Netherland's Influence on European Natural Gas Prices

February 27, 2015Netherlandsby EW News Desk Team

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Natural gas prices in Europe continue to climb, as the continent's largest producer, the Netherlands, announced a further reduction in their production cap for the first half of 2015. Sources from Groningen announced that the production from the gas field, the largest in Europe, would fall below a level announced at the end of last year.

This is the opposite of America, where supply is up and prices down because of innovation and creativity by the private sector via oil shale and fracking.

The reduced production reflected right away as the cost per therm hit a six week high in the European market. The Dutch Transfer Facility hubs and the UK's Balancing Point managed to extend gains earlier this week.

The Groningen Impact

Groningen has been the largest producer of natural gas in Europe and has been the backbone of the Netherlands fossil fuel economy. But due to environmental and safety hazards the field was forced to cut back on production to prevent a negative ecological impact; this in turn is expected to severely affect the economy and will force it to import gas by 2025. This could benefit countries like Saudi Arabia perhaps even America.

Though experts predict that this is only a short-term rise, they believe that long-term prices will rise due to a persistent supply-demand mismatch. On Monday, the prices stood at $7.92 per million BTU for natural gas and $26 per megawatt-hour for Dutch fuel, both the highest since December of last year.

Proposed Production Cap

Earlier in December 2014, the Dutch government announced that the annual production cap for Groningen would be 42.5 billion cubic meters, down from 39.4 billion cubic meters.  First half annual production was set at 16.5 billion cubic meters of which 7.6 billion were already produced in the month of January, which was 0.6 billion lower than the average production capacity during February.

Since Groningen contributes 75% of the nation's gas supply, and with talks of further reducing the production cap to 35 billion cubic meters per annum, experts fear that this will result in a steady 9 percent year-over-year reduction in gas production.

Alternatives to European Gas

Though market experts fear the effect that reduced production will have on the gas prices, officials are not too worried about the availability for utilization. The Dutch economy minister Henk Kamp clarified that out of the 39.4 billion cubic meters extracted from Groningen, 33 billion will be sufficient to keep all gas users well supplied even during the coldest months. The rest is surplus.

Further, the drop in Netherland's production output will only account for a 3% reduction for Western Europe. Sources also verified that even with Brazil and Nigeria's gas supplies completely out of the equation, the deficit 6 billion cubic meters should not be too difficult to acquire with Russia as the other major supplier. But many people do not want to reward Russia with anything right about now, or as long as Putin or someone like him is calling the shots.

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