Karel Beckman and Jilles van den Beukel
OIES (Oxford Institute of Energy Studies), July 2019
The Natural Gas Programme at OIES has produced a significant amount of research over the past three years on the issue of the decarbonisation of the gas sector in Europe. We have highlighted the challenges that this poses for traditional players across the gas industry in the region, as it has been made clear that gas has a limited future in the EU unless it can show how it will contribute to achieving a net zero emissions target by 2050. We now examine the strategy of a specific country, the Netherlands, which relies more on natural gas than any other country in the EU but which has embarked on an energy transition intended to lead to a complete phaseout of unabated natural gas consumption and production by 2050. This provides an excellent case study of the challenges, risks and costs that will be faced by the gas industry as a whole in the EU over the next three decades.
The prospects for natural gas in the Netherlands changed dramatically between 2012 and 2018 due to rising concerns over climate change and induced earthquakes in the gas-producing province of Groningen, leading to a shift in policy focus from financial to environmental and safety concerns. In October 2017 the newly elected government adopted ambitious greenhouse gas emission reduction targets implying that consumption of unabated natural gas must cease completely by 2050. In March 2018 the government announced that production from the giant Groningen field, for over 50 years the mainstay of Dutch gas production, will be phased out as quickly as possible and no later than 2030.
At the instigation of the government, civil society organisations negotiated a detailed Climate Accord which indicates how the government-set greenhouse gas emission reduction targets in five economic sectors (electricity, industry, built environment, transport and agriculture) are to be reached. The final version of the Climate Accord, which entails a complete conversion from gas-fired to ‘sustainable heating’ of all buildings in the Netherlands, 100 per cent renewable power production, and a conversion to ‘sustainable’ (net zero emission) industrial heating processes by 2050 (with intermediate targets for 2030), was sent to Parliament in June 2019.
Despite the political consensus on climate policy goals, and the speedy realisation of a Climate Accord, there is still a great deal of uncertainty as to what shape the energy transition in the Netherlands will take. Progress has been slow, particularly in the buildings sector and industry, and surrounded by controversy. It is also unclear to what extent the Dutch energy system will be electrified, and what role there will be for hydrogen.
In response to the political and public opposition to natural gas, the Dutch gas industry developed a strategy based on the continued use of ‘molecules’ in the energy system in the form of ‘sustainable gases’ (hydrogen, biogas, biomethane). In this system it sees a future role for itself as a producer, trader and transporter of sustainable gases, while developing new activities in areas in line with its expertise, such as offshore energy activities, ‘deep’ geothermal, transport and storage of CO2, and construction of district heating networks. For most of these alternative activities, the industry prepared ‘roadmaps’ in 2017 and 2018, but to date few concrete projects have been undertaken and it is unclear whether the industry will succeed in its self-imposed transformation.
We conclude that, although the Dutch gas industry has responded proactively to the challenges with which it is confronted and the goal to phase out natural gas faces technical, political and economic limitations, the transition to a zero-emission energy system is likely to continue and could represent a serious threat to the future of the Dutch gas industry.
Jilles van den Beukel and Lucia van Geuns
HCSS, February 2019
In March 2018, the Dutch government decided to stop natural gas production from the Groningen field as soon as the demand for Groningen gas allows. This implies that gas production will stop in 2030 at the latest and that about 500 BcM of gas will be left in the ground.
Since the first registered induced earthquake in the Groningen field in 1991 the amount of seismic energy released per unit of produced gas has gradually increased. Up until 2012 this did not receive the attention it should have received from the operator (NAM) and from the Dutch state.
In the years following the 2012 Huizinge earthquake (the largest earthquake so far) a number of legal and regulatory measures were taken that made a long-term continuation of gas production increasingly difficult. From late 2015 onwards, production has been set at the minimum level that meets domestic demand and existing export contracts for Groningen gas.
A reversal of the burden of proof for damage to houses, in combination with a large rise in the number of associated damage claims, has greatly increased the non-technical cost of gas production. Many of the more recent claims, especially those on the outer fringes of the field, were not, or were only to a very small extent, related to damage caused by earthquakes but this could usually not be proven. The application of a relatively strict norm for safety related to earthquakes implied that a long-term continuation of significant gas production would require a major house strengthening program. Home owners are currently entitled to compensation for any related reduction in the value of their houses. People have the right to claim compensation for psychological duress.
As a result of the rapid increase in non-technical costs, of which a relatively large share had to be paid by the operator, the Groningen gas field had by 2017 become a major liability to Shell and ExxonMobil (the NAM shareholders). For a long-term continuation of gas production these costs would have been of the order of several tens of billion euros. The measures taken in 2018, apart from leading to a planned cessation of gas production also included a more equitable division of costs between NAM and the Dutch state and implied a large reduction in the house-strengthening program.
These measures were taken against a setting in which the social license to operate for Groningen gas production was gradually lost. Earthquakes played a major role; those with damaged houses that had trouble receiving compensation received widespread sympathy in the Netherlands. Concerns about climate change and a desire among the population in Groningen (who did not financially benefit from gas production) to have a greater say in what was happening in their region also played an important role. Amongst decision makers there was a greater emphasis on environmental and safety concerns at the expense of financial and economic considerations. Electorally, it had become very difficult to defend a long-term continuation of Groningen gas production.
It is the loss of the social license to operate that we see as the core reason for the termination of Groningen gas production.
Jilles van den Beukel is an independent energy analyst (formerly a principal geoscientist at Shell).
Lucia van Geuns is a Strategic Advisor in the Energy Transition Program of The Hague Centre for Strategic Studies (HCSS).
Jilles van den Beukel and Lucia van Geuns
HCSS, September 2018
Over the last few years the oil price has experienced significant changes. From well over 100 dollars per barrel in the pre-2014 high oil price world, the price dropped to as low as 30 dollars per barrel in early 2016. Since then, it has embarked on a trajectory of gradually rising prices, reaching close to 70 (WTI) or 80 (Brent) dollars per barrel in the second quarter of 2018.
The main cause for the big oil price drop in 2014 was the United States (US) oil industry cracking the code to start unlocking vast amounts of shale (or tight) oil by fracking. Nevertheless, the rise of US shale does not seem more important than other major technological breakthroughs from the last decades, such as 3D seismic, horizontal drilling and the opening up of deepwater.
The Paris climate agreement, on the other hand, has fundamentally changed the world of oil. Oil is no longer a relatively scarce commodity that will be needed for an, for all practical purposes, infinite amount of time. Whilst climate change has been well understood for decades, the Paris Agreement marks a major step in the willingness of society to act. Even at a time when all measures related to limiting global warming are only having a minimal influence on oil demand (Electric vehicles [EVs] reduced oil demand by about 0,05% in 2017, for example) they have started to influence investment decisions and valuations of oil companies.
In one of Shell’s scenarios in the early 1970s, Pierre Wack, discussing the potential effects of nationalizations and the increasing power of Organisation of the Petroleum Exporting Countries (OPEC), compared the oil industry to a boat floating down a river: everyone could see the bend ahead and hear the waterfall beyond it, aware of what was to come. The same dynamic is at play today.
We aim to discuss the questions and uncertainties that, in our view, matter the most for the future of oil markets and the oil industry. Whilst discussing different scenarios we will not refrain from focusing on the scenario that we consider the most likely (rather than giving an extensive overview of potential scenarios). We will do so for three different timeframes:
- Short term, up to 2020, with a focus on shale oil
- Medium term, 2020-2025, with a focus on conventional oil
- Long term, 2025-2040, with a focus on peak oil (demand)