Can the EU cope without Groningen?
Output from the Netherlands’ giant gasfield, a stalwart of European gas supplies for decades, is falling sharply, increasing the continent’s need for imports
The Dutch government says production from the Groningen gasfield will be 27bn cubic metres (cm) in 2016, half the annual volume produced in 2012-13, in line with a court mandate to limit the risk of earthquakes. From 2020, output will fall to 18bn-24bn cm. Previous quota announcements in 2014 and early 2015 had led to rallies in gas prices, but this time it caused a fall, indicating relief that further cuts were not imposed and confidence in the ability of the sector to meet demand. Falling output in Holland and later in the UK offshore sector will, however, lead to a steady rise in European imports. Quite how much will be needed depends on uncertain future demand, as supply is not expected to recover unless shale drilling gets going.
The cuts last year meant the Netherlands, which has relied on the field for around 60% of its supply, in Q3 became a net importer for the first time in 50 years. Groningen supplies low calorific L gas, high in nitrogen, largely to residential consumers in Holland, Germany, Belgium and northern France. For 40 years the field had been the main means of balancing seasonal demand fluctuations, as well as providing a baseload flow.
Less flexible with age
The Groningen restrictions come on top of steady declines in the region’s seasonal swing-production potential over the past 15 years, as producing gasfields have matured. The UK and Germany now provide almost no swing capacity, down sharply from 2000 when they held 35-40% of the region’s total, or 6.1bn cm a month,(bn/month) according to McKinsey, a consultancy. In the same period, Norway increased swing capacity from 1.9bn to 3.1bn cm/month, although this too is increasingly constrained as baseload contracts fill pipeline capacity. Dutch swing capacity had already dropped from 7.3bn to 5bn cm/month before the Groningen restrictions.
The flexibility that these fields used to provide now needs to be met from alternative sources, although a mild winter in Europe has so far made the issue less pressing. Seasonal storage capacity has been expanded over the past few years, driven by higher winter-summer price spreads. This is related to the anticipated reduction in regional seasonal supply, which reached 25bn cm in 2015, and is expected to rise to 34bn cm a year (cm/y) by 2025, along with 24bn cm of flexible storage. Over the past year, storage utilisation has risen, with withdrawals accelerating in early 2015 to 230m cm a day last winter, compared with daily withdrawals of 90m cm in 2013-14. The same is expected this winter, although mild weather has so far meant little has been required.
The other main sources of supply are liquefied natural gas (LNG), Norway and Russia, both for swing demand and to fill storage in summer. Underutilised LNG import terminals in the UK, Belgium and the Netherlands are expected to receive 167 cargoes in 2015, up from 132 in 2014 and the most since 2011, according to Bloomberg. Last summer, relatively high prompt summer prices drew Norwegian gas into storage. But with little Norwegian flexibility in winter, cheaper oil-price-indexed Russian gas is expected to take its place (if needed). That will be especially true if strong Asian seasonal gas demand keeps LNG prices relatively firm. Gazprom has said it will cut prices to compete with LNG imports and plans to keep gas supplies to Europe at about 156bn-160bn cm/y in 2016-18.
This year, low utilisation of regasification capacity and a loose LNG market, thanks in part to new US output, mean seaborne supplies will play an even bigger role, allowing cheaper Henry Hub gas prices to influence Europe’s market. The marginal cost of US LNG is at 115% of Henry Hub, well below prevailing gas prices in Europe. That may bring more competition to existing suppliers and improve energy security in Europe, despite the fall in Groningen output.
Nevertheless, if prices stay low and demand starts rising as forecast, the continent will increasingly rely on imports. Should consumption climb by a third and domestic production fall to around 205bn cm/y, as widely predicted, EU import requirements will rise to 426bn cm/y, or about 46% more than in 2014. Given such import dependence, a heavy reliance on Russia and the key role many in the EU now see for gas, the introduction of a European Commission LNG and gas-storage strategy this year is a sensible move.