Background to the future security of supply of gas in the Netherlands

05-12-2018

How do we maintain security of supply if Groningen production drops to zero?

Following the government decision to reduce production from the Groningen field to zero as soon as possible, GasTerra has carried out an initial analysis of the future security of supply of natural gas in the Netherlands and the other market area for this specific gas (low-calorific gas or L-gas) in parts of Germany, France and Belgium. This shows that, from the middle of the next decade, our country will need the remaining inland production to meet its existing export obligations and that it will become completely dependent on imports for its own natural gas supply.

Dutch gas production falling more sharply

In other words: although policies are being actively pursued to reduce the demand for natural gas, Dutch gas production will fall so rapidly that a gap will emerge between gas production and domestic demand.

As a result, import gas requirements in the Netherlands will increase considerably and these imports will be of high-calorific (H-) gas. The volumes concerned can be used for Dutch H-gas users and for conversion in the Netherlands to L-gas to supply the entire L-gas market area as long as there is still sufficient demand. An important point is that all L-gas volumes have to be physically supplied by the Netherlands; the H-gas required for conversion to L-gas must actually flow through the Netherlands and therefore has to be imported. This is because the nitrogen installations and L-gas storage facilities necessary for this are situated in the Netherlands.

All in all, the security of supply issue is important for the Netherlands. Guaranteeing security of supply ensures not only that households, industries and power plants can always rely upon natural gas, it also contributes towards a stable gas market with lower price volatility and a favourable investment climate.

Informed choices

GasTerra believes that informed choices must be made with regard to import dependency. Although expectations are that the role of natural gas in our energy consumption will decline in future, with a current share of around 40% of national energy consumption it is still extremely important. In this context, last summer GasTerra commissioned market research company IHS Markit to perform a comparative study into the way in which our neighbouring countries are preparing for security of supply. This security is defined as the way in which the anticipated gas demand is covered by domestic production and import volumes secured under long-term contracts. IHS concludes that, with total reliance on the short-term trading market, the Netherlands appears to be opting for a different solution to our neighbours, who have been accustomed to import dependency for a long time already. The report and its conclusions can be found here.

GasTerra recognises that a cautious discussion is currently developing about the future security of gas supply in the Netherlands. GasTerra thinks that this is important because the company has historically made a considerable contribution towards the security of supply in the Netherlands and large parts of Europe.

Backbone of the gas system

In recent decades the gas field in Groningen has been the backbone of the gas system and could always step in with additional capacity if there were risks of shortages in the system, for both short-term and long-term fluctuations, depending on availability from other sources. When the Netherlands no longer has the security of production from Groningen, we need to ask who or what can offer us sufficient supply at critical times in the future.

This is not an acute problem as security of supply is still well-regulated in the Netherlands. The gas roundabout and the gas trading hub, the TTF, play a major role here. They have provided the hardware and software framework through which the reduced volumes from Groningen could, and can, be properly cushioned. The TTF has expanded to become Europe's most liquid gas trading hub. GasTerra believes that the TTF must continue to be the main pillar of a well-functioning market; now and for the foreseeable future. But GasTerra has reservations about being completely reliant on the short-term trading market without supplementary security of supply measures and a new policy being in place.

Partial gas supply coverage may also be desirable in the light of developments appearing to unfold outside the Netherlands. Reputable authorities predict that there will be scarcity on the world trade market after 2020. Most of the countries surrounding us are now largely dependent on imports for their gas supply. These countries have secured their supply requirements by entering into long-term import contracts with large producers.

Maintaining our good reputation in the Netherlands

The liberalisation of the gas market changed the nature of long-term contracts. In the past, these were concluded in order to finance major investments in production and infrastructure and to guarantee market certainty for the producer. The prices in these contracts were generally based on those of alternative fuels and they were typically supplied at a fixed point or border point. In the liberalised market, long-term contracts are shorter in duration; volumes are delivered to the trading hub and indexed to the gas price applicable there. This makes them an efficient method for aligning security of supply and market certainty requirements. They are also appropriate for the current market and provide security so that we can continue to rely on the gas roundabout after 2020.

The Netherlands has a reputation for being a reliable gas supplier at home and abroad. Now that the Netherlands can no longer fall back on Groningen, we have to ask how this reliability should be designed. GasTerra wants to have this discussion so that security of supply in the Netherlands can be maintained at a responsible level while production from Groningen is reduced to zero. Our country has a reputation to maintain in this regard.