Groningen gas: the loss of a social license to operate

February 12th 2019 - 08:24

In March 2018, the Dutch government decided to stop natural gas production from the Groningen field as soon as the demand for Groningen gas allows. This implies that gas production will stop in 2030 at the latest and that about 500 BcM of gas will be left in the ground. In this paper we give an overview of the developments leading to this decision; from a geological, financial, political and societal point of view.

From 2012 onwards, a number of legal and regulatory measures were taken that made a long-term continuation of gas production increasingly difficult. A reversal of the burden of proof for damage to houses and the application of a relatively strict safety norm (implying a major house strenghtening program) meant that a long term continuation of production would lead to costs of several tens of billion euros. 

These measures were taken in a setting where the social license to operate for Groningen gas production was gradually lost. Decision makers put a greater emphasis on safety and the environment, at the expense of financial and economic considerations. It is the loss of the social license to operate that we see as the core reason for the termination of Groningen gas production.

As a result of the rapid increase in costs the Groningen gas field had by 2017 become a major liability to Shell and ExxonMobil (the NAM shareholders). The road forward chosen in 2018 also included a more equitable division of costs between NAM and the Dutch state (needed to ensure the continuation of production by NAM) and implied a large reduction in the house strengthening program.

It is not peak fossil demand (and stranded assets due to lack of demand) that may turn out to be the biggest future risk for oil and gas companies but the loss of the social license to operate, which can result in legal and regulatory measures that can turn out to be extremely costly.

Authors: Jilles van den Beukel, independent energy analyst (formerly a principal geoscientist at Shell) & Lucia van Geuns 

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Lucia van Geuns is an experienced energy professional who held research positions at the Netherlands Organisation for Applied Scientific Research (TNO) and the Clingendael International Energy Programme (CIEP) after a career with Royal Dutch Shell (1980- 2002). She has a background in geoscience, petroleum engineering, economics & planning. Her research focuses on international energy market developments, energy transition issues and climate change policies. In her present role, she is a frequent speaker on (international) energy markets for various public and private stakeholders.
Jilles van den Beukel is an energy specialist. His research focuses on the oil and gas industry, energy markets and the energy transition. He is a regular contributor to IEX, Energeia (the energy news service of the FD) and various research institutes and think tanks.