Fundamental change in playing field for natural gas in the Netherlands
Following the earthquake near Zeerijp on 8 January 2018, the Ministry of Economic Affairs and Climate (EZK) asked the Dutch State Supervision of Mines (SodM) and Gasunie Transport Services (GTS) to give advice on scaling back gas extraction in Groningen from the viewpoint of safety and security of supply. The two bodies issued their advice simultaneously. Strictly from the viewpoint of safety, SodM advised that production be scaled back to a maximum of 12 billion cubic metres per year (bcm). For the sake of the security of supply, GTS calculated that in a cold year, approximately 27 bcm is needed to guarantee supply, and in a warm year, approximately 14 bcm. One of the starting points here is that the system of ‘level gas extraction’ be abandoned, so that our possibilities for converting high-calorific gas into low-calorific gas can be utilised to the maximum. The ministry decided to look into how and when gas extraction can be scaled back to 12 bcm.
Helping reduce gas extraction
This significant reduction in gas extraction from the Groningen gas field requires drastic measures, for both the short and medium term. Gasunie will do its utmost to help achieve this. A further decrease in production can be achieved through a series of measures to facilitate conversion to high-calorific gas, making use of quality conversion, and switching to renewable sources.
In 2013, agreements were already made to switch Germany, Belgium and France from low-calorific gas to high-calorific gas over a span of ten years, starting in 2020. Due to this conversion, the foreign demand for Groningen-quality gas will be virtually non-existent from 2030 onwards, and there will no longer be any export of low-calorific gas. It is being investigated with the parties involved, including Gasunie Deutschland, whether this conversion process can be accelerated even more. The conversion of large industries and power stations in the Netherlands is also being looked at.
Since the decrease in Groningen production, our use of quality conversion has risen from 5.7 billion cubic metres in 2013 to 25.8 billion cubic metres in 2017. The volume of low-calorific gas that can be rendered from high-calorific gas flows from elsewhere using our existing nitrogen installations can be increased even further if the level production profile currently used at the Groningen gas field is abandoned. Groningen production would in that case only serve as a supplement to the maximum use of quality conversion, driven by temperature-dependent demand from users. This could cause quality conversion to increase to around 33 billion cubic metres per year. The conversion capacity can also be expanded further by the construction of an additional new nitrogen installation. The installation near Zuidbroek researched previously could be put into operation at the beginning of 2022 and could contribute to the reduction in gas production from the Groningen gas field particularly in the period until about 2030. A final decision on this from the Ministry of Economic Affairs and Climate is expected at the end of March.
The switch to alternative energy carriers can also help reduce the demand for natural gas. The use of renewable gases could replace approximately 1 billion cubic metres of Groningen gas as of 2025. This would involve the use of green gas (via fermentation and gasification) and an accelerated roll-out of supercritical water gasification and fermentation solutions. Mixing hydrogen with the L-gas could save 0.2 billion cubic metres of natural gas. In 2030, hydrogen from various sources (including wind out at sea) could replace approximately 6 billion cubic metres of Groningen gas in total.
Better insulation, the use of hybrid heat pumps and heat grids may also offer a solution. The roll-out of the Zuid-Holland heat grid enables the supply of heat to 1 million domestic households and the equivalent in horticulture and industry, for instance. In this project alone, the use of residual heat can save approximately 1 billion cubic metres of Groningen gas. The current coalition agreement allocates heating infrastructures and CO2 capture and storage (CCS) an important role in reducing CO2 emissions.
Climate benefits can be achieved right away by using natural gas instead of the more polluting fossil fuels like coal and oil. Replacing these fuels with natural gas can deliver significant carbon savings. Gas-fired power stations have much lower CO2 emissions than coal-fired power stations for example. It is expected that natural gas will continue to play a role for some time still, although this role will change, from predominant use of natural gas to more of a supporting role (customised gas approach).
We see that sustainability is making headway within the gas sector too, in parallel with the ambition to scale back on Groningen gas extraction. In the decades to come, natural gas will increasingly be replaced by renewable energy sources. The energy supply of the future will be an interplay of different sustainable energy forms: electrons, heat and molecules. These forms and their related infrastructures will become more and more intertwined with each other. Energy carriers such as green gas and hydrogen will take over some of the role currently filled by natural gas. Heat grids will also provide some of the built environment with heat. This chiefly requires new knowledge and the development of innovative technologies, which is why we are participating in a number of projects and testing grounds.
Together with SCW Systems, we built a demo gasification plant in Alkmaar in 2017. In the plant, supercritical water gasification is used to sustainably produce gas and reusable raw materials from wet biomass (residual and waste flows). For the coming years, we foresee an upscaling of this new technology for use on an industrial scale as well. In September, Gasunie joined the North Sea Wind Power Hub consortium. Together with TenneT, Danish Energinet.dk and the Port of Rotterdam Authority, we are exploring the possibilities of combining a large-scale wind farm on the North Sea with the production, storage and transport of sustainable energy in the form of hydrogen.
At the beginning of 2018, the Dutch House of Representatives adopted the Progress of the Energy Transition bill, amending the Dutch Gas Act. The legislative amendment provides the necessary clarity so that all the parties involved can now work to realise the European and national ambitions for the energy transition. The amendment enables Gasunie to further contribute to the energy transition. We want to actively help to achieve to a CO2-neutral energy supply by 2050 — an energy supply that is not only clean, but one that continues to be reliable and affordable as well. We are convinced that the focus here must be on the highest CO2 reduction per invested euro.
