Gas production in the Netherlands. importance and policy

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1 Gas production in the Netherlands importance and policy

2 Summary The demand for energy is increasing year after year: global demand is growing by approximately one per cent per year. To meet this demand, various sources of energy are available. Fossil energy resources will continue to predominate in the coming decades. The role of natural gas among the fossil energy resources, will become increasingly important. Gas is the cleanest fossil fuel, which is appropriate during the transition period to a more sustainable energy supply. The member states of the European Community will become increasingly dependent on imports: according to the IEA, by 2030, imports of natural gas into the EU will have risen to 63 percent of the consumption. The Netherlands is fortunate to possess huge gas resources, of which the other EU countries are also benefiting. The importance of this gas resource should not be underestimated: gas production has contributed greatly to the prosperity of the Netherlands and is still contributing approximately five billion of euros annually in state revenues. The Dutch natural gas resources have also played an important role in the security of supply to the EU and to the Netherlands itself and will continue to do so in the decades to come. In the Netherlands, gas production has to meet to stringent environmental standards. For ecologically valuable areas, the so-called sensitive areas, the stringent Birds and Habitat Directives [Vogel- en Habitatrichtlijn] have to be taken into account. Especially in these areas, it is crucial to try and find arrangements that create a win-win situation for all parties involved. In the past few decades, we have gathered a great deal of information on gas production in sensitive areas, such as the Wadden Sea. Recent research has shown that the changes in ecology that might result from subsidence due to gas production will be negligible in comparison with the variations that take place naturally in the Wadden Sea. This has led the cabinet to decide that the concerns about the effects of gas production have been resolved satisfactorily and that production of gas, as well as exploration for gas, underneath the Wadden Sea can be permitted under strict conditions. Over the past thirty years, the Dutch natural gas policy, the cornerstone of which is the small fields policy, has been very successful. The essence of the small fields policy is that small fields are produced in preference to the Groningen field. The unique characteristics of the Groningen field enable this field to act as a swing producer, which can balance variations in supply and demand. This has resulted in many more small fields being brought on stream. Until recently, each year, the volume of gas discovered used to exceed the volume of gas produced in the same year. This made it possible to preserve the reserves present in the Groningen field so that any small fields that may be found in future will also be able to benefit from the swing capacity of the Groningen field. Since a number of years, however, the volume of gas reserves held in the small fields has been declining, because the number of new finds has decreased and because of the downward adjustment of the existing reserve estimates. Moreover, studies have shown that the exploration and production climate in the Netherlands has deteriorated in comparison to other gas-producing countries around the North Sea. If we do not 1

3 take additional measures, it is feared that approximately 200 billion m 3 of economically producible gas will eventually stay in the ground. Hence, short-term action is needed, also in view of the reduction in infrastructure on the continental shelf, which is expected in the coming years and in view of the fact that the Groningen field will not be able to act as a swing producer indefinitely. The main policy objective is to maintain the level of mining activity at the same high level for the coming fifteen years, maximising the total economic recovery of natural gas. Measures to improve the exploration and production climate will encourage exploration for, and production of natural gas. Such measures could include: elimination of hurdles in legislation and regulations, making procedures for licence applications more efficient, continuation of the small fields policy, improving access to information, tackling the issue of sleeping licences and actively approaching new companies. The effects of these measures will be closely monitored. Should these measures produce inadequate results, other measures shall be considered, to achieve the policy objective. 2 2

4 1 Introduction Gas production and its effects are regularly in the spotlight in the Netherlands. Sometimes this news concerns a windfall for the Treasury, because gas revenues turn out to be higher than estimated. Then again, attention focuses on earthquakes that are due to gas production. Local citizens are closely involved when drilling operations take place in their direct vicinity. In the past few months, gas production has regularly been in the news because of the debate on the advice of the Wadden Sea Advisory Committee and the cabinet s response to this advice. It is remarkable that in all these cases, a limited number aspects of gas production was debated, while wider issues such as the benefits of, and the need for gas production received less attention. The letter to the Second Chamber of Parliament dated 3 September on the security of access and supply, and the letter of 28 June on the Wadden Sea policy and the Industry letter of 6 October 2004 all announced that the gas production policy would be worked out in detail. The aims of the present letter are: - to place gas production in a wider context; - to argue the case for the benefits of, and the need for gas production; - to announce measures to improve the exploration and production climate. This letter exclusively addresses the production of gas. The gas market, including aspects such as storage, transport, flexibility and trade is not addressed. Other aspects of the energy policy, such as energy-saving, and sustainable energy are not addressed here either. The Energy Report 2005 will set out an integrated vision on future energy supplies. This letter is composed of the following parts. Chapter 2 addresses the importance of gas production in the Netherlands. Chapter 3 deals with the Dutch gas policy. Chapter 4 focuses on the relationship between gas production, the environment and nature. Chapter 5 covers the exploration and production climate. Finally, Chapter 6, outlines the policy plans. 1 TK , TK , , no. 1 3

