Earthquakes Force NAM to Reduce Gas Production from Groningen Field
A series of earthquakes in the Netherlands' most northerly province of Groningen, which have caused damage to houses and buildings, prompted a recent decision by the minister of economic affairs to impose a production ceiling on gas production from Europe's largest onshore gas field, the Groningen field. In addition, a €1.2 billion has been awarded to compensate for the damage.
Following the discovery of the 3,000 billion cubic meter (bcm) Groningen field in the province of Groningen, near the village of Slochteren, the Netherlands has become one of the major suppliers of gas in Europe. Gas production from the Groningen field is essential in the Netherlands, as most Dutch households depend on Groningen gas for cooking and heating purposes. Moreover, gas production (offshore and onshore) is an important source of income for the Dutch state, amounting to €12 billion to €14 billion per year. Of that amount, €10 billion to €12 billion comes from sales of Groningen gas, both in the Netherlands and abroad. On January 1 2013 remaining recoverable reserves were estimated at 824 bcm. The Groningen field is exploited by Nederlandse Aardolie Maatschappij (NAM) – a 50/50 joint venture of Shell and ExxonMobil.
However, recent expert reports have indicated that the gas production activities have caused series of earthquakes in the area (roughly, 50% of the province's surface is located above the field). The earthquakes varied in force, but in the near future, some are expected to reach 4 to 5 on the Richter scale, including a soil movement ratio of 0.12g (where g stands for the acceleration caused by gravity). According to the State Supervision of Mines – the national authority charged with the safety and security of mining activities – unlimited production from the Groningen field could lead to further damage to houses and potentially to dikes.
As a reaction to growing concern and public discontent, the minister of economic affairs announced measures to limit production from the Groningen field in order to avoid further earthquakes and soil movements. Production wells near the vulnerable village of Loppersum will be decreased from 15 to 3 bcm per year in 2014, 2015 and 2016. The State Supervision of Mines advised NAM to cease production from additional wells, but this advice has been followed only in part. This measure will effectively lead to a Groningen field production ceiling of 42.5 bcm in 2014 and 2015, and of 40 bcm in 2016.
On November 29 2013 NAM submitted its production plan for the Groningen field. This production plan requires formal approval from the minister. The measures will be adopted once the minister approves NAM's production plan for the next three years. The final decision is expected mid-2014 and will be subject to appeal. Further investigation into soil stability will have to be conducted and taken into account in the production plan that NAM will have to submit on July 1 2016 for the following three years.
The measures announced by the minister also include plans to reinforce buildings, houses and infrastructure. Furthermore, a compensatory payments package of €1.18 billion will be made available to the region. NAM will finance €1.125 billion; the province will finance the rest. As the Dutch state participates in the exploitation of the Groningen field through a limited partnership with NAM, through a complicated profits/costs allocation system, the state will ultimately bear 64% of these costs (€114 million per year), while receiving 90% of the profits. The state's reduced profits over the coming three years are estimated at €2.3 billion.
The measures have been received sceptically by the public and by Parliament. On February 5 2014 the proposed measures and numerous questions raised by members of Parliament were discussed in the Second Chamber. After a long debate, the Second Chamber agreed to the proposed measures.
This article was originally published in the Energy & Natural Resources Newsletter of the International Law Office - www.internationallawoffice.com.
For further information on this topic please contact Roland de Vlam at Loyens & Loeff NV by telephone (+31 20 578 5785), fax (+31 20 578 5800) or email (email@example.com). The Loyens & Loeff website can be accessed at www.loyensloeff.com.