Shell Acknowledges Groningen Risks
In the starkest terms yet Royal Dutch Shell's 2015 annual report, released on March 10, says that decisions on the future operation of the giant Groningen field in the Netherlands "could have a material adverse effect on our earnings, cash flows, proved reserves and financial condition."
The Groningen field is 60% owned by NAM – the operating company jointly owned by Shell and ExxonMobil – and 40% by the state; last year a Dutch court imposed an annual cap going forward that is roughly half the 54bn m3 it produced in 2013.
"Production from the Groningen asset has resulted in earth tremors in the past, and tremors are expected to continue", the Risk Factors section of Shell's annual report published March 10 states. "This has resulted in damage to buildings and complaints from local communities. The Dutch government, local authorities and the operator are implementing measures to address the concerns of the local communities. The government has ordered a cap on production and a further reduction of production is possible. If the government decides not to develop the full field as currently planned, it could have a material adverse effect on our earnings, cash flows, proved reserves and financial condition." The most powerful quake caused by Groningen drilling was a 3.6 magnitude in August 2012.
Elsewhere in the report Shell notes that, in Q2 2015, the Dutch economy minister announced a further cut in the Groningen production for 2015 to 30bn m3 in an effort to reduce the potential for seismic activity while allowing a further 3bn m3 to be drawn from Norg storage for winter supply. But it also notes that the Dutch State Council ruled last November that Groningen production be capped at 27bn m3 for the gas year 2016, until the minister takes a new decision on NAM’s production plan. He is expected to approve a new development plan for Groningen no later than October 1 this year.
Shell said that NAM produced just 28.1 bn m3 from Groningen in 2015: "While the Dutch government currently supports the full development of the Groningen gas field," asserts Shell: "...any decision to change the development plan to reduce the ultimate recovery of resources would adversely affect our proved reserves."
The largest Dutch gas marketer, GasTerra, which is half owned by the government, recently observed that Dutch gas sales would never be the same again. The swing field earns valuable receipts from domestic sales and exports to northwest Europe, producing more when demand is higher.
The Shell annual report also discusses related environmental issues. "An extensive study is in progress to better understand seismic risk in the area. Several universities and researchers are involved and a report is expected in 2016. Interim results from November 2015 included a fully-integrated seismic risk assessment. This risk assessment demonstrated that all the analysed production levels meet the acceptable risk boundaries set by the ministry of economic affairs of the Netherlands."
Shell notes that a long-term programme has been developed by the National Coordinator for Groningen to work with regional authorities and residents on improving claims handling and dispute resolution, and that NAM is working together with all relevant parties. However the report does not reference a Dutch court ruling last September that owners of damaged or blighted buildings in the affected area have the right to claim against NAM for the fall in their property value, whether or not they are up for sale. A lawyer for claimants Pieter Huitema of De Haan said at the time that could potentially lead to up to €5bn claims against the operator NAM. In December, NAM lodged an appeal against the court ruling.