article published today by the Dutch Financial Times, Financieele DagbladRoyal Dutch Shell and ExxonMobil each own a 50% share in NAM, the company responsible for the earthquake blighted Groningen Gas Field and consequential potential bill for untold billions in damages to effected residences.

“The minister cannot sign a deal with Shell and Exxon, which involves billions of euros…

Shell and Exxon lack trump card in negotiations with Wiebes

BY BERT VAN DIJK AND GIJS DEN BRINKER

Negotiations between Minister Eric Wiebes of Economic Affairs & Climate and oil companies Shell and ExxonMobil about gas extraction in Groningen are almost complete. Within two weeks, the minister will present a coalition agreement on the billions issue. Which cards are on the table?

1. Security of supply

Minister Wiebes announced at the end of March that he wants to bring gas production in Groningen to zero as quickly as possible. That would mean that the gas extraction by those lower volumes would soon no longer be profitable for Shell and ExxonMobil. Even though there is hardly any money to be gained from gas extraction, several sources report the FD.

Logical would then be that the energy companies stop gas production. But that is not possible. The seller of the gas, GasTerra (also owned by the government, Shell and Exxon), has contracted a large part of the Groningen gas for long periods for buyers at home and abroad.

In a response to the Council of State, Wiebes points out the ‘disruptive consequences of the long-term closure of final customers’. Companies that need gas could go bankrupt.

These obligations are one of the reasons why Wiebes ignores an advice from the Council of State. He wants to ensure that the safety of local residents in Groningen is always above supply security. But according to the Minister, this could lead to ‘the Netherlands being put to a halt’.

In order to prevent Shell and Exxon from giving it a shot, Wiebes also proposes a mining obligation: they have to keep on pumping gas, even if they do not earn a penny. Simply replacing Gronings gas with gas from elsewhere is not possible in the short term. The composition is different, so customers can not just use it.

2. Compensation

The extraction obligation immediately causes a new problem: this limits the freedom of NAM to dispose of the gas it owns, a violation of the property right. Normally, this would result in NAM shareholders being able to look after Shell and Exxon for compensation.

The minister thinks he can prevent direct compensation by keeping gas extraction financially attractive to Shell and ExxonMobil. How he wants to do that is still unknown. It is obvious that adjusting the profit distribution between the State and the two oil companies.

Agreement remains secret

When the Minister and Shell and ExxonMobil finalize their negotiations, it is not known, but it seems to be a matter of days or at most two weeks. The Main Agreement remains secret, because according to the minister, this agreement contains a lot of confidential business information.

Wiebes promised the House of Representatives last week to strive for ‘the greatest possible openness’. However, he does not intend to submit the negotiation results with the oil companies to the Chamber in advance, to the annoyance of some MPs. “The minister cannot sign a deal with Shell and Exxon, which involves billions of euros, where the government also has a part of the responsibility and in which a division is made, without the parliament giving its approval in advance?” , an angry Henk Nijboer, MP for the PvdA, asked himself.

But according to Wiebes, that is possible. ‘It is the State that negotiates with private parties. Any negotiation with private parties can have budgetary consequences. As a government inspector you have to debate about it ‘, said Wiebes to Nijboer.

The decades-old ‘multi-yield scheme’ applies to the distribution of the profit. It was once intended to skim over the profits of oil companies. In an era of production declines and rising costs, it results in the revenue / expense ratio being completely out of balance.

For the NAM, which has to bear over a third of the earthquake costs, there are less and less gains in the current distribution key. ‘In the case of smaller volumes, the gas production is still profitable for the State for a long time due to the increased revenue regulation, but for NAM the point is very close that gas extraction is no longer profitable’, says a directly involved party.

Where that precise turning point to loss lies, no one wants to say, but in Groningen there is a rumor that gas extraction is no longer profitable if it is below 20 billion cubic meters. For the current year the production ceiling has been set at 21.6 billion.

Now that gas production must reach 12 billion cubic meters within a few years, a new profit distribution will have to be made.

3. Risk liability

The most difficult and sensitive negotiating point is liability for future damage. After all, it is possible that there will be earthquakes for years to come as a result of gas extraction, even after it has been stopped.

This is an unattractive prospect for Shell and ExxonMobil. They do not want to be responsible for something they have no control over, a bill of bill where no ceiling or end date is on. Especially for Exxon: an emotional bond with the Netherlands does not have the company and it has the reputation to do nothing more than the law requires.

Wiebes is committed to ensuring that NAM remains responsible. In the parliamentary debate in the House of Representatives last week, the minister said that the NAM ‘will at all times […] pay the damage and the reinforcement to the infinite as long as necessary’.

He himself sees a legal dilemma there. ‘If you are not on the tap yourself, how can you be held accountable for that?’, Wiebes acknowledged.

The minister thinks he has found the solution by temporarily eliminating a crucial legal provision that regulates that a legal person is no longer liable for something that has not happened through his actions. “That means: you did not do it, but you are still financially responsible,” says Wiebes.

It is a wooden string solution, the minister acknowledges. ‘That is of course not a very sustainable construction and that is why we have to arrange this differently in the future and we have to separate the strict liability and the obligation to pay each other.’

The question is whether and under what conditions Shell and Exxon agree with this. ‘This is very sensitive to NAM shareholders’, according to a person directly involved.

Problem for the oil companies is that they do not have a trump card. They cannot return the concession just like that, because they will then remain liable for their part for damage that occurs in the future. Only if a third party, such as the State, takes over liability for quakes after their departure, will they consider it.

A way out is to stipulate the widest possible profit-sharing scheme, in order to make the compulsory extraction (and the payment of the damage) as favorable as possible. But in the best case, that is a consolation prize.

Shell, Exxon and NAM do not want to give a substantive response as long as the negotiations take place.

Loss of flexibility

In order to be able to continue to guarantee the supply of gas and at the same time close the gas tap in Groningen, Wiebes wants to build a nitrogen plant that can convert 6 to 7 billion cubic meters of foreign gas into gas with the same quality characteristics as the Groningen gas.

Although the Netherlands can thus guarantee the security of supply, it may lose some of its flexibility in the gas supply. The production of the Groningen field can be raised and lowered very quickly, which is especially important in cold periods in the winter.

This flexibility is less, when more pipeline gas comes from Russia, for example. This can lead to challenges in sudden cold periods, because the gas consumption of households in particular has enormous peaks and troughs. Although gas storage facilities can absorb a part, at the end of the winter of 2017 all gas storage locations in the Netherlands were virtually empty due to the cold weather.

It is precisely the flexibility requirement that is expected to increase in the coming years due to the growing share of renewable energy. Because windmills and solar panels need a back-up for periods of little wind and sun and to be able to bridge seasons.

DUTCH SOURCE ARTICLE

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