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6 2 The importance of gas production 2.1 The role of gas in our energy supply Energy plays a crucial role in our society. However, energy is a scarce commodity and its use has a negative impact on the environment (including CO 2 emissions). Its is therefore crucial to reduce the demand for energy as much as practicable by for instance energy-saving measures. Energy saving is wholeheartedly supported by the government: all aspects of it are addressed: from research, market introduction, performance enhancement to exploitation. Even so, the International Energy Agency (IEA) predicts that the primary energy consumption in the European Union (EU) will be approximately 25 percent higher in 2030 than in This demand can be met by various sources of energy. Fossil fuels, including coal, oil and gas, are at present the principal sources of energy, while the contribution of sustainable energy and nuclear energy are only minor. In the medium term (2020), the contribution of natural gas in Europe, being the cleanest fossil fuel, will increase considerably at the expense of especially coal. In the longer term (second half of this century), sustainable sources of energy, nuclear energy and clean fossil energy 4 are expected to make a substantial contribution. As a result of the huge, economically producible natural gas resources that are present in the subsurface of the Netherlands, we have become largely dependant on gas for the production of electricity and for domestic use. By now, gas is supplying half of all the energy consumed in the Netherlands. That gas is not necessarily produced in the Netherlands. It can also be imported. What is then the importance of a continued commitment to gas production in the Netherlands? The three main arguments are: security of supply, the Dutch economy and sustainability. 2.2 Security of supply The IEA expects that the world demand for gas will approximately double in the period from 2001 to This will mainly be due to the increased demand from the electricity sector. The major growth markets: Europe, North America and the Far East (especially India and China) will increasingly depend on imports. More than half of the world s existing gas reserves are located in only two countries: Russia and Iran. But the EU itself possesses considerable reserves too. More than half of the natural gas reserves in the EU-15 (the member states of the EU prior to 1 May 2004) are located in the Netherlands and the Dutch sector of the North Sea. The Netherlands plays an important role in the security of supply to the EU: 15 to 20 percent of the 450 billion m 3 gas that is consumed annually in the EU is produced in the Netherlands. 3 IEA, World Energy Outlook Clean fossil energy is defined as producing, transporting and converting hydrocarbons into energy or other substances, in such a manner that a minimum of carbon dioxide is emitted into the atmosphere. 5 IEA, World Energy Outlook

7 Figure 1: import of natural gas into the EU-15, by source (in billion m 3 ) However, it is difficult to predict how long the EU will be able to remain self-sufficient and meet internal gas demand. If consumption increases considerably, reserves will become depleted faster. However, the continuous advances in exploration and production techniques and new geological information can also lead to more gas finds and an increase in production. It is therefore anticipated that global gas reserves are larger than currently believed. Whatever, security of supply in the long term is a major item on the political agenda all over the world. In Europe, the European Commission has initiated a broad discussion on the basis of the Greenbook Towards a European strategy for the security of energy supply (2001). The Greenbook stresses the increasing European dependence on imported energy. For instance, dependence on gas imports will increase from 36 percent in 2000 to over 60 percent in 2030 (see figure 1). In the meantime, the security of supply directive has come into force including measures to ensure an uninterrupted supply of natural gas The Dutch economy Over the years the Netherlands has developed a significant and high-quality oil and gas industry. The added value of this sector for the Dutch economy depends on the volumes of oil and gas that are produced, the oil and gas prices for sale both at home and abroad, and the division of profits between the mining companies and the State. The total added value of this sector in 2000 was over eight billion euros. This equals 2.1 percent of GNP. Gas production and all related industries provide jobs for approximately eleven thousand people, largely in the northern part of the Netherlands 7. Gas production has also greatly stimulated the knowledge infrastructure in the northern provinces (Energy Valley 8 ). 6 Directive 2004/67/EG, 26 April Vision on natural gas production in the Netherlands in the 21st century, Policy Research Corporation (SDU, 2002). 8 This initiative of the three northern provinces links energy knowledge and industry (in particular in the field of natural gas) to the opportunities for infrastructure and future building projects. 6

