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Page added on February 27, 2017

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The Dutch Love Affair With Natural Gas: A Cautionary Tale

Consumption

The story sounds familiar. For decades oil and natural gas drilling have been proceeding and creating prosperity for those involved. At some point significant earthquakes occur in areas where they were formerly very rare or nonexistent. Those quakes are linked to oil and gas drilling and production. The industry denies the link.

The quakes continue, get worse and finally get strong enough to do damage.

To those living in the United States, this reads like stories coming out of the fracking boom in states that include Oklahoma, Texas, Ohio, Kansas and Arkansas. To those living in Europe, it’s the story coming out of The Netherlands, home to the Groningen Gas Field, one of the largest natural gas finds ever.

The Groningen field has been both a blessing and a curse for the Dutch. Since its discovery in 1959 the Dutch have reaped huge financial benefits from having their own secure and abundant source of natural gas. Beyond that, the country has until recently been a major exporter of natural gas to its European neighbors.

But the field has also proven to be a drag on the rest of the economy, inflicting what has been dubbed the “Dutch disease.” In short, the Dutch disease refers to negative effects that a huge natural resource find can visit upon a society. These include a decline in other sectors of the economy and a strong currency which makes exports less affordable to foreign buyers. The moniker “Dutch disease” results from the fact that The Netherlands was the first place such effects were studied in detail.

What has caught the Dutch by surprise–and may someday soon catch America by surprise–is the speed with which its decades-long reliance on a large initial endowment of natural gas has turned into a liability.

First, there were the earthquakes linked to drilling and production operations in Groningen which have forced the government (part owner of the field) to scale back production to reduce the frequency and severity of those quakes. This production decline of more than 50 percent has meant a serious loss of revenue for the government which used those revenues for decades to supplement the government’s budget. Government gas revenues dropped by more than half from €13 billion to around €5 billion from 2013 to 2014.

Second, as a result of the production cutbacks The Netherlands is now a net importer of natural gas, instantly losing its self-sufficiency status. Europe’s gas now will likely have to come increasingly from Russia whose relations with Europe are replete with complications.

Third, the Dutch have failed to prepare for this day. Instead, they blithely made themselves deeply dependent on natural gas for their energy needs. Some 98 percent of Dutch homes use natural gas for heating and cooking. Renewable energy makes up a paltry 5.5 percent of the country’s energy mix as of 2014.

Fourth, the Dutch are still obliged to honor long-term contracts which force them to deliver substantial quantities of natural gas to customers outside the country. The country is increasingly facing the strange predicament of having to import more and more natural gas to offset what it must ship abroad. This is in a country whose dominant field, Groningen, is now 80 percent depleted.

And, here is where the Dutch situation ought to be a warning to the United States. America is entering into more and more long-term contracts to export liquefied natural gas (LNG) to customers in Europe and Asia even as the country remains a net importer. There is good reason to believe that most estimates of future natural gas production in the United States are far too optimistic. Let me quote for the second time in three weeks from an independent analysis of U.S. shale gas production trends (the only class of natural gas experiencing production growth in recent years):

Shale gas production overall has declined by 4.7% since peaking in February 2016 (down 2.1 billion cubic feet per day…). All shale plays have peaked and older plays, like the Barnett and Haynesville, are down 38% and 52%, respectively.

Second, the U.S. electric utility industry has added significant natural gas-fired generating capacity in response to two trends: government regulation of greenhouse gas emissions and the low price and rising availability of natural gas. Despite the election of Donald Trump, who favors a return to coal, the low price of natural gas will probably allow the conversion to and expansion of natural gas-fired capacity to continue…until it can’t. At which time we may be stuck with much higher electricity costs.

The promised natural gas deliveries will likely not be available at low prices. Production declines will result in a battle over who gets the remaining supplies, thereby hiking prices for U.S. consumers. The U.S. utility industry may rue the day it chose to make itself so heavily dependent on natural gas.

Finally, states that became addicted to money from the natural gas boom are finding the bust difficult to navigate. In comparison, the Dutch had one large boom that lasted for decades. The kind of exploration and development that is taking place in U.S. shale gas fields requires constant drilling just to maintain production at current levels. We can expect boom and bust in short spurts from here forward. That signals that the cost of exploiting the remaining shale gas resource (again, until now the only growth area in U.S. natural gas production in recent years) will almost surely stairstep higher as lower-quality deposits are tapped at greater and greater expense.

The Dutch have had a very long love affair with natural gas. But, as it turns out, a seemingly comfortable, stable relationship with natural gas can unravel just as quickly as a real love affair, leaving one dazed and asking how it all happened so fast.

Americans may not be as dependent on natural gas as the Dutch. But they have rushed into their own torrid love affair with natural gas and lost sight of the fact that affairs which start out torrid are the same ones that tend to flame out quickly, surprising everyone with their sudden demise.

