Dutch offshore clings on to life [NGW Magazine]
Dutch gas producers are experiencing similar pain to their peers working off Norway and the UK as a result of the collapse in European gas prices. Operators who spoke with NGW are waiting for a new incentives package to be introduced by the government to ensure investment continues during the downturn. A court ruling last year on nitrogen oxide emissions has also brought permitting to a standstill, putting many oil and gas projects on hold.
Arendo Schreurs, director general of the Netherlands Oil and Gas Exploration and Production Association (Nogepa), describes the current situation as a "perfect storm," with operators responding to low prices by cutting costs and holding back some investments.
Some operators have responded with production cuts, including Dutch junior Tulip Oil. On July 13, it said it had lowered output to 119mn m³ of gas in the second quarter, from 198mn m³ in first quarter, to "leave gas in the ground" until prices are higher. It was flowing 1mn m³/d at time of press.
Neptune Energy, the Netherlands' largest offshore oil and gas producer with 21,700 barrels of oil equivalent (boe)/day last year, has brought forward maintenance activities in response to the market's collapse.
"I’m going through our portfolio on a day-by-day basis almost, to see where production is no longer profitable, and evaluate what we can do about it, reduce costs or increase production and look for opportunities," Neptune's managing director in the Netherlands, Lex de Groot, told NGW. Speaking about the Dutch North Sea as a whole, he warned that if low prices persisted, decommissioning plans would have to be accelerated.
Neptune removed three platforms earlier this year that had ceased production in 2016 and it is working continuously to ensure its portfolio remains healthy, de Groot said.
The market turmoil also led to the collapse in March of a plan by London-listed Solo Oil to buy stakes in 14 offshore gas fields from local player One-Dyas.
New investments can still go ahead, Schreurs says, as long as the Dutch government introduces its new marginal field incentive programme, first announced more than two years ago. There were some delays because of a state aid issue with the European Commission.
"For investing in exploration and production of gas, it's very important that the incentives are implemented," Schreurs said, saying his association was hopeful that it would apply to assessments in the current tax year. "But there is some danger that it will not pass parliament's first and second chambers until 2021, and then the question will be whether they will make it retrospective to January 1, 2020," he said.
Groningen was once the Netherlands' main source of gas production, but over the decades of production, tremors have damaged buildings in the vicinity of the field. It has been steadily reducing its production, under the government's plan to shut it down completely from 2022. Smaller fields collectively now produce more than Groningen, and maximising their recovery is needed to help the Netherlands curb its imports and improve its balance of payments.
Marginal field incentives already exist, although the government has proposed applying them to existing brownfields that cannot be exploited under current fiscal conditions, rather than just exploration projects. The so-called uplift – tax deduction on capital investments – will also be raised from 25% to 40%.
“We see that the investment climate in the Netherlands compared with Norway or the UK is less favourable,” said Robert Frimpong, managing director of Wintershall Noordzee, a Dutch joint venture between Russia’s Gazprom and Germany’s Wintershall Dea. But he noted that increasing the tax deduction to 40% would create “a more attractive investment environment and level-playing field.”
New incentives will not be enough, though, until an impasse over nitrogen emissions is ended. Draconian rules on onshore nitrogen deposition were put in place last year following a ruling by a top court. The Council of State last May found Dutch rules for issuing building and farming permits were in breach of EU laws protecting the environment from nitrogen oxide emissions. While they do not apply offshore, North Sea projects are nevertheless affected.
Neptune is unable to get permits for many of its projects, Le Groot said. Wintershall Noordzee is looking to develop the F17 Rembrandt/Vermeer oil development. But because of the nitrogen restrictions, “permit applications have essentially come to a standstill causing delays to this project,” Frimpong told NGW.
“The Dutch E&P sector requires reliable and predictable permitting procedures with an established framework providing planning certainty in order to be competitive and successful,” he said.
The government is also drawing up plans for subsidies for sustainable energy, potentially applying to the electrification of offshore installations. The Netherlands could also take a leading role in Europe's development of hydrogen energy, partly by repurposing its offshore gas infrastructure.
The European Commission (EC) has just published its hydrogen strategy, which calls for both demand- and supply-side subsidies to produce hydrogen and create a well-functioning market for the fuel source. The strategy heavily prioritises so-called green hydrogen, produced from water using renewables energy, but it also sees blue hydrogen – fossil fuel-derived hydrogen made cleaner through the use of carbon capture – as being a key stopgap solution.
The EC hopes that blue hydrogen, typically derived from methane, will achieve near-term emissions reductions while the cost of green hydrogen is brought down. Nogepa said it was satisfied with the EC's strategy, as it recognises blue hydrogen as a "stepping stone" towards green hydrogen. Some industry associations have criticised the EC for not positioning fossil fuel-derived hydrogen as an end goal, rather than a stopgap.
"There is no future in the long term for blue hydrogen in the Netherlands anyway," Schreurs said. "But we need blue hydrogen to develop the market for the green hydrogen that we need."
The Netherlands is a major wind power producer, boasting 4.463 GW of installed capacity at the end of last year, as well as almost as much solar capacity. But the country’s heavy reliance on intermittent renewables means adequate energy storage is critical, helping to avoid excess supply going to waste and meet demand when renewable generation is low. This is to be hydrogen’s role.
"We think that hydrogen production, transport and storage offshore is a solution for energy supply in the Netherlands," Schreurs said. "The storage part is very important for moments when the wind isn't blowing and when the sun isn't shining."
Neptune is preparing for the installation of a green hydrogen electroyser at its Q13a platform in the Dutch North Sea, which will be powered by nearby wind turbines. The project, known as PosHYdon, is a collaboration of businesses and research organisations.
“The North Sea infrastructure is excellent for green hydrogen. The pipelines and other infrastructure need no or minimum modifications for it,” de Groot said.
There is another venture in Rotterdam, H-Vision, that aims to produce blue hydrogen from offshore gas and store the carbon produced in the process in depleted North Sea reservoirs. It is backed by BP, ExxonMobil and Shell, among other companies.
There has been growing antipathy in many European countries towards upstream development, exemplified by Ireland's recent pledge to ban the issue of new gas licences. But by pursuing such policies, countries risk simply increasing their imports and most likely their carbon footprints too.
"We're seeing in the Netherlands some reluctance to onshore production. There's a ban on new licences, but permits for existing licences are still being issued," Schreurs said. "There's a general feeling that as long as we need natural gas in our energy mix, we better produce it ourselves because it has economic value and a smaller carbon footprint than imported gas."
The Netherlands became a net importer several years ago, as a result of the state-mandated production cuts at the nitrogen-rich Groningen field. Production fell 13% in 2019 to 28.1bn m3, and given the circumstances, is on track for another year of decline. Its customers are instead being sold high-calorie gas that has been ‘diluted’ with nitrogen, or they have converted their burners to run on high-calorie gas.