8 Gas revenues have greatly contributed to the prosperity of the Netherlands over the past 40 years. In total, total gas revenues nominally amount to 150 billion euros. At present, Dutch gas production is generating five billion euros annually in state revenues. Thirty percent of these revenues is paid into the Fund for Enhancement of the Economic Structure (Dutch acronym: FES for Fonds voor Economische Structuurversterking) 9. This fund finances investments in hard and knowledge infrastructure. The remainder goes to the Treasury. 2.4 Sustainability The target of the long-term energy policy is to arrive at a sustainable energy economy, i.e. an economy that uses energy in a clean, dependable, reliable and efficient manner. The course towards a sustainable energy economy is called transition 10. However, even if we manage to save a lot of energy and the contribution of sustainable energy sources to the overall energy supply increases considerably, we will, for the coming decades, still be largely dependent on fossil fuels, such as coal, oil and gas. If we manage to achieve the target of 10 percent sustainable energy by 2020, we will still depend on fossil energy resources for the remaining 90 percent. Moreover, the demand for energy is expected to keep growing structurally. In view of this long-term major dependence on fossil energy, the utilisation of fossils fuels should be made as environmentally-friendly as possible. One of the advantages of natural gas in comparison with other fossil fuels is that carbondioxide (CO 2 ) emissions will be nearly halved if, instead of coal, gas is used for generating electricity (see figure 2). Figure 2: comparison of CO 2 emissions The emissions that cause acidification and the emission of fine dust are also less for gas than is the case for coal or oil. The European Commission therefore expects that the share of natural gas in electricity generation in Europe will gradually increase from less than 20 percent in the year 2000 to 37 percent in The introduction of a European emissiontrading system, which is planned for 2005, will also stimulate a changeover to cleaner forms of fossil energy such as natural gas, in addition to energy saving and the use of sustainable energy sources. 9 The State revenues from gas consist of corporate taxes and non-tax monies, such as profit share, royalties and surface rentals. Of the non-tax monies, 41.5 percent is paid into the FES. 10 See also the report Innovation in Energy policy (TK , 29575, no. 1) 7

9 Natural gas also plays a major role in clean fossil energy. This would, for instance, be possible by capturing the CO 2 that is released by burning fossil fuels and injecting it into depleted gas fields or using it for other purposes. Another form of clean fossil energy is to produce hydrogen from fossil energy resources such as natural gas or other hydrocarbons in combination with capturing and storing the CO 2 released by that process. It is expected that hydrogen will eventually play a significant role in a sustainable energy economy 11. The existing gas infrastructure in the Netherlands can be a positive factor for the introduction of hydrogen as an energy carrier. The cabinet has informed the Second Chamber in 2003 about the perspectives for clean fossil energy and announced the first CO 2 storage project in the Netherlands, which is by now being implemented 12. Natural gas is not only the cleanest fossil fuel, but, moreover, in the Netherlands, gas is being produced in an extremely clean manner, subject to strict environmental criteria and observing meticulous procedures. Instead of producing its own gas, the Netherlands could switch to importing gas. Gas is already being imported, one of the effects of the liberalisation of the gas market. However, producing gas in the Netherlands is better for the environment than importing it. At the moment, environmental criteria applicable to gas production are less strict in countries such as Russia. Moreover, when gas is transported over large distances, part of it is lost because of leakages. The IEA estimates that approximately two to five percent of the gas volume (methane) of the Russian gas escapes during transport to Europe 13. In addition, powering the compressors that are needed to transport the gas consumes a lot of energy. 2.5 Conclusion The role of gas in our energy supply will become increasingly important in the decades to come as well as during the transition to a sustainable energy economy. The Dutch gas reserves will be an important factor in this process. The importance of Dutch gas production is great: it contributes to the security of supply in Europe and also considerably to the economy and prosperity of the Netherlands. Moreover, domestic gas production is subject to stringent environmental criteria, and for the time being prevents large-scale, less efficient and/or less clean, imports of gas that would otherwise be needed. The Dutch gas reserves will be exhausted one day, but the cabinet s intention is to maximise benefits to society, as long as we still have gas. 11 see also TK , , no TK, , , no This equals an emission in CO 2 equivalents equalling the entire annual CO 2 emission of the Netherlands, i.e. approximately 185 million tonnes. 8

10 3 The Dutch gas policy 3.1 Reserves The Netherlands is a major gas-producing country. Annual production is approximately 70 billion m 3 and annual domestic gas consumption approximately 35 billion m 3. The gas reserves are currently estimated at approximately 1600 billion m 3, of which 1200 billion m 3 are contained in the Groningen gas field. The total proven reserves in various small fields both offshore and onshore, amount to approximately 400 billion m 3. In addition, the futures (i.e. reserves that can, for instance, be expected on the basis of seismic surveys, but which still have to be proven by drilling), are estimated to add another billion m 3 to producible reserves. One third of the futures is located onshore and two thirds offshore. The total gas resource, the sum of the gas that has been produced to date, proven reserves and futures, amounts to approximately 4500 billion m 3, of which 2600 billion m 3 has already been produced 14. Whether the remaining gas will eventually be produced depends to a large extent on the exploration and production climate. 3.2 The small fields policy After the Groningen field was discovered in 1959, Dutch gas production was initially virtually only from this giant gas field. One of the results of the oil crises in the 1970s was the growing awareness that we should preserve this field and also explore for smaller fields, i.e. all fields smaller than the Groningen field. To this end, the small fields policy was developed. The crux of the small fields policy is that gas production from small fields is encouraged by using Groningen field as a swing producer. The Gas Act obliges Gasunie to purchase all gas produced from small fields 15. This guarantees the mining companies that they will be able to sell their gas on reasonable conditions and at market prices long before they start production. By the time the first gas is produced, however, the mining company can choose whether it wishes to sell to Gasunie or to another buyer. Gasunie can only afford to give this purchase guarantee because the Groningen field can balance the differences in supply and demand - differences between successive years and between summer and winter. We call this the swing capacity of the Groningen field. The result of the small fields policy should be that the maximum number of small fields is brought on stream. However, the capacity of the Groningen field has decreased so much by now that, in addition, underground storage facilities (UGS) are also needed to meet peak demand in winter. There are currently three UGSs in operation: in Norg, Grijpskerk and Alkmaar. The importance of small fields for Dutch gas production is shown in figure 3: Approximately two thirds of the total gas currently produced comes from small fields. The small fields policy has contributed considerably to the security of supply in the Netherlands as well as in Europe. Provided the mining companies will continue to develop 14 The data mentioned in section 3.1 can be found in the EZ Annual Review: Oil and Gas in the Netherlands 2003 (June 2004): 15 Articles 54, 54a and 56 Gas Act. 9