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63 Comments on "The Dutch Love Affair With Natural Gas: A Cautionary Tale"

  1. Simon on Tue, 28th Feb 2017 5:16 pm 

    rockman …. what you said :0

  2. rockman on Tue, 28th Feb 2017 10:00 pm 

    Simon – All I did was post the stats put out by the Dutch govt. Just facts folks can characterize as they wish. But I think it will take at least 10 to 20 years to prove the proposition that most countries, given the choice of burning more coal or not supplying their citizens with the energy they desire will justify coal expansion as a classic “necessary evil”.

  3. Simon on Wed, 1st Mar 2017 12:33 am 

    Rockman, you are correct, I think depends on the size of the grid and the penetration of alts.
    The EU as a whole is much like the US, in that its probably windy somewhere, and sunny somewhere, so the more interconnectors we have the less need for FF to be running.
    It will take a breakthrough in energy storage to really start to make inroads, into FF backup …. but ta da

    http://aesenergystorage.com/2016/01/07/aes-announces-completion-of-the-uks-biggest-battery-energy-storage-array/

    we are working on it.

  4. Cloggie on Wed, 1st Mar 2017 5:19 am 

    Sorry but where is your evidence? I get the feeling Cloggie, that this is an idealistic crusade for you.

    https://www.deingenieur.nl/artikel/laagterecord-kostprijs-offshore-windenergie

    If in Google Chrome browser, right-click > translate English.

    Minister Kamp of Economic Affairs announced today that the consortium will construct the wind farm for a grant price of 5.45 cents per kWh.

    With these kWh prices any discussion about cost benefits just evaporated. Nothing idealistic about it, just hard money and environmental interests.

    All signals green for North Sea wind power. Holland alone can harvest more electricity from its continental shelf than it can consume itself, thus export the surplus to the rest of Europe. Britain same story.

  5. Cloggie on Wed, 1st Mar 2017 5:22 am 

    The EU as a whole is much like the US, in that its probably windy somewhere, and sunny somewhere, so the more interconnectors we have the less need for FF to be running.

    Several studies point at a figure of 40% alt-energy share below which you do not have to worry too much about storage, on statistical grounds, provided the grid area is on a continental scale, like in Europe or the US (minus Texas).

    But perhaps the Texan grid can be integrated into the continental grid without a high noon gun fight.lol

  6. rockman on Wed, 1st Mar 2017 9:29 am 

    Cloggie – “But perhaps the Texan grid can be integrated into the continental grid without a high noon gun fight.” To steal a line from the gun rights people: They can take our electricity when they pull the wind turbines from our cold dead hands. LOL. One of the reasons Texas has advanced so fast with alt energy is that we don’t require permission from our federal govt. As soon as someone starts crossing state lines the feds start setting the rules. When our politicians wanted to spend $7 BILLION to improve our grid all they had to do is get voter approval and not from our national govt. Ten years ago Texas issued offshore wind leases because, unlike all other coastal states, we have sole authority over the first 10 miles from the beach. At the same time eastern states delayed offshore wind development off their coasts despite the fact those were leases in federal and not state waters.

  7. GregT on Wed, 1st Mar 2017 11:01 am 

    “Nothing idealistic about it, just hard money and environmental interests.”

    Hard money, and environmental interests, are in direct contradiction to each other cloggie, and when fossil fuels are no longer available, all of those wind turbines will eventually end up rotting on the ocean floor, with no way for future generations to clean them up.

    Greenwashing at it’s finest.

  8. Cloggie on Wed, 1st Mar 2017 11:54 am 

    Hard money, and environmental interests, are in direct contradiction to each other cloggie

    Not in the case of wind and solar.

    and when fossil fuels are no longer available, all of those wind turbines will eventually end up rotting on the ocean floor, with no way for future generations to clean them up.

    Keeping repeating for the umptieth that 2+2=5 won’t make it any more true.

    Links please.

  9. Davy on Wed, 1st Mar 2017 12:06 pm 

    No links needed for an obvious scenario. Clog, your beloved energy systems are not magic. They are subject to a reality of a world in decline. They have a fragile manufacturing process. You are way too optimistic. I hope for the best but acknowledge the worst and everything in between.

  10. Cloggie on Wed, 1st Mar 2017 12:21 pm 

    No links needed for an obvious scenario.

    So you and Greg have no links, no surprises here. I just have to trust you on your blue eyes.

    No way, Jose.lol

  11. Davy on Wed, 1st Mar 2017 1:09 pm 

    Links don’t make it so Cloggie. You and others here are obsessed with your links. What is in your head? I find often links are an intellectually weak way to project authority. The sources may be corrupt or interpreted wrong. Try being authentic.

  12. Sissyfuss on Wed, 1st Mar 2017 2:18 pm 

    Trump says we wonderful clean coal. Now is that one of dem alternate facts?

  13. rockman on Wed, 1st Mar 2017 3:41 pm 

    “Trump says we wonderful clean coal. Now is that one of dem alternate facts?” The same “clean coal” the Dutch are switching to replacing their curtailed NG production so as to prevent those minor tremors that have been doing an insignificant amount of damage.

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