European Gas Surges As Dutch Government To Shutter Massive Field

The Netherlands is closing the Groningen gas field from October 1. Permanently. That’s according to media reports.

This is a long-running saga and as far as I’m aware, the news shouldn’t come as a surprise. The field, Europe’s largest, is a sore spot for locals, who’ve incurred incalculable property damage over several decades tied to dozens upon dozens of earthquakes linked to gas extraction.

“Incalculable” may not be the right word. Aggrieved residents have attempted to calculate the scope of their losses. Well more than a third of homes located near the field have been damaged over the past half-century, and the Dutch government has forked over €1.65 billion in settlement money. Critics call that a pittance, though. And they have a point. The government’s share of lifetime profits from the field comes to more than €350 billion on an inflation-adjusted basis.

As you can imagine, a couple of supermajors are involved: Shell and Exxon operate the field through a JV. At a very basic level, this is an all-too-familiar tale of governments and energy companies subjugating the interests of local residents to the perceived necessity of monetizing a fuel reservoir. It’s a story as old as the industrial revolution, and in this particular case, it dates to 1963, when production began. 23 years later, the tremors started, and they haven’t really stopped since.

The government plans to spend more than €20 billion over three decades to help residents in Groningen. But that’s too little. Or if it’s not, it’s certainly too late. In the Netherlands, and particularly in Groningen, this is considered a crisis and a scandal, and it’s a continual source of political peril for prime minister Mark Rutte.

This matters for Europe and for the macro narrative more generally. The Dutch government was under pressure at various intervals to bring more supply from the field online to mitigate lost flows from Russia following Vladimir Putin’s invasion of Ukraine last year. At one point, Shell said Dutch production could easily replace the gas Germany imported from Putin, but officials were wary (to put it mildly), even as they left the door open to boosting supplies in a worst-case scenario.

As anyone who follows the macro narrative knows, the worst-case energy scenario for Europe didn’t materialize. Although the bloc succumbed to the shallowest of shallow recessions during the winter, gas prices plummeted to two-year lows amid mild weather, demand curbs and imports. Thursday’s Groningen news triggered a 30% jump in benchmark prices, which are very volatile, I should add.

For now, hot weather is the concern when it comes to prices, but permanent closure of the Groningen could conceivably reduce the margin for error in Europe next winter.

As a reminder, Europe needs to make it to 2026, when the US and Qatar should be able to meet its energy needs. As I put it earlier this month, “what happens between now and then is really just anyone’s guess.”

The decision to close the Groningen field, which isn’t official just yet, wouldn’t actually be permanent. The wells could be reopened, although one source told Bloomberg that “the government may dismantle [them] by filling them up with concrete next year.”