11 Figure 3: annual gas production in the Netherlands in billion m 3 (source: TNO-NITG) and produce at the same level, both onshore and offshore, we will be able to depend on the combination of gas production from small fields and the swing capacity of the Groningen field until approximately Limiting production from the Groningen field Because of its swing capacity, the Groningen field is essential for the implementation of the small fields policy. To ensure a prudent use of the Groningen field, the third Energy Policy Paper set a production ceiling of 80 billion m 3 for all of the Dutch fields in Production from the Groningen field was the difference between the national production ceiling and the expected production from the small fields. This way the production ceiling formed an indirect ceiling to production from the Groningen field. In 2000, the production ceiling was legally embedded in the Gas Act. In recent years, however, annual reports of Gasunie have shown that if we adhere to the production ceiling of 80 billion m 3, the Groningen field will be depleted much sooner than considered desirable by 2020 instead of by This is mainly due to a significant downward adjustment of the medium-term prognoses for the production of gas from small fields. The instrument of a national production ceiling would thus result in compensation through increased production from the Groningen field. Therefore, the production ceiling that Gasunie should apply in implementing the small fields policy was adjusted downward early this year Up to 2007 the range shall be 75 to 77 billion m 3 per year, for the period it shall be billion m 3 per year. The national production ceiling has been kept at 80 billion m 3 per year. This also includes gas that is not marketed via Gasunie. 10

12 Because it is expected that the supply of gas from small fields will decrease further in the near future and will have to be compensated for by additional production from the Groningen field, the indirect control of the Groningen field will not be a suitable instrument any more. For that reason, in the implementation of the Second Gas Directive 17, the existing national production ceiling as laid down in the Gas Act, has been replaced by a maximum volume of gas that may be produced from the Groningen field, expressed in an annual average calculated over five years. The details of this five-year ceiling will be specified in consultation with the parties involved. The implicit Groningen production ceiling has thus been changed into explicit control of Groningen production. This way, the Groningen field will be able to continue to act as a swing producer for as long as gas production from small fields can reasonably be expected. 3.4 Imports and exports As the European gas market has been liberalised, gas is being imported and exported, both by Gasunie and by other market players. Imports currently total approximately 10 billion m 3 per year and exports approximately 45 billion m 3 per year. These exports go to other EU countries. The Dutch gas exports can be explained, not only by the free market principle, but also by the small fields policy. The cornerstone of this policy is the guarantee to mining companies that Gasunie will buy all the gas that is offered. Domestic demand is at present approximately 35 billion m 3 per year. Figure 3 shows that the supply from the small fields currently exceeds domestic demand. In addition, a certain minimum volume of gas has to be produced from the Groningen field. That minimum volume is necessary to absorb fluctuations in supply and demand, for technical reasons and because of the licence holder s interest in a reasonable production level. All the gas that Gasunie does not sell at home is exported. Conversely, Gasunie has decided to import gas because in the past, because the commitments agreed for exports and domestic consumption structurally exceeded the average production ceiling of 80 billion m 3. This has laid the foundation for a future key position of the Netherlands in the international gas trade, based on the combination of the existing infrastructure, the geological configuration and the proximity to the market. 3.5 Gas in the long term It is not the case that there will be no gas left in the Netherlands in 25 years time. However, it is expected that most gas from the small fields will have been produced by then. The Groningen field will not have been depleted either by that time, but the reservoir pressure will no longer be high enough for the field to act as swing producer. To ensure an adequate gas supply in the long term, we are preparing ourselves for the time when, to meet gas demand, the Netherlands and the EU will increasingly depend on imports from outside the EU, e.g. from Russia, Algeria, and Iran and on liquefied natural gas (LNG). The preparations for large-scale imports of gas from Russia are partly bilateral, for instance by Gasunie entering into contracts with the Russian company Gazprom, partly in the form of an energy dialogue between the EU and Russia. This energy dialogue should create the conditions for an increase in gas exports from Russia into the European 17 TK ,

13 12 Union in the coming decades. A key issue are the guarantees in long-term contracts, which are necessary to secure funding for the huge investments that are needed to construct facilities for gas-production in Russia and to transport that gas to Europe. Another discussion topic is energy-saving projects in Russia. By promoting energy-saving measures, the energy dialogue can contribute to a maximally clean energy supply as well as to continuation of a secure energy supply in the future.

