Today’s 3.4 Earthquake In The Netherlands Should Be A Modest Positive To LNG Markets Rebalancing In Early 2020’s

Jan 8, 2018


There is no question that the stronger than expected LNG markets in H2/17 has been driven by China’s urgency in fighting pollution that has led to China’s LNG Dec imports being up 38% YoY to 7.8 bcf/d.  Its why we wrote out Sept 20 blog “China’s Plan To Increase Natural Gas To 10% Of Its Energy Mix Is A Global Game Changer Including For BC LNG[LINK].  However, we still look at events like today’s 3.4 earthquake in Groningen province (Netherlands) as a positive factor that will add support, albeit modest, to the faster than expected rebalancing to LNG markets.  The increasing earthquake activity in Groningen province led to the Dutch government regulating Groningen natural gas production down since Jan 1, 2014 (was 5.2 bcf/d in 2013, now 2.1 bcf/d).   We think the risk (increasing likelihood) is that this biggest earthquake since the 3.6 in Aug 2012 is likely to be a catalyst to a further regulated reduction in Groningen natural gas production and therefore increase Netherlands LNG imports ie. a modest positive to LNG markets.

A 3.4 earthquake hits 25 km northeast of Groningen, largest earthquake since the 3.6 in Aug 2012 Today (2pm UTC, 7am MST), the Royal Netherlands Meteorological Institute reported [LINK] a 3.4 earthquake.  The earthquake was centered approx. 25 km northeast of the city of Groningen (Netherlands) and in the heart of the onshore Groningen natural gas field.  Note that Groningen is an approx. 200,000 population city and it is also the name of the province.  Most significantly, this is the strongest earthquake in Groningen province since the 3.6 earthquake in Aug 2012.

3.4 Earthquake, Jan 8, 2017                   

1

Source: Royal Netherlands Meteorological Institute

Groningen Onshore Natural Gas Field

2

Source: Geo ExPro

Our non-technical explanation of earthquakes related to the oil and gas industry in Groningen province.   Here is our non-technical explanation for the issue of earthquakes in the Groningen province related to the production of natural gas in the Groningen natural gas field.  The issue of earthquakes in Groningen is related to natural gas production.   The Groningen natural gas field is the major natural gas field that has had production reduced due to the increasing earthquakes related thereto.  This is different than in Oklahoma where the injection of waste water is linked to earthquakes.  Rather the earthquakes are believed to be caused by the massive production of natural gas out of a high porosity sandstone reservoir.   Producing the natural gas out of these very small pores, effectively reduces the pressure in the sandstone, which allows a compaction of the sandstone from the weight of the overlying rock.  And then the problem is that there are local faults, and the compaction doesn’t occur equally, so when there is different compaction around a fault, it ends up in earthquakes.

The increasing earthquake activity ultimately led to the Dutch govt’s move to regulate Groningen natural gas production at lower levels.   It wasn’t just the 3.6 earthquake in Aug 2012, rather there was a strong public uproar over the big increase in earthquakes in Groningen in the years leading up to the 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 for now at 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.

The Dutch court ruling for 2.1 bcf/d for 2018 was not permanent.  The 2.1 bcf/d limit was per the Dutch Council of State (the top administrative court in the Netherlands) ruling.  Raad Van State (“RVS”) is a constitutionally established advisory that must be consulted by cabinet on legislation before any legislation is submitted to parliament.  RVS wrote on the Nov 15 court ruling [LINK] that the minister has 1 year to substantiate the 2.1 bcf/d production level.  RVS said “The Minister of Economic Affairs and Climate must reach a new decision on gas extraction in Groningen. The minister has so far failed to properly substantiate his previous decision to allow 21.6 billion cubic metres to be extracted per gas year over the next five years. This was the ruling given by the Council of State’s Administrative Jurisdiction Division today (15 November 2017).”  And “Given the shortcomings in the minister’s decisions, the Administrative Jurisdiction Division has set aside these decisions. If this were accepted, the 2007 extraction plan would come back into effect. This would allow NAM to extract unlimited amounts of gas, leaving objectors in a worse position than they would have been in had the Administrative Jurisdiction Division not set aside the decisions. That is unacceptable. In its ruling, the Administrative Jurisdiction Division has thus included an ‘interim provision’ as a temporary measure. This provision allows gas extraction to take place in accordance with the most recent amendment decision, temporarily allowing NAM to extract 21.6 billion cubic metres of gas in the coming year. This interim provision will remain in force until the minister’s new gas extraction decision comes into effect.”

Today’s 3.4 earthquake has to bring risk or increased likelihood for a lower regulated Groningen natural gas production levels .  In a coincidental timing, DutchNews reported today that the economic minister responsible for natural gas development was already scheduled to be in Groningen province on Wed.  This should bring some added Dutch news/reaction to today’s 3.4 earthquake.  Regardless of his visit timing, we have to believe the biggest earthquake since Aug 2012 and the start of regulated lower Groningen production levels on Jan 1, 2014, combined with the temporary and conditional approval of the 2.1 bcf/d production limit for 2017-18, has to bring added risk to the 2.1 bcf/d limit and even added risk that the Dutch govt is forced to deal with this 2.1 bcf/d production level prior to the 1 year period (Nov 2018) being reached.

Any reductions to Groningen gas production should lead to increased Netherlands LNG imports.   Netherlands was a major natural gas exporter to western Europe prior to the Groningen restrictions. It was only a few years ago that it exported approx. 3 bcf/d to western Europe.  But it moved to a small net natural gas importer in 2017.  In 2016, the BP Amoco data was that Netherlands had a net natural gas surplus of 0.7 bcf/d.  But that was before the 10% cut at Groningen down to the 2016 level of 2.1 bcf/d.   This would have cut into the 0.7 bcf/d surplus.  We saw support for the start of imports in 2017 with the Netherlands receiving its first US LNG imports on June 9, 2017 at its Gate terminal in Rotterdam.  Therefore if the 3.4 earthquake becomes the catalyst for further reductions in the Groningen natural gas production, this should be a direct benefit (need) for increased Dutch LNG imports.

Netherlands Natural Gas Production And Consumption (bcf/d)

3

Source: BP Amoco

Any reductions to Groningen production should support an already stronger than expected LNG market.  China urgency to fight pollution has been a game changer to LNG markets in H2/17.  We believe China’s plan to increase natural gas to 10% of its energy mix may be tough to achieve as it requires China to increase natural gas imports by ~3.5 to 4.5 bcf/d per year. It’s a huge challenge, China’s Dec LNG imports were up 2.2 bcf/d YoY.  But it means that China by itself is a game changer to LNG markets rebalancing years sooner than expected.  Today’s Groningen 3.4 earthquake isn’t material to this LNG rebalancing, rather we believe it will likely be a positive, albeit modest, to views like Shell who sees a LNG “supply/demand gap emerging early 2020s” and not the conventional wisdom of 2025.  This LNG rebalancing means that there is a need for FID for new LNG export projects including BC LNG projects and the risk to new LNG projects is not on the LNG market outlook, but on the cost and execution of the individual LNG project.  We are hopeful the Trudeau government appreciates the changing LNG rebalancing view and sees they can help put BC LNG projects, including Shell’s LNG Canada project, over the hump by not adding to the costs and execution from imposing anti-dumping duties on LNG modules made in South Korea/China and aren’t made in Canada.