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    Groningen and the Iberian Solution [GGP]

Summary

In March 2018, the progressive closure of the giant Groningen gas field was announced by the Dutch government. The field, which was producing as much as 54 bcm in 2013, is to be completely shut down by 2030.

by: Alan Riley and Francis Ghilès

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Global Gas Perspectives

Groningen and the Iberian Solution [GGP]

In March 2018, the progressive closure of the giant Groningen gas field was announced by the Dutch government. The field, which was producing as much as 54 bcm in 2013, is to be completely shut down by 2030. The Netherlands and the European Union (EU) will have suffered a loss of domestic production equivalent to the entire annual capacity of the Nord Stream 1 gasline. The imminent loss of Groningen’s production (in energy terms) will create a major European supply gap.  Gazprom has not been slow to argue that it can replace the lost Dutch production with gas from the proposed Nord Stream 2 gasline. However, Nord Stream 2 will not provide any additional supply to the European gas market. One major alternative to closing this gas supply is to increase current gasline capacity (7 bcm) over the Franco-Spanish border. Spain has substantial LNG import capacity, in addition to its significant and expandable gasline capacity bringing natural gas from Algeria.

This “Iberian solution” could help to effectively close the supply gap and reinforce the EU and Spain’s relations with the North-African country, which has proven itself as a reliable supplier of gas since 1964. It would also encourage a broader strategic dialogue with Africa’s largest country, whose stability is key to European security, but whose leaders, particularly in the wake of the NATO-backed military intervention in Libya in 2011, remain suspicious of European (and more particularly French) intentions in its Sahel backyard.

The Rise and Fall of the Groningen Field

The development of the Groningen gas field six decades ago marked the beginning of a golden age of natural gas production in Western Europe. Groningen was followed by offshore fields in Dutch, Danish, British and Norwegian waters, transforming North-Western Europe itself into a major global energy province. Groningen lay at the heart of the EU’s domestic gas production.

However, in March 2018, the Dutch government sounded the death-knell of the Groningen field. This decision was forced upon the authorities by overwhelming evidence of seismic activity emanating from the field. Following earlier small tremors, a 3.6 magnitude earthquake in Huizinge in August 2012 led to the imposition of further production caps by The Hague. In January 2018, another major quake forced the government to announce the progressive closure of the field.

The Russians to the Rescue

Gazprom argues that it can come to the rescue with Nord Stream 2. However, on closer examination, the “Nord Stream 2 to the rescue” story does not add up. Gazprom is promising that additional natural gas will reach Western Europe. However, the history of Nord Stream 1 shows that when it was brought online, gas flows via Ukraine fell. In other words, it was just a diversionary gasline. There was in fact no new additional gas supply. Given that Ukraine and Russia are de facto in an armed conflict over the occupied Donbass, it is difficult to believe that Nord Stream 2 is likely to be anything more than a diversionary gasline. By merely switching lines, Russia could undermine Ukrainian finances, which last year made $2 billion from Russian gas transiting via its “Brotherhood” gasline. Therefore it is extremely unlikely that Nord Stream 2 is going to help close the Groningen supply gap.

The Iberian Solution

Aside from the fantasy of Nord Stream 2 actually providing any additional gas, there are many more serious and credible supply options on the Iberian Peninsula. To import gas from Algeria via the Medgaz and Gazoduc Maghreb-Europe (GME) gaslines, Spain has an available capacity of 20 bcm, of which only 14.5 bcm was used in 2017. Algerian state-owned energy company Sonatrach is looking at expanding the capacity of the Medgaz pipeline from 8 bcm to at least 10 or 11 bcm, and perhaps even to 16 bcm by 2020.

Algeria is also sitting on at least 3 trillion cubic metres of natural gas resources. Lack of investment and rising domestic consumption have eroded export potential over the last decade, but in 2017 Sonatrach still exported some 55 bcm, most of which went to EU states. The argument here is that the development of Algerian gas fields, combined with expanded gasline capacity into Spain, could provide a substantial additional supply to the EU.

Algeria’s potential is further underpinned by the plunging cost of solar power. As a result of technological and product development, the cost of solar panels has collapsed. Furthermore, the IEA predicts that between 2017 and 2022, 1,000 GW of solar capacity will be rolled out worldwide. This is equivalent to half the global capacity of coal-fired power stations, which took 80 years to install. The possibility that Algeria could cut its domestic natural gas consumption (some 40 bcm at present) and replace a substantial proportion of it with cheaper solar power is now a real prospect.

The supply potential of the Iberian Peninsula is strengthened by the fact that Spain has 61 bcm of regasification capacity, of which only 25% is actually used.    

The main barrier to opening up the Iberian energy market’s supply routes to the rest of the EU is the restricted route over the Franco-Spanish border. Only one 7-bcm gasline is available to carry gas northwards and connect the Iberian gas market to that of the rest of the EU. The main blocking factor has been the political power of EdF, which is seeking to protect the interests of the French nuclear industry. However, the double impact of the imminent loss of production from the Groningen field, combined with delays and cost overruns in the French nuclear industry, will give that company an opportunity to reconsider its opposition to the gasline’s expansion.

Conclusion: The Iberian Solution Is A Major Opportunity for European Supply Security

Connecting the Iberian gas market to that of the rest of the European Union would have positive benefits for all Member States, France included. In October 2018, the EU-backed Val-de-Saône gasline will be completed. It will connect the French gas market from north to south, making it possible to make much more use of an expanded Franco-Spanish interconnector. For the first time, France will become a more or less single gas market, paving the way for far greater competition and potentially lower energy prices, which would be lowered even further if the Franco-Spanish interconnectors were to be expanded.

The Iberian solution would not only benefit France and Spain, but also Algeria, creating additional incentives to increase gas production. It could also encourage Algeria to kick-start a domestic renewables revolution. Such a transformation would lead not only to a switch in consumption from gas to solar, but also to an increase in export revenues. It would also lay the foundations for the development of a second export industry involving solar-generated power. Technical, market and political circumstances may be aligning to create a win-win situation for France, Spain and Algeria.

Alan Riley and Francis Ghilès

Alan Riley is Senior Fellow, Institute of Statecraft, London.  Francis Ghilès is Associate Researcher, Barcelona Centre for International Affairs.  First published by PETROSTRATEGIES

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