14 4 Gas production, the environment and nature 4.1 General Gas production affects the environment just like any other industrial activity. Before gas can be produced, it first has to be found. To begin with, seismic surveys are carried out to define potential new plays. Subsequently, exploration wells are drilled to find out whether producible quantities of natural gas are really present. An exploration well is generally drilled by a 50-metre-high drilling rig, which stays in a particular location for approximately two to three months. If it is decided to bring an onshore field into production, a production location has to be constructed. Once production wells have been drilled, the drilling rig leaves and a Christmas tree is put in place which is approximately two metres high. In case of offshore fields, a production platform generally has to be put in place. Especially drilling operations may cause inconvenience; for instance due to the illumination of the drilling site or the noise of the drilling equipment or the flaring of gas during testing. Legislation, licence regulations and covenants try to ensure that the inconvenience caused by exploration for and production of gas remain within acceptable limits. The legislation, which is increasingly based on international regulations, increasingly takes nature and environmental aspects into account. This applies to gas production in both sensitive and in less sensitive areas. The concern for the environment and nature is especially reflected in environmental impact assessments, mining environmental permits, and conservation act permits. These permits normally include provisions concerning noise contours, visual intrusion, lighting, traffic, fire prevention, waste management, energy management etc. 4.2 Specific consequences of gas production Both subsidence and earthquakes can be specific consequences of gas production, but their effects are completely different: - Subsidence is a very gradual process, which does not damage buildings directly. However, the effects of subsidence on the water balance and thus on vegetation and the environment, as well as on buildings and infrastructure, may be considerable; - Earthquakes, on the other hand, may, if the magnitude is sufficiently large, cause direct damage to buildings, whereas the effects on the natural environment are negligible. Large parts of the Netherlands are undergoing slow, natural subsidence. Some of this natural subsidence is caused by compaction of near-surface layers such as clay or peat. The production of natural gas also contributes to subsidence. Natural gas is contained in porous sandstone strata - the reservoir- at a depth of approximately three kilometres. The reservoir is overlain by impermeable, sealing, rock strata. During production of the gas, the pressure in the reservoir gradually decreases and the sandstone strata are slightly compressed. The maximum amount of subsidence takes place above the centre of the gas field. The ground surface above the centre of the Groningen field has subsided by more than 25 centimetres since the start of gas production in Because subsidence occurs 13

15 very gradually and over an extensive area, the maximum slope of the resulting saucer shape is very small: approximately two millimetres per 100 metre comparable to the thickness of a euro coin over the size of a football field. The amount of subsidence above small fields ranges from barely perceptible to a couple of centimetres. Since 1900, almost fifty earthquakes of a magnitude of 3 or higher on the Richter Scale have been recorded in the Netherlands. Most of these earthquakes (43) took place in the southern part of the country and were due to natural causes. Earthquakes that occur in the northern part of the Netherlands are virtually always due to gas production. These are related to pressure changes in the rock strata from which the natural gas is produced. The pressure changes may cause movement along existing fault planes deep in the subsurface. Most of this movement occurs gradually, but occasionally the movement is abrupt. In that case we speak of an earthquake. The most severe earthquake due to gas production had a magnitude of 3.5 on the Richter Scale and caused minor damage and the toppling over of a few objects near the epicentre 18. To prevent any damage being caused by subsidence, several measures are being taken, such as adjusting the level of the groundwater, building additional water works including locks, sluices and pumping stations, and raising the dikes. NAM has established a special fund to pay for all these preventive measures for the Groningen field in which it has deposited an initial sum of 295 million euros (price level 1980). In addition, an agreement has been concluded between NAM and the province of Friesland concerning the Tietjerksteradeel concession, which is also intended to compensate for any adverse effects of subsidence. Compensation for the damage that has been caused by ground movements (i.e. both earthquakes and subsidence) should in principle be settled between the aggrieved party and the mining company. Since the introduction of the new Mining Act, the mining companies have a legal responsibility to exercise due care as stipulated in additional rules. The Technical Commission on Ground Movement (Dutch acronym: Tcbb for Technische Commissie Bodembeweging), which was established pursuant to the Mining Act, advises citizens, upon request, on the causes and extent of material damage due to ground movements which can reasonably be deemed to be caused by mining operations. The Mining Act also provides for a Guarantee Fund Mining Damage, which can award compensation in case the mining company concerned has been declared bankrupt, has been granted a moratorium on payments, or has ceased to exist. So far, these situations have never occurred in the Netherlands. 4.3 Gas production in sensitive areas Sensitive areas are those areas that have been designated as such pursuant to the Habitat Directive, the Birds Directive and/or the Nature Conservation Act, areas that are wetlands pursuant to the Ramsar Convention or areas that have the status of a restricted area within the National Ecological Network or areas that are part of a National Park. 18 See also 14

