February 1, 2018 / 9:34 AM / 22 days ago

UPDATE 3-Dutch aim for major cut in gas production at earthquake-prone Groningen field

* Dutch gas regulator: cut Groningen production to 12 bcm

* Groningen production at 60 percent lower than 2014 peak

* Operator Gasunie: cuts only if production can fluctuate

* Minister: close Loppersum site in Groningen field (Adds minister comment, analyst)

By Bart H. Meijer

THE HAGUE, Feb 1 (Reuters) - The Dutch government aims to adopt a recommendation by the regulator to cut production at the Groningen gas field by nearly half to 12 billion cubic meters per year “as quickly as possible” to limit the risk of earthquakes.

Economy Minister Eric Wiebes did not give a timeframe for the plan on Thursday, but it will likely take several years.

The government has lowered output from Groningen several times as decades of extraction have led to dozens of earthquakes each year, damaging thousands of homes and buildings.

But it has to balance the need for safety with securing energy supplies. Some 40 percent of the Netherlands’ energy needs come from gas, the bulk of which is from Groningen.

“This is a terribly large step,” Wiebes told journalists in The Hague. “The 12 is now really my goal. I plan to implement that advice and do so as soon as possible.”

Sector regulator SodM recommended production in Groningen be limited to 12 bcm per year, from the current cap of 21.6 bcm.

It said production should be cut further in the future, with a “total shutdown” possible if necessary, after the northern Dutch region was hit by a 3.4 magnitude quake, the largest in years, in January.

By cutting production to 12, it should reduce risks for people living in the region significantly, SodM inspector-general Theodor Kockelkoren said.

Meanwhile, on the supply side of the equation, gas transport company Gasunie said demand could be met with a cap of 19.5-21 bcm in the gas year through October 2018 - but only under a system that allows production to fluctuate along with temperatures.

“We are erring on the safe side as the uncertainty is large. It’s impossible to exactly predict the magnitude of earthquakes at different levels of production”, Kockelkoren said. “It is now up to the minister to make a very difficult decision.”

CHEAP GAS

Wiebes earlier ordered the immediate halt of production at the Loppersum site in the Groningen gas field and pleaded for producer NAM and Gasunie to take all possible measures to reduce production using existing possibilities - resulting in a trim of between 0.5 bcm and 2 bcm, depending on the weather.

Analyst Richard Taylor at BMI Research said he expected the government to gradually reduce production.

“We expect the Dutch government will seek to avoid a more dramatic cut in order to avoid switching status to a net importer of natural gas, as well as to avoid increasing reliance on Russian and Norwegian gas imports and more expensive LNG cargoes.”

For decades, the Netherlands has enjoyed cheap gas, which heats homes, generates electricity and powers major industry.

Gas company NAM, the joint venture of Royal Dutch Shell and Exxon Mobil that runs the field, last month proposed halting production at six points in Groningen and lowering production overall, without setting any target.

Once the largest supplier of European Union gas, output at Groningen has already been trimmed by 60 percent from a peak of 54 bcm in 2013.

SodM recommended immediately cutting production entirely at five points in the Groningen field: Ten Post, Overschild, De Paauwen, ‘T Zand and Leermens. Production at the Bierum cluster should be kept as stable as possible, with fluctuations limited to around 20 percent, it said.

The Gasunie recommendation would allow production to be as low as 14 bcm in relatively warm years - but it would risk forcing a major increase in cold years to as high as 27 bcm. Production is currently kept as stable as possible in order to lessen the risk of major earthquakes.

Wiebes is expected to review ways to cut production, including by lowering consumer and industrial demand, by the end of March. The government will issue a decision on production for the year through October 2019 by June.

Dutch gas prices were little changed after the announcement. Earlier this week, analysts said production of around 18 bcm/year would guarantee supplies.

“I felt anything below 19bcm as a current cap would be bullish. Price movement as yet has not been much,” said Oliver Sanderson, Thomson Reuters gas analyst. “I think this is because the market is waiting for confirmation”.

He said he thought NAM would not accept the 12 bcm cap for several years and would make a shorter term counterproposal. (Reporting by Bart Meijer; Additional reporting by Nina Chestney; Editing by Anthony Deutsch and Alison Williamas)

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