Big gas field is causing tremors, exposing energy firms to
criminal probe and rising bills
By Sarah Kent
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the US print
edition of The Wall Street Journal (June 26, 2017).
GRONINGEN, The Netherlands -- For decades, the giant Groningen
gas field beneath the flat, green farmland in the north of this
country counted among the greatest prizes for Exxon Mobil Corp. and
Royal Dutch Shell PLC.
Then the earthquakes started.
The exploitation of Groningen -- the biggest gas field in Europe
-- has been causing tremors for over two decades, rattling a
bucolic province with no previous history of quakes and exposing
two of the world's biggest energy companies to a criminal probe and
rising reconstruction bills.
Amid a public outcry, the Dutch government has imposed
increasingly strict limits that have more than halved Groningen's
gas production since 2013. Now, authorities are proposing another
10% cut in hopes of further reducing earthquakes. And a Dutch
public prosecutor is preparing to open a criminal investigation
into responsibility for the earthquakes.
Shell and Exxon are pushing back through their joint venture,
Nederlandse Aardolie Maatschappij BV or NAM. The venture says
cutting output even more is "out of proportion and not effective,"
and would create uncertainty about the legal framework for its
operations. It warns that continuous changes to the production
level may ultimately threaten the business's profitability.
NAM said it is considering formally contesting the government's
decision. It also expressed surprise at the Dutch court order to
the prosecutor to open a criminal investigation this year, since
the authorities had previously found no grounds for such action.
The state will take a decision on whether to prosecute once the
investigation is complete.
Groningen was expected to be one of the world's largest gas
producers for decades to come. Last year, it made up almost 10% of
both Exxon and Shell's total gas production globally and its
reserves are among the companies' largest undeveloped
resources.
Moreover, the field's profits have been lucrative for the Dutch
government, which not only collects taxes from NAM but is also a
40% stakeholder in the field. Since production began, the field has
generated almost EUR300 billion ($335 billion) for Dutch
coffers.
Exxon named restrictions on Groningen as a factor contributing
to a nearly 4% decline last year in its global natural-gas output.
Shell said Groningen issues were largely responsible for a decline
of 636 billion cubic feet in proven reserve estimates for its
European joint ventures, equivalent to nearly 2% of the company's
total gas reserves at the end of 2016.
Under the current arrangement, the government bears 64% of the
costs related to compensation to residents, efforts to reinforce
buildings, lawsuits and other items.
It isn't the first time seismic activity has caused controversy
in the energy industry. A U.S. debate has raged for years over
whether water injection related to drilling has caused earthquakes
in Oklahoma and Texas. Earthquakes like the ones in Groningen are
less known and less understood.
Groningen's quakes were first officially linked to gas
production in the 1990s, nearly 30 years after work on the field
began. Decades of production have caused pressure in the porous
ground containing the gas-bearing reservoir to decrease, according
to the Shell-Exxon venture and the Dutch government. That increased
the stress on natural faults, resulting in the earthquakes, the
company and government say.
The tremors have caused widespread damage, though no deaths, in
a province of nearly 600,000 people.
A large majority of the temblors registered low magnitudes of
between 1.5 and 2, and early on NAM dismissed them as little more
than a nuisance. But the public and authorities snapped to
attention in 2012, when an earthquake of magnitude 3.6 rippled
through Groningen province.
The region's homes and infrastructure, built on flat land,
weren't designed to withstand even such low seismic instability.
The tremors occur where Groningen's gas lies -- just under 2 miles
below ground level. That relatively shallow depth, and more
significantly the soft, clay-like topsoil in much of the region,
make for stronger ground movements than expected from earthquakes
of such magnitude, according to the Netherlands State Supervision
of Mines, which regulates gas extraction.
"The impact on the houses and streets is a split second. There
are no rocks in between," said Hans Alders, a Dutch government
official appointed to oversee efforts to strengthen and repair the
province's buildings and infrastructure.
In a 2015 report, the Dutch Safety Board said NAM and the
country's Ministry of Economic Affairs failed to "act with due care
for citizen safety" and didn't adequately research the risks posed
by earthquakes.
The government said it has recognized that mistakes have been
made and has implemented the report's recommendations.
NAM hasn't disputed the findings and has made several public
apologies. It has acknowledged liability for earthquake-related
damage and paid out hundreds of thousands of euros in compensation,
poured millions more into a fund to stimulate the region's flagging
economy and put aside more than EUR1 billion, mostly for a program
to strengthen and repair buildings in the area. The bill is
expected to grow.
NAM said while it would meet all its liabilities, it isn't
possible to predict the exact costs of strengthening and repair in
the years ahead.
The gas company could also be on the hook for nearly EUR8
billion to fully compensate residents throughout the region for
losses to property value and psychological damage, said Pieter
Huitema, a Groningen lawyer who brought two successful civil suits
on those issues.
NAM is appealing both lawsuits and said all numbers relating to
the size of potential liabilities are unsubstantiated. The company
said it already has a system to compensate residents for lower
property values and needs more clarification on how to establish
psychological damages.
Both Shell and Exxon said they are confident NAM could produce
gas safely. "Safety is, and always has been, our primary focus,"
Exxon said in an email.
The earthquakes have unexpectedly persisted -- albeit at a lower
level -- despite the Dutch restrictions on Groningen output. That
unpredictability, and a belief that NAM failed to present an
adequate plan to mitigate it, prompted the Dutch regulator to
recommend the further output reduction earlier this year.
Jelle van der Knoop, president of the residents' association
Groninger Bodem Beweging, said many residents want gas production
to end altogether.
"The sooner they stop, the sooner there will be no earthquakes,"
Mr. van der Knoop said.
Write to Sarah Kent at sarah.kent@wsj.com
(END) Dow Jones Newswires
June 26, 2017 02:47 ET (06:47 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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