16 These areas are characterised by important ecological values and therefore protected. Approximately one third of the gas futures in the Netherlands is located under sensitive areas. To carry out new mining operations or to modify existing operations in or near a sensitive area, decision-making checklists are applicable, as specified in the Policy Document on Spatial Planning [Nota Ruimte] and the Habitat Directive. These checklists also affect the assessment of the different licence applications. A decision-making checklist spells out the criteria that should be weighed in order to determine whether an operation can be permitted. It is important that all pros and cons are integrally weighed. In areas that have been designated sensitive pursuant to the Birds Directive or the Habitat Directive, gas production may be permitted if scientific data indicate that there is no reasonable doubt that any harmful effects can be ruled out. In the implementation of these regulations, it is extremely important to try and find solutions that would create win-win situations for all parties concerned, as has also been agreed in the discussion platform Oil and Gas Council (Dutch acronym: OOG, for Overlegraad Olie en Gas) 19. An important sensitive area is the Wadden Sea. Gas is currently being produced from five fields that are, either fully of partially, located underneath the Wadden Sea. These fields are: Zuidwal, Anjum, Ameland, Blija and Groningen. The total gas resources underneath the Wadden Sea and the Wadden area 20 include the existing production locations, the proven reserves in Paesens (Nes), Moddergat, Lauwersoog, Ternaard and Vierhuizen, and the futures. Figure 4: gas reserves in the Wadden area in billion m 3 excluding Groningen (source: TNO-NITG) Field/area Proven reserves Futures (still to be proven reserves) Existing production locations (excl. Groningen) Paesens (Nes), Moddergat, Lauwersoog, Ternaard, Vierhuizen (proven and developed, not yet producing) Further Wadden area Total The reserves underneath the Wadden area total billion m 3. This equals about 20 percent of the total, onshore and offshore, proven reserves (not yet producing) and futures. 19 Most persons who are taking part in the discussion platform OOG are associated e.g. with the mining industry, environmental organisations, government departments, but OOG also includes a number of independent persons. OOG was established in 2001 to enhance the pertinent dialogue between these groups. OOG does not have a formal status. The members of OOG are serving in a personal capacity. 20 The Third Policy Document Key National Spatial Planning Decision Wadden Sea defines as Wadden area: the Waddenzee, the Wadden islands, the tidal inlets in between these islands, the coastal zone of the North Sea up to 3 nautical miles off the coast, and the entire territories of the mainland municipalities that border on the Waddenzee. 15

17 The amount of knowledge and data on the consequences of gas production from under the Wadden Sea has grown considerably in comparison to the 1999 Gas Decision. In its letter of December 1999, the cabinet at the time formulated a number of key issues for which significant uncertainties remained. These uncertainties concerned the predictability of the Wadden Sea ecosystem, the delay factor in the effects, the baseline study, the quality and quantity of additional sand suppletions, monitoring en injection of water to prevent subsidence. Considering the cabinet point of view, based on the advice from Advisory Group Wadden Sea Policy, cabinet commissioned additional research to address these issues. The resulting up-to-date knowledge leads to the conclusion that the ecological effects that would result from subsidence due to gas production would be small in comparison to the variations that are due to natural processes in the Wadden Sea. The uncertainties with respect to the effects of subsidence due to gas production are also classified as minor. Cabinet is, therefore, of the opinion that, on the basis of currently available scientific data, the uncertainties and doubts about the consequences of gas production have been sufficiently removed. The data and advice all point in the same direction: i.e. that there is no reasonable doubt that possible gas production, within strict boundary conditions, will not have harmful consequences for the natural values of the area. It should be noted though, that natural processes cannot be predicted with one hundred percent accuracy, but that, should natural processes show a significant deviation from the expected trend, intervention is basically possible, following the hands-on-the tap principle. Therefore, cabinet intends to permit production and development of the small fields underneath the Wadden Sea from onshore locations outside the Wadden Sea 21. With regard to the construction of new installations for exploration drilling or gas production within the Wadden Sea, the present policy will be continued: i.e. this will remain prohibited. Obviously, drilling and production activities should only take place in an extremely careful manner and within strict boundary conditions. The production plans and monitoring plans specified in the new Mining Act will be good instruments to control production and set limits to subsidence. 21 TK , , no. 1 16

