We need to talk about Groningen

Unless you are (or have been) involved in the European gas business, there’s a fair chance that you have never heard of Groningen.

The university city of Groningen in the northern Netherlands is home to almost a quarter of a million people, De Drie Gezusters (the three sisters, a large complex of interconnected bars and restaurants) and one of my favourite hotels in Europe, the delightfully seedy Schimmelpenninck.  It’s not far from Assen which, aside from a fabulous MotoGP track, is also home to a large Shell office.  In the days when I visited it housed their North Sea Exploration & Production folks; I’m not sure what happens there these days.

It’s also ground zero for the European gas industry.  Discovery of the Groningen field around this area in the 1950s catalyzed the exploration of adjacent areas, initially in the Southern North Sea (oddly, not an oxymoron), that led to the industry as we know it and the cleanup of Western European cities as they transitioned away from coal.  A fact that everyone has conveniently now long since forgotten.

The Dutch Government of the time was remarkably forward-thinking.  Not only did they conceal their interest in gas extraction through the famous Maatschap (or partnership, a series of companies that would confuse Greenpeace and make Enron proud), they also sought to enact policies that would protect the field as a resource for the Dutch people.  Policies that required the development of all other fields in preference to Groningen to protect it, such that it would be available when needed.  For an emergency.

For a moment, perhaps, like now.

It’s mostly shut in – or at best, severely curtailed.  Extraction has been linked to Earthquakes in the region – peaking at 3.6 on the Richter scale – to which 22,000 homes are exposed.  For sure, if that’s your home, it isn’t good.  But let’s work through this.

3.6 on the Richter scale is defined thus: “Often felt by people, but very rarely causes damage. Shaking of indoor objects can be noticeable.”  The Kiwis in the audience (Hi Mum!) are shrugging their shoulders.  It’s unlikely to be beyond the gift of the Dutch government, nay, the European Union, to be able to provide some comfort to these homeowners - be it insurance for their Delft figurines or reinforcements for their properties.

In the interests of balance, this information doesn’t clearly correlate with some reports of many buildings being damaged to the point of being uninhabitable, and I’ve been unable to close this gap.  Perhaps my lack of faith in most media is causing me to assume hyperbole, however I will restate the obvious that Northern European winters without heating are also uninhabitable.

So, while the Poles are reopening lignite mines and the Germans are tearing down wind turbines to access old coal seams, the Dutch are reducing flow from Groningen even further, from 4.5bcm in the 12 months to Oct 1 2022 (oddly, the European gas year runs from October 1 to September 30) to 2.8 bcm in the following 12 months – a drop equivalent to 18 or 19 LNG cargoes.  From a field with a recent peak well north of 50bcm, connected by existing pipelines to an energy-starved continent.

We haven’t seen hoarding on this scale since the great toilet roll saga of March/April 2020.

At the same time, the mass media is (rightly) wringing its hands about what may happen this winter, crying out for price caps, while a flotilla of LNG carriers are waiting off the coast, eager to find a slot in a receiving terminal to deliver their precious load of life-saving fuel.

On this, I call BS.  Actually, no.  I call cash-and-carry.

Cash-and-carry is a commodity trading strategy that takes place when the price available in a future month is higher than the current month price, and the differential is greater than the cost of storage.  So, I buy it now, sit on it for a while, and sell it later for a guaranteed profit.  It’s a common tactic in non-perishable commodities, but has become more frequent in LNG as ship technology has advanced to reduce the amount of evaporation.  It’s intended to move product to a period of higher demand and therefore level out the pricing.  However…

When this tactic is available in the market, it tends to drive up the cost of shipping which – surprise! -  provides further upward pressure on the commodity price.  In a market that is already way beyond the fundamentals – that is, when no more supply can be triggered by the high price - so all that is being determined is who has the deepest pockets. 

This means that European countries are essentially competing with each other and, in doing so, taking supply away from poorer countries.  The human cost of this may get more headlines on the Rhine, but will be most felt on the Ganges – a point that I will never tire of making.

I don’t know how Mark Rutte, the Dutch PM, defines an emergency.  He may well be thinking that next winter may be worse (and on this point I would tend to agree).  I do know that he’s been in power since 2010, so the aforementioned recent peaks of Groningen production are within his tenure.  The entire curtailment policy has been within his tenure, as has the CO2 reduction policy.  He knows.

You want to put a ceiling on European gas prices?  You want to undermine the mechanisms that exacerbate the situation? 

Mr. Rutte, tell us when Groningen may flow.  Tell us the price.  Allow the Operator to prepare.

What’s the number, Mr. Rutte?