Musings from the Oil Patch
Comment of the Day

February 17 2014

Commentary by Eoin Treacy

Musings from the Oil Patch

Thanks to a subscriber for this edition of Allen Brooks’ ever interesting report dated February 4th. Here is a section:

The Dutch government earns about €12 ($16.3) billion annually from the sale of Groningen production. The decision to cut output means state income will fall by €600 ($813.2) million in 2014, €700 ($948.7) million in 2015 and €1 ($1.4) billion in 2016, given the projected production and gas prices. The lost income will be in addition to the €1.2 ($1.6) billion to be spent over the next five years to strengthen buildings, houses and infrastructure in the region. These investments hope to reverse the decline in house prices due to the actual and potential earthquake damage.

Making up for the potential €3.5 ($4.8) billion drain on the Dutch treasury over the next 3-5 years is the first order of business for the government. Expectations are that some of the lost income will be recouped by increased imports and exports that will find their way through the Dutch energy hub. The expectation that Groningen’s gas volumes would be cut has already boosted local gas prices, which should not be a surprise, but also a pain for citizens and businesses. The biggest beneficiary of the Dutch cut will be Gazprom (GAZ.BE), which sees being able to sell an additional 175 Bcf of gas to Europe, thus earning an additional $1-2 billion in revenues, and further strengthening Europe’s dependency on Russian gas. Oil-price-linked gas imports will keep energy prices in Europe high providing an environment in which slightly cheaper Russian pipeline gas can capture a greater market share.


Eoin Treacy's view

Here is a link to the full report quoted above.

The Netherlands has benefitted enormously from its energy resources not least in cementing Rotterdam as a globally significant port. However, as one of Europe’s most densely populated countries, the prospect of the emotional wellbeing of the population being put before gas production has resulted in a potential headache for its neighbours.

Gazprom has been ranging above $8 since December and a sustained move below that level would be required to question recovery potential.

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