More good news yesterday for LNG developers looking to FID in 2018 with the Dutch cabinet detailing its plans to shut down Groningen gas production to zero. It seems like the 3.4 earthquake on Jan 8 was the straw that broke the camel’s back and led to the Dutch cabinet’s plan to take Groningen natural gas production to zero. In Feb, a technical committee recommended to the cabinet that Groningen gas production be reduced from 2.07 bcf/d to 1.16 bcf/d. The cabinet went further and yesterday issued its release “Cabinet: end of gas production in Groningen” that sees Groningen production reduced to the recommended 1.16 bcf/d in Oct 2021, but no later than Oct 2022. However, the cabinet went further, saying “Gas production from the Groningen field will be completely terminated”. We estimate Groningen will be down 1.68 bcf/d by 2022/23. This is an elimination of gas supply, not a delay. The timing is a big positive to LNG supply developers. China’s game changing priority on its fight against pollution is, by itself, moving the LNG supply gap closer to 2020. This is positive for LNG projects, such as Shell’s LNG Canada, looking to go FID in 2018.
The largest earthquake (3.4 earthquake on Jan 8) since Aug 2012 was the final straw that has led to the Dutch govt decision to shut in the 2.07 bcf/d Groningen gas field. Yesterday’s Dutch cabinet actions are the result of a long standing issue with earthquakes and Groningen natural gas production. The Jan 8 earthquake was the biggest earthquake since the 3.6 earthquake in Aug 2012. But the strong public uproar built up over time with the big increase in earthquakes in Groningen in the years leading up to the Aug 2012 3.6 earthquake. Ultimately, this led the Dutch govt in Jan 2014 to start to regulate Groningen natural gas production at lower than capacity levels to reduce earthquake risk. Prior to the Jan 2014 regulated volumes, Groningen produced 53.9 billion cubic metres or 5.2 bcf/d in 2013. At that time, Groningen was 79% of total Dutch natural gas production. On Nov 15, 2017, the Dutch courts allowed the Groningen production restriction to remain unchanged for the 2017-18 year to its current 2.1 bcf/d (21.6 billion cubic metres per year). The 2.1 bcf/d in 2016/17 was a reduction of 10% from 2015-16. This accumulated buildup of govt actions in response to earthquakes was why we looked at the 3.4 earthquake on Jan 8 earthquake as leading to greater restrictions to Groningen production and why we wrote our Jan 8 blog “Today’s 3.4 Earthquake In The Netherlands Should Be A Modest Positive To LNG Markets Rebalancing In Early 2020’s” [LINK].
The technical recommendation to the Dutch govt was to cut Groningen production to 12 bcm/yr or 1.16 bcf/d. Post the Jan 8 earthquake, the Dutch govt asked for a technical recommendation on Groningen gas production. On Feb 1, the Dutch State Supervision of Mines (SSM) recommended to the minister [LINK] that “we advise the Minister to reduce the gas production as soon as possible to a maximum production level of 12 billion cubic meters per annum.” The SSM recommended cut was 0.91 bcf/d. At 12 bcm/yr, this is 1.16 bcf/d, or down 0.91 bcf/d from the then current restricted amount of 21.5 bcm/yr or 2.07 bcf/d. Later on Feb 1, the Dutch minister Eric Wiebes advised that he would detail the plans to reduce to get to the SSM recommendations by the end of March. He was also quoted on the challenges to get to the SSM levels. DutchNews [LINK] quoted Wiebes “We have to go back to 12 billion cubic metres and that is almost half,’ and ‘It will be an enormous social challenge.’
The Dutch cabinet went beyond the SSM technical recommendation and is going to shut down Groningen natural gas production. Yesterday, the Dutch cabinet detailed its plans for Groningen gas field with its release “Cabinet: end of gas production in Groningen” [LINK], which went beyond detailing the plan to get to the SSM recommendation to cut Groningen by 0.91 bcf/d to 12 bcm/yr or 1.16 bcf/d. [Note the Dutch releases are in Dutch and we used Google Translate for an English version]. The cabinet did that and is targeting for the 1.16 bcf/d to be reached by Oct 2021, but no later than Oct 2022. The cabinet then went beyond that and, as noted in the press release title, called to terminate Groningen natural gas production. The cabinet release or the minister report [LINK] did not provide detailed data points for the decline of Groningen by year. However, they included the below graph showing the expected gas production for a cold, average and warm year.
Afbouw Gaswinning Groningen (Gas Extraction of Groningen)
Source: Dutch Govt
The Dutch Groningen cuts should reduce gas supply by ~1.68 bcf/d by 2022/23. The planned reductions are significant to global natural gas supply. A 1.68 bcf/d reduction is equivalent to future LNG supply increases from the next Exxon Papua New Guinea LNG expansion (the existing PNG LNG was ~1 bcf/d pre earthquake) and one new Cheniere Train (basically ~0.6 bcf/d per train). These reductions to Groningen should also lead to increased Dutch LNG imports. Netherlands was a small net exporter of natural gas in 2016 and was moving to a balanced position (we don’t know the final 2017 numbers yet) in 2017 and received its first LNG import last summer. A reduction in Groningen should clearly move Netherlands to a net importer of natural gas. The Dutch releases did not provide detailed Groningen gas production targets by year. We estimate the projected Groningen gas levels for an average year in the below table. The impact by 2022/23 will be to reduce Groningen gas production ~1.68 bcf/d. The Dutch govt will be looking to replace low caloric content with higher heat content gas, and there will be a push to reduce demand. A good example was this week, DutchNews [LINK] reported how a new 50,000 homes project would be built and not be connected to the natural gas supply. But we believe to the most part, the lower Groningen gas production will lead to increased natural gas imports including LNG.
Estimated Reductions To Groningen Gas Production
Source: Dutch Govt, Stream Asset Financial
Good news to LNG suppliers looking to FID in 2018, an increasing LNG supply gap post 2020. The game changer to the LNG outlook has been China’s urgency in fighting pollution. It is material and, by itself, moves LNG rebalancing years sooner than expected. Yesterday’s Groningen news may not be material by itself, but it is significant as it provides an offset, in supply, to future LNG supply growth equivalent to a potential Exxon PNG LNG expansion and one of Cheniere’s future LNG trains. Its a positive data point as this will be a reduction in global natural gas supply, and will help create a bigger LNG supply gap post 2020. It also creates an increasing need for FID in 2018 and likelihood that LNG projects, like Shell’s LNG Canada, will go FID over the summer, and for other LNG projects to go FID later in 2018. For more on our recent views on LNG Canada, please refer to our March 15, 2018 blog “LNG Canada Reiterates It Wants To Be In Construction in 2018, Feels More Like An Expectation” [LINK] and our Feb 21, 2018 blog “Shell Called Tight LNG Markets >7 Mths Ago, Will They Keep Hinting And Pointing To LNG Canada FID Being Likely In 2018?” [LINK]