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Friday, 23 May 2014

State bureau Energy Management Netherlands (EBN): “If The Netherlands wants to maintain its current proceeds from gas exports, it should scale up its small field exploration and start exploration of shale gas fields”

A few months ago, I wrote an article about the Dutch ‘addiction’ to its natural gas proceeds (€15 billion in 2013).

This addiction has been so substantial during the last 45 years and it presumably had such a negative influence on Dutch productivity, the manufacturing industry and the general appetite for innovation, that the economic science invented the expression “Dutch disease” for it:

…from the second half of the sixties on, the NAM (Dutch Oil Company; the official explorer of the Dutch gas) drilled themselves dizzy and the Dutch gas production soared to no less than 95 billion cubic meters in 1976 (see the following chart).

The proceeds from the gas drilling in the seventies and eighties were so high that they led to a rockhard Dutch guilder, but at the same time also to enormous inflation rates and massive interest rates of 12% and higher.

These circumstances killed productivity and industrial production: people called this phenomena ‘stagflation’ and the Dutch Disease became a known concept in the whole economic world.

You could state that the same what happens now in Russia with the proceeds of Rosneft and Gazprom, happened in The Netherlands during those days.

Yesterday, the State Bureau for Energy Management Netherlands (i.e. EBN) wrote an ‘alarming’ report: the Dutch state, as well as companies exploring the Dutch gas supplies, should all scale up their exploration of the Dutch small gas fields [the only large gas field in The Netherlands is the ‘Groningen’ field.  This is the eighth biggest gas field in the world – EL]. This is necessary in order to maintain the gas production in the years 2019 and further at a similar level as today. The exploration of Dutch shale gas fields is explicitely included in this scenario, in spite of the political and public controverse around this subject.

Here is an extensive summary of this must-read report (available in English):

This year’s Focus on Dutch Oil and Gas reviews the status of the Dutch E&P (Energy & Petroleum) industry.

Table with the Dutch gas and petroleum reserves,
based on the Petroleum Resources Management System (PRMS)
Table  courtesy of: EBN
Click to enlarge
The Dutch onshore and offshore reserves and resources are still large, but declining.

Increased effort and further optimisation are required to minimise the decline in production, in the form of higher investments in exploration and wider applications of new technology.

Over the past two years, the Dutch E&P sector has seen a small decline (2.5%) in annual gas production from small fields. Production from the licences in which EBN participates was only 0.4 BCM lower in 2013 than in 2012, while the amount of produced condensate even increased. The small fields reserves base (PRMS categories 1, 2 and 3) fell by only 6.3 BCM.

Despite these relatively positive signs, the long-term outlook has changed considerably compared to that published in the 2013 edition of Focus on Dutch Oil and Gas. In the past few years, replenishment of reserves has relied mainly on gas being transferred from the contingent resources categories (PRMS 4, 5 and 6) to the reserves categories (PRMS 1, 2 and 3).

Thanks to new technologies and favourable gas prices, Dutch operators have been able to identify increasing opportunities within existing fields and discoveries. Many operators have recently announced plans to start developing long-stranded fields or to push the ultimate recovery of producing fields to even higher levels.

Risked production forecast small
fields gas production
Chart courtesy of: EBN
Click to enlarge
There are signs, however, that the underlying growth needed in the contingent resources categories is flattening out, while the numbers of exploration wells and exploration successes in the Dutch E&P sector were both lower in 2013 than required to slow down, let alone halt, the annual decline in production.

Assuming the operators’ exploration efforts in recent years to be representative for future exploration activity levels, the annual future gas production in a ‘business as usual’ (BAU) scenario will fall faster than previously forecast.

In previous editions of Focus on Dutch Oil and Gas, EBN assumed that operators holding the most prospective acreages would increase their exploration efforts. If this does not materialise, EBN expects a lower contribution to the forecast from yet to be discovered fields. EBN will therefore continue encouraging operators to aggressively explore their own acreages, while also being committed to encouraging exploration beyond established play boundaries, and promoting a favourable Dutch E&P climate.

The latest BAU forecast represents a scenario in which the project portfolio permits maintaining a plateau production level of 28 BCM for the next five years. After that, the decline will resume, unless investments are made in onshore and offshore exploration to unlock further traditional and also more challenging resources, such as tight gas and shale plays.

The ‘upside’ scenario relies heavily on these latter resources. It is vital to mature these plays if the Netherlands wants to avoid a rapid decline in gas production within the next decade.

Dutch natural gas consumption
and production scenarios
Chart courtesy of: EBN
Click to enlarge
However, 2013 saw no major breakthroughs in the development of tight gas fields, while political and societal opposition has pushed potential shale gas development even further back in time. EBN nevertheless expects both shale and tight gas to become increasingly important in the coming two decades.

Despite active exploration, the Dutch small-fields onshore and offshore reserves and resources base is declining. The average reserves replacement ratio for on- and offshore fields is well below 100%.

Small fields reserves after production
and added reserves
Chart courtesy of: EBN
Click to enlarge
Since offshore reserves comprise 63% of the total reserves, maturation of offshore contingent and prospective resources into reserves is required to maintain the offshore fields’ sizeable contribution to production and reserves. This requires substantial additional investments in exploration and production activities.

