Record low Groningen gas output expecations fail to shift bears

Winter low-calorific natural gas production from the Dutch Groningen field could fall to its lowest in over a decade in the current gas year should a temporary 27 billion cubic metre (bcm) annual production cap hold, ICIS analysis suggests.

ICIS has produced a production outlook based on how annual output has been split across the 12 months of the gas year during the past five years, taking account of the current 30bcm 2015 calendar year cap and the 27bcm 2015 gas year cap (see graph).

Based on this outlook, production in the 2015 gas winter could total 17.16bcm which would be lowest winter output since before the 1990 gas year and nearly 43% behind the 2010-2014 five-year average.

Winter output has totalled less than 20bcm on five occasions since 1990: in 1994 (18.15bcm), in 1999 (19.26bcm), in 2000 (17.52bcm), in 2001 (18.63bcm) and in 2006 (18.98bcm). Last year, winter output totalled 22.18bcm after production was heavily curtailed from 9 February 2014.

The present 27bcm cap has been temporarily enforced by the Dutch council of state – the country’s highest general administrative court. The cap is based on the volume of gas expected to be needed to help meet L-gas demand in an average-temperature year, but up to 33bcm of production would be permitted in the event of an unseasonably cold winter.

The cap was described by the court as an “interim relief measure” and is subject to change from mid-December when the Dutch economy ministry finalises its future production plan and L-gas supply strategy.

There are two key sources on hand to help the market cope with the restriction on Groningen output. The first is L-gas stocks at the 7bcm capacity Norg storage facility which currently stand at 88% and are estimated by ICIS to be around 841 million cubic metres ahead of the same time last year.

The second is quality conversion capacity which can be used to source L-gas from high-calorific natural gas (H-gas) through nitrogen blending. Relatively strong H-gas supply to the Netherlands this year has so far come from increased imports from Norway and Germany and reduced exports towards Britain on the BBL. Due to the new Bergermeer storage facility in the Netherlands – which is more than 97% full with nearly 4.1bcm in store – Dutch gas stocks are around three times greater than they were last year at around 6.3bcm and will provide additional supply relief this winter.

Bearish outlook remains

Despite the tighter L-gas supply outlook, the market has edged lower since the court’s decision and one trader remained bearish in his outlook.

Since the court’s decision on 18 November, TTF natural gas contracts for delivery in 2016 have shed value, but risk premium priced into the hub in the lead up to the ruling has only partially been undone.

One trader active at the hub said he expected prices to continue gradually unwinding the gains accrued in the past two weeks.

“The market is still bearish in terms of forecast and consumption, the market is still long everywhere” he said. “For instance, today [23 November] is the first cold day this winter and the market has dropped down” he added.

The TTF Q1 ’16 contract was assessed by ICIS at €17.513/MWh on 23 November which is down €0.562/MWh compared to the 17 November, but up €0.488/MWh compared to the 12 November when the court announced that it would give its ruling on 18 November.

Asked about the outlook for the TTF Summer ’16, the trader said the need for some shippers to empty storage sites could apply significant pressure to the contract: “If it remains mild, the price could be €10.00/MWh or less, I’m serious…but the market could be more volatile”. jake.horslen@icis.com