Gas production in Europe is currently declining faster than demand, also with the high forecasts for the share of sustainable energy. In the coming decade, it will remain a challenge to bridge the gap between demand and supply (supply gap). This generates extra demand for transport capacity in Europe, which is why we are joining with other partners in participating in cross-border projects in the areas of gas infrastructure and liquefied natural gas (LNG). Examples include the construction of the EUGAL pipeline in eastern Germany, the reverse-flow of BBL (the Balgzand Bacton Line gas pipeline between the Netherlands and the UK) and research into the development of an LNG terminal near Hamburg.
The north-western European gas market could be qualified as robust. To ensure it stays robust, it is important to reinforce the supply routes to the north-western European system, also in southern and eastern Europe. We see that these shifts require the development of additional transport connections within Europe.
Although the demand for natural gas in north-western Europe is reasonably stable, we see a slight decline in the gas trade. Of the three largest north-western European gas trading platforms, the Title Transfer Facility (TTF) saw the lowest relative decline in traded volume in 2017. This makes TTF the leading liquid gas hub in Europe. With the removal of the Julianadorp interconnection point, the BBL pipeline became part of the TTF market area on 1 January 2018. As a result, TTF is linked directly to the British National Balancing Point (NBP) gas hub and flexibility has increased significantly for our customers.
Alongside the challenge of identifying and making the most of opportunities on time, we also face uncertainties. A new five-year regulatory period has started in the Netherlands, which assures all the parties involved of some calm. A new five-year regulatory period starts for Germany in 2018. In our non-regulated part of the business, some of the current long-term capacity contracts have expired. This concerns EnergyStock (our gas storage) and BBL (the pipeline between the Netherlands and the United Kingdom). Some of the BBL capacity released was sold in 2017, along with virtually all of the EnergyStock capacity.
Consequences for our company
As a result of the risk-based revision of our replacement and maintenance programme, the investments in our existing infrastructure are decreasing, while still allowing the retention of safe and reliable gas transport. We are performing more corrective than preventive maintenance and can reduce the use of compression capacity. For this reason, we are provisionally decommissioning our stations in Schinnen and Oldeboorn.
We want to respond decisively to new developments. This requires intensive contact with external stakeholders and involving employees in the changes at and outside of Gasunie. There will be contraction and growth in our company, now and in the years to come. Contraction in a large part of our current activities and growth as the result of new activities, in particular at Gasunie New Energy. The growth in terms of employment is limited for the time being.
Together with representatives from the trade unions and the Works Council, we have developed a sustainable employment conditions policy. In 2017, this culminated in, among other things, a new collective labour agreement for the coming four years. The starting points in this are above all the sustainable employability of our employees and the possibilities for them to develop their own initiatives in this context. We want to give everyone the opportunity to continue working energetically, at Gasunie or elsewhere.
In 2017, we were able to achieve almost 100% transport security. There was only one brief disruption at a customer’s. The quantity of gas we transported for our customers through our Dutch and German gas networks was fractionally less than in 2016. To offset the decline in production of Groningen gas, we converted 11% more high-calorific gas in 2017 compared to the previous year to make it suitable for use by domestic households and companies. Our safety results continued to improve, as evidenced by, for instance, a reduction in the number of reportable incidents per million hours worked. We also made good progress on our Operational Excellence programme in 2017, including the revision of our replacement and maintenance programme.
Our result after taxation increased by € 76 million to € 259 million compared to last year. Excluding impairments in 2016 and 2017 (the normalised result after taxation), there was a decrease of € 151 million, which was mainly due to a decrease in our operating result stemming from the new Method Decision for GTS as of 2017.
During the last regulatory period (2013-2017), Gasunie Deutschland was able to operate efficiently and effectively, which enabled it to achieve additional results. The opportunity for achieving additional results, both in terms of nature and scope, in the coming regulatory period (2018-2022) is considerably restricted. Gasunie Deutschland also carried out an extensive investment programme in the 2013-2017 period, as a result of which investment allowances were received in advance within the regulatory framework, which also stipulates that these allowances must be repaid at a later date. Both of these effects have been taken into account in a write-down of € 150 million on our network in Germany in 2017. For a detailed explanation, see: Financial results.
Changes in supervision and management
On 1 April 2017, Annie Krist left our organisation to become CEO of GasTerra. We thank Annie for her great dedication over many years. René Oudejans temporarily acted as CEO before the position was permanently filled with the appointment of Bart Jan Hoevers on 1 September as GTS CEO and member of the Executive Board. Jean Vermeire will be resigning his position as member of the Supervisory Board as of March 2018. We are very grateful to Jean for his expert supervision and advice over the past ten years.
Word of thanks
Gasunie’s aim is to continue to serve society and its customers as well as possible on the path to a CO2-neutral energy supply. The dedication of our employees is indispensable in these efforts. They work day in, day out to ensure safe and reliable gas transport and energetically dedicate themselves to realising new projects. We owe them a great deal of thanks. With their dedication and good collaboration with our customers and project partners, we are confident that we can take the next steps in 2018 in our evolution from a gas infrastructure company into an energy infrastructure company. We are convinced that this will help us accelerate the transition to a CO2-neutral energy supply.
Groningen, 28 March 2018
Bart Jan Hoevers