18 5 The exploration and production climate in the Netherlands 5.1 Extent of mining operations The Dutch government does not itself decide on matters such as exploration for, and production and export of gas. This is the job of the gas industry, on the basis of economic considerations and obviously adhering to the existing legal provisions. Most companies that are active in the oil and gas industry are multinationals that operate in various countries and on several continents. They generally evaluate in which projects and areas they will invest on a global scale. If we wish these companies to continue exploration and production activities in the Netherlands, the local exploration and production climate should be attractive. This means that the conditions and circumstances under which they can operate here, should be and remain competitive in comparison with the conditions in other gas-producing countries. The government has an important role in creating these conditions. In the past few years, the large mining companies do not seem to be prepared to invest large sums in exploration and production operations in the Netherlands. Their attention seems to shift to regions elsewhere in the world. Only seven offshore exploration wells were drilled in 2003, compared to an annual average of thirteen in the period from 1998 to NAM only drilled one offshore exploration well in 2003, Total none. A few mediumsized and smaller mining companies are currently showing interest in the Netherlands. In general, however, small mining companies are less interested in exploration, because of the relatively high costs and risks involved. In the past few years, we have seen a reduction in gas reserves: in 2002 the reduction amounted to 48 billion m 3, in 2003 to 100 billion m 3. Its has by now become clear that the same trend will continue in The reduction cannot be explained solely by the fact that gas is being produced every year. It is also due to the fact that hardly any new reserves are being found and to the downward adjustment of the existing reserve estimates. In the past, the reduction in reserves caused by gas production tended to be more than offset by the addition of newly found reserves. Figure 5 shows the actual and the expected gas production from small fields. This shows that production in the Netherlands is past its peak. If no new fields are brought on stream any more, gas production from the small fields will have halved by The figure also shows that the proven reserves and futures are sufficient to be able to produce a considerable volume of gas for approximately thirty more years. Calculations made on the basis of the present-day production plans of the mining companies and information supplied by Gasunie show that approximately 200 billion m 3 of economically recoverable gas is in danger of remaining in the ground, unless the exploration and production climate improves considerably. This amount of gas represents approximately 6-10 billion euros in state revenues (nominally). 17

19 Figure 5: production from small fields (source: TNO-NITG 5.2 Concerns about the exploration and production climate Various positive and negative factors affect the exploration and production climate and thus the decision-making processes in oil and gas companies, whether or not to invest in operations in the Netherlands, either onshore or offshore. Some of these factors can be influenced by, for instance, government measures, others are a given factor. Some factors that are positive for the Netherlands are: - the favourable geological configuration. The chances of successful exploration are good and because of the shallow water, the costs are relatively low; - the small fields policy; - state participation through Energie Beheer Nederland (EBN) resulting in spreading of risks. EBN participates for 40 or 50 percent in both exploration and production; - the extensive infrastructure; - the proximity of the market. However, other factors are negative for the Netherlands, such as: - the fact that the remaining gas potential in the Nederlands is decreasing and it is becoming more difficult to find sizeable new gas fields; - the high level of payments in comparison with other countries. In the Netherlands, the total payments to the government amount to approximately 70 percent at present; - the abolition of the tax measure depreciation at will 22 in 2003; - the uncertainty about the consequences of liberalisation of the gas market and of the restructuring of the Dutch gas structure, commonly referred to as the Gasgebouw, for the sales of the gas from small fields and for the gas price; 22 A fiscal tool to stimulate investment in exploration and development of gas finds in small and marginal offshore fields, to underpin the small fields policy. This measure used to cause government income to be transferred to a later point in time. 18

20 - administrative hurdles such as the complicated legislation and regulations, the long duration of procedures, which is caused by increasing tensions in weighing the interests that are relevant for society, the lack of an integrated assessment and the lack of unanimity within the state government; - a lack of transparency as a result of a scattered and not easily accessible geological data and procedural information. International developments also affect the situation in the Netherlands. In the past, companies used to have separate budgets for individual countries. Decision-making used to focus on the choice between different, more or less favourable locations within the Netherlands. Nowadays, the choice is between locations all over the world, so fields with 2 to 5 billion m 3 in reserves, have to compete for funding with fields that are many times as large elsewhere in the world. Moreover, recent advances in technology enable production from locations where this was previously impossible. In other cases, it has become possible to produce more cheaply, making as yet uneconomic fields economic. The impression that the Netherlands has become less attractive for gas production is confirmed by studies into the exploration and production climate carried out in 2000 and 2003 by Gaffney, Cline and Associates (GCA) 23. These two studies compare the exploration and production climates in the various gas-producing countries surrounding the North Sea, i.e. the Netherlands, the United Kingdom, Norway, Germany and Denmark. The ranking of the Netherlands in 2003 has gone down both in absolute and in relative terms in comparison to The authors of the report consider the abolition of the tax measure: depreciation at will, as the cause of this deterioration, but the other negative factors mentioned above also play a role. 5.3 Immediate action is needed Some people claim that the Dutch gas that currently remains in the ground, because the mining companies consider the cost of exploration and production too high, will be produced later anyhow, when oil and gas are getting increasingly scarce and the oil price is structurally higher than at present. However, this is not entirely true, the situation in the Netherlands is different from that in most other countries in the world, for the following reasons: - To be able to take advantage of the swing capacity of the Groningen field, the small fields have to produce gas within the period that the Groningen field can still act as a swing producer. Otherwise, chances are that the investments in the small fields are no longer profitable and that the gas will stay in the ground. To clarify this point: the time needed for the exploration, development and production of gas accumulations in the Netherlands is approximately 15 to 20 years. - The life expectancy of the existing infrastructure for offshore gas production is limited. A production platform or pipeline will generally be abandoned, as soon as production falls below a financially viable limit. Figure 6 shows that the number of platforms that are currently producing, will decrease considerably in the coming decade. Thus, the 23 Comparative study of the exploration and production climate offshore Netherlands, U.K., Norway, Denmark, Germany and onshore Netherlands Executive Summary, Gaffney, Cline & Associates (February 2004) 19

