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Zacks: Groningen Gas Field to be Phased Out 8 Years Before Schedule

Zacks Equity Research: September 11, 2019

The government of the Netherlands recently stated that gas production from the Groningen field, once biggest in Europe, will be gradually phased out by mid-2022 (eight years earlier than planned) to lower the risk and damages from the earthquakes caused by drilling. Nederlandse Aardolie Maatschappij BV or NAM, a joint venture between Royal Dutch Shell PLC RDS.A and Exxon Mobil Corporation XOM is the operator of the field.

Earlier-than-planned halt of the Groningen gas field resulted from the frequently felt earth tremors with 3.4 magnitude earthquakes hitting the region in January 2018 as well as earlier in 2019, thereby coercing a dip in the extraction levels and a vow by the government to stop production as early as possible.

Back in 2013, before the field was detected to cause drilling-related tremors that damaged buildings, Groningen extracted nearly 54 billion cubic metres (bcm) of gas. Following the earthquake at the start of this year, an immediate step was taken by the gas sector regulator to cut the production by 40%. The Dutch government capped the production to 11.8 bcm for a year through October 2020.

The fall in the production will induce a $441-million expense for the Dutch state. The final settlement on the costs associated with the closure of Groningen production will be completed by the first half of 2020.

This once Europe’s main supplier of natural gas will be operational until 2026, provided the commodity witnesses high demand during extreme cold winters.

Both Shell and Exxon Mobil with a Zacks Rank #5 (Strong Sell) and a Zacks Rank #3 (Hold), respectively, have a number of energy assets on the European continent. Therefore, the gradual decline in production from the Groningen field is not expected to be a headache for the oil majors in the long run.

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