On average only one third of the cash flow generated from E&P activities in the Netherlands is reinvested in new Dutch E&P activities, while the remainder is invested elsewhere in the world or paid out as dividend. The worldwide reinvestment ratio for major E&P operating companies in the past two years was approximately two to three times higher.
Consequently, there certainly seems scope for a higher investment level in the Netherlands.

In the ‘business-as-usual’ scenario, a further 45 BCM can still be produced from prospective resources in 2050. This estimate is based on currently identified projects and excludes prospects yet to be defined. However, timing is crucial, especially offshore. The risk of offshore infrastructure disappearing in the near future is driving the urgency for exploration.
Encouraging timely exploration activities is consequently one of EBN’s key missions.

Increased throughput of installations and cost-effective tail-end production are becoming progressively important in order to defer abandonment. A side effect of extending production, is the fact that this will also allow deferring the costs of abandonment, currently estimated at around €5 billion.
The Netherlands is a net exporter of natural gas and, based on the current levels of domestic gas consumption, will be able to remain self-sufficient for at least another decade to 2025. If the upside scenario materialises, this might be stretched to 2030.

In addition to self-sufficiency, the proceeds from natural gas strongly contribute to Dutch State revenues. Domestic production contributes to a sustainable energy supply because imported gas supplies, such as LNG shipped from Algeria and pipeline gas from Russia, cause considerably higher greenhouse emissions than domestic production.

A total of 85% of the existing gas fields in the Netherlands are producible by conventional technology. Although the remaining Dutch small-fields portfolio is categorised as tight, these fields can also contribute to a sustainable energy supply, particularly if the recovery factor can be increased. With many gas fields approaching their end of field life, the Netherlands is generally seen as a mature, but attractive gas province.

The report argues (justifiably) that the exploration and sales of Dutch natural gas is more environmentally friendly than importing the gas from Russia, Algeria or the United States.

Despite that argument, one could argue that the exploration of the Dutch natural gas has not only been positive for the Dutch economy and population during the last 50 years; even if the causes and the consequences of the Dutch disease will be left out of the equasion.

Dutch gas production
including Groningen
Chart courtesy of: EBN
Click to enlarge
As this chart shows, there has been an increasing interest of the Groningen field in the recent Dutch gas production. This interest, however, is colliding with the needs of the inhabitants of the Dutch province of Groningen, as these people have to deal with a soaring number of earthquakes in their province: a palpable result of the Dutch natural gas exploration.

Of course you can argue that you can’t bake an omelet without breaking an egg: especially in the gas exploration. However, when this ‘egg’ means that your property and that of your neighbours becomes too dangerous to live in, due to the increased risk of earthquakes, this is a high price for people to pay in a small, densely populated country, like The Netherlands.

And there is more: one of the techniques mentioned in the report, as a means to increase the gas yields from small fields before their end-of-field-life, is ‘foam injection’.  As the report already states itself, this technique – as well as the usage of other chemical agents in gas production – is not exactly environmentally friendly:

Modern production technologies, as well as the need to keep ageing installations in operation, require increasing quantities of production chemicals such as corrosion inhibitors, foaming agents and kinetic hydrate inhibitors.

In combination with condensates, these chemicals tend to form emulsions, which are increasingly difficult to handle. The legally permitted water-over-board quality limit of 30 ppm aliphatic hydrocarbons is, in many instances, difficult to achieve. It is often more cost-effective to inject the produced water into dedicated water-disposal or converted production wells.

Also the large scale production of shale gas requires a massive deployment of polluting chemical agents. These agents are used for the ‘multistage hydraulic stimulation’ (aka fracking) that is necessary to explore this gas in a profitable manner. Massive usage of chemical agents could harm the Dutch ground and surface water reserves, which are of vital importance for The Netherlands.

All these issues raise the question whether The Netherlands should remain striving for a leading role in the European gas (and petroleum) production.

During the next 15 years, The Netherlands can still remain a net exporter of gas, when the exploration of the small fields and shale gas fields runs as planned (see the aforementioned chart of Dutch gas consumption vs production). During this time frame, the gas exports will remain a very valuable source of income for the Dutch government.

However, after 2030 The Netherlands seems destined to become a net importer of gas when everything else remains business-as-usual. This means that the inflow of proceeds from the gas exports will come to an end after all for the Dutch government. That is why - in my opinion – the Dutch government must stop burning up these net gas proceeds during the next fifteen years, ‘like there is no tomorrow’.

Instead, The Netherlands should step up its efforts in the production of sustainable energy, while at the same time looking for ways to save energy on a national scale. Despite the large-scale deployment of thermal insulation, energy-efficient household appliances and high yield heating installations in houses, as well as other energy-saving measures, the energy consumption in The Netherlands – and thus the consumption of gas and other sources of energy – has remained fairly stable during the last twenty years (see the following chart).

Energy consumption in The Netherlands
Chart by: Ernst's Economy for You
Data courtesy of: CBS
Click to enlarge
The biggest cause for this stable energy consumption in households, in spite of all energy saving measures, is (in my humble opinion) the soaring amount of electronic gear in houses: desktop computers, laptops, iPads, smartphones and game computers. This is all equipment that is in use or standby all day, while continuously consuming considerable amounts of energy.

If The Netherlands wants to reduce its annual consumption and dependency of natural gas, it should look for ways to spur austerity and energy saving, with respect to the energy consumption in the Dutch households and companies.

Otherwise, the Dutch gas proceeds will go through the chimney within 15 years, never to come back anymore…

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