21 infrastructure of platforms and pipelines will fall into disuse. Especially fields with reserves that are smaller 3 billion m 3 greatly depend on the existing infrastructure for exploitation to be profitable; - There is a every chance that the companies that are currently ceasing operations in the Netherlands because, elsewhere, the exploration and production climate is more favourable and the fields are larger, are not likely to return. In that case, deferral of production will in practice become permanent. Figure 6: number of offshore platforms: many fields are in the final stage of production (source: EBN)

22 6 Policy plans 6.1 General Considering the major importance of gas production for the Netherlands, I wish to prevent that the recent developments will lead to an even greater reduction in activity and I therefore consider it necessary to take measures before very long. I intend to keep mining operations - investments, exploration, development and production - at the same level of activity for at least the coming fifteen years, ensuring the production of as much gas as possible. The proposed measures have been formulated with the assistance of EBN, TNO-NITG, CPB [Netherlands Bureau for Economic Policy Analysis] and the study by GCA, mentioned before. In addition, there have been bilateral contacts with Norway and the United Kingdom, concerning the improvements in the exploration and production climate that have been initiated in these countries. The next section gives details of various non-financial measures that will contribute to an increase in exploration for, and production of the gas contained in small fields. Some of these measures have been instigated already, others will be announced shortly. This package of measures does not include re-introduction of depreciation at will. The possibility of re-introducing this tax measure was made dependent on the evaluation of the effects of abolition of depreciation at will by 1 January CPB carried out that evaluation in the summer of This shows that depreciation-at-will has definitely been effective. However, the recent developments in oil prices in particular have led CPB to conclude that re-introduction is not appropriate at present. Too many fields that are profitable anyhow, even without depreciation-at-will, would also benefit. The objective of my policy is to maintain the current level of activity. I will continue to monitor the effects of this policy closely. If the activity does not reach the desired level, we will consider which other measures would be effective to still achieve this objective. Stimulating new exploration and at the same time preventing too many free riders, will be the main criteria. 6.2 Policy plans Effective regulatory framework and efficient licensing procedures Administrative hurdles are not only encountered in onshore projects, but increasingly in offshore projects as well. It frequently takes years before a project can be realised, this delay is in many cases unnecessary. This situation contributes to an uncertain investment climate. Cabinet has instigated a project in the context of operation B4, which stand for Beter Bestuur voor Burger en Bedrijf [= a better government for citizens and companies] to tackle the identified hurdles. The B4 working group concluded its analysis in June The results confirm that the legislation applicable to gas production is extremely comprehensive and too complicated and that individual aspects have to be harmonised better in order to improve coherence and predictability. According to the working group, the solution partly lies in present trend in legislation, which intends to speed up and streamline decision-making processes. Examples are: the fundamental revision of the 21

23 Spatial Planning Act, environmental licensing and current developments in General Administrative Law. Its is currently being assessed whether organisational measures including improvements in coordination could contribute to reducing handling times. Cabinet is planning to formally announce a cabinet viewpoint by end Continuation of small fields policy The small fields policy is crucial for an optimum exploitation of the Dutch gas reserves and related concerns such as the security of supply, the economy and sustainability. This policy will be continued after the restructuring of the Gasgebouw has been completed. It is sometimes claimed that the Gasunie s purchasing guarantee will not be needed any longer, once the gas market is liberalised 24. However, at present the market is insufficiently flexible to offer a satisfactory alternative. In a liberalised market, a large share of the produced gas volume will probably be sold directly to the market. However, the purchasing guarantee will still be important, especially for the smaller, marginal fields Tackling sleeping licences A company can leave an exploration or production licence in abeyance for years. This actually happens sometimes, because costs turn out to be too high, the technology needed is not yet available or the project is dropped in favour of other projects inside or outside the Netherlands. Sometimes, other companies consider the licence attractive and are willing to take action sooner. Until recently, this situation could not be resolved. Since the new Mining Act came into force in 2003, the Minister of Economic Affairs can, in accordance with Article 21 of the Mining Act, withdraw such a sleeping licence. Recently, this possibility is being actively used. The company concerned then has four possible courses of action: - surrender the licence; - rapidly take action itself ; - sell the licence to another company; - not take action; in that case the licence is withdrawn. Since 2003, nine exploration licences and five production licences have been wholly of partially sold to other mining companies. Furthermore, it will be assessed whether the instruments offered by the Mining Act concerning the obligation to carry out exploration activities should be expanded for existing exploration licences Actively approaching new companies Now that exploration for gas seems to become less interesting for large mining companies because the Dutch territory has largely been explored, it is getting more interesting for medium-sized and small companies to invest in the Netherlands. A medium-sized company generally has a limited portfolio with projects in a small number of countries. By taking over concessions and fields in countries where the company 24 See, for instance, OECD Economic Surveys Netherlands, July

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