Four decades of Groningen production and pricing policies

Abstract

This paper deals with production and pricing policies for the Groningen gasfield. It will provide an evaluation of the past and a view to its future in a liberalized European gas market. The lifelong production potential and high productivity of the Groningen gasfield is unique. The extremely low-cost field is also unique in the sub-optimal manner in which it has been exploited over the whole of its forty year life to date. Its initial monopolistic situation in the West European energy economy created an opportunity for its development to be limited to production levels, whereby super-normal profits were generated on high value sales at the cost of consumers’ welfare.

The breach in the monopoly, through competition from Soviet gas, readily able to undercut Groningen prices, posed a serious threat both to unit values and market expansion. Fortunately, the fortuitous 1973/4 international oil supplies and pricing crisis restored Groningen’s fortunes. Following the upward price adjustments for foreign sales, the stage was set for achieving high company profits and massive government revenues. Dutch society in a broader sense benefited only indirectly through government tax expenditures. Again, energy consumers’ welfare gains were ignored.

This remains the essence of the situation, pending agreement on the introduction of the liberalized market to meet EU directives. Currently the Dutch gas regime and policy objectives are being adjusted to the requirements of operating in a liberalized market. These changes recognize: first, the invalidity of the government’s long-held fears for gas scarcity in such a way, that the earlier steps to restrict both foreign and national sales have been abandoned, and second, the need to reinstate Gasunie as an active, rather than a passive, player in the European gas market, in which other participants have subverted Gasunie’s earlier dominance.

The second part of the paper will examine, whether and how these changes can be reconciled with the core elements of the Dutch gas policy, i.e. state and private revenues, co-ordination of supply and production, the ‘small fields policy’ and the balancing role of the Groningen field. The liberalization of the European gas market, together with changes in the pattern of supply and demand and stated Dutch policy objectives of energy policy may give rise to conflicts between the interests of the Dutch State, the owners of the field and, again, the consumers.