Gas

Vision

Gas has been an inextricable part of the European energy supply in general and the Dutch energy supply in particular for more than half a century. Since its discovery in 1959, the Groningen Gas Field, the largest gas field in the world at the time, has produced over 2,000 billion m3 of natural gas. More than 95% of Dutch households use natural gas for heating. GasTerra has the exclusive right to sell Groningen gas. It is sold on the domestic market and to energy companies in Germany, Belgium and France.

In addition to the Groningen gas, which is low-calorific gas (i.e. it has a relatively low calorific value), GasTerra also sells a large volume of high-calorific gas. Most of this gas comes from the smaller Dutch fields in the North Sea and on land, or is imported from Russia and Norway. The high-calorific gas is used by industry in the Netherlands and abroad and by users of low-calorific gas produced by quality conversion (the addition of nitrogen in special plants). Producers of small field gas can sell it themselves, but do not have to, as GasTerra is legally obliged to buy this gas at the going market price if asked to do so.

In a period of structural and radical change, in which the trade in gas and the transport of gas have been split off from each other and the market liberalised, gas has retained its pre-eminence in the energy supply. All the same the era when that could be taken for granted is over. The position and the image of gas have come under pressure. The positive characteristics of our product, such as comfort, cleanest fossil fuel, flexibility and versatility, are at risk of being pushed into the background. The most important reasons for this in our region have been the earthquakes, which have reinforced the idea among many people that gas is at best a necessary evil, and the crisis involving Russia and Ukraine, which has strengthened existing doubts about the security of the gas supply in Europe. In addition, it has become increasingly understood throughout the world that the share of fossil fuels in the energy mix must fall sharply in the decades to come, in order to prevent the average temperature rise due to human activity rising by more than one and a half to two degrees.

Natural gas can help to substantially reduce CO2 emissions by replacing the more polluting fuels (oil and especially coal) where this is possible and sensible. After all, gas is by far the cleanest fossil fuel. Nevertheless, an increasingly large group sees our product as primarily part of the problem rather than part of the solution. But the reality is that (natural) gas is both. Throughout the world, in Europe and in the Netherlands gas is essential, and will remain so in the decades to come, both as regards security of supply and a responsible climate policy. On the latter point: GasTerra has, together with sister companies in the Dutch Gas Association KVGN, embraced the Gas by Design concept. The idea behind this is that in the transition towards a climate-neutral energy supply we will only use natural gas where more sustainable alternatives are at present less attractive. In other words, gas is becoming customised.

Finally: despite the major changes that have taken place and will continue to take place in the energy sector, the high economic and social value of this natural treasure must not be underestimated. Almost sixty years after the discovery of the Groningen field, the Netherlands still has access to almost 900 billion cubic metres of conventional natural gas. If this is extracted responsibly, society will continue to benefit from it in the future.

Chain management

GasTerra attaches great importance to responsible chain management. Our primary focus in this area is on the use of our product (downstream), because we consider it important that society uses gas as efficiently as possible. However, we still note that some stakeholders are unclear about GasTerra's role upstream, especially with respect to the earthquake problems and the purchase of gas from Russia.

The chain

All activities from production to the use of natural gas are part of the chain. GasTerra is responsible for the trading activities. We buy and sell gas and provide related services, dealing with various national and international parties. Naturally we deal with producers, suppliers and customers but also, for example, with network operators for transporting the gas, and with market regulators and authorities that are responsible for controls required by legislation and regulations. In addition, we have the public service obligation to implement some provisions of the Gas Act, in particular the purchase of gas from the small fields, taking and selling gas from the Groningen Gas Field and, where necessary, supporting GTS in carrying out its statutory duties. GasTerra also buys (limited amounts of) gas from Norway and Russia. Production from these foreign sources is subject to the laws and regulations in those countries, over which GasTerra has no direct influence. 

We participate in various partnerships within the chain, in pursuit of goals such as supporting clients in making production processes more sustainable (the Environmental Plan for Industry), knowledge-exchange, the development of innovative gas applications, publicising the benefits of gas in the transition toward a sustainable energy supply and improving regulations. In the context of the last two goals, we are active in The Hague and, mainly through the trade association Eurogas, in Brussels. We are also affiliated to the national organisation Vereniging Energie-Nederland that promotes the interests of the energy industry.

As a trading company, we have limited influence over chain management upstream, partly because our statutory public service obligation does not allow us a free choice as to which producer we do or do not buy gas from. Moreover, it is not possible to find out exactly where the gas we buy comes from on the free gas market. GasTerra refrains from bringing political or social debates into its contractual relations with suppliers and customers. However, we are part of the Project Delta Group partnership which shares best practices on gas extraction. 

As far as the production of Groningen gas is concerned, the division of roles is as follows: NAM extracts this gas and is responsible for implementing the cabinet's decisions on limiting production from the Groningen Gas Field. GasTerra is solely responsible for selling this gas. The production from the Groningen Gas Field (and the small fields) is subject to strict environmental and safety regulations laid down by the government. GasTerra has no direct influence on this but expects its suppliers to comply with the legal requirements.

The Netherlands

Gas production from the Groningen field is increasingly restricted as a result of the increasing frequency and severity of earthquakes in the extraction area. In December 2015 the cabinet decided, in line with a provisional decision by the Council of State, to limit gas extraction from the Groningen field to 27 billion cubic metres for the 2015/2016 gas year, with an option to increase to up to 33 billion cubic metres if the year is relatively cold. In September 2016 the Minister for Economic Affairs took a new definitive licence decision on gas extraction in the long term. From the 2016-2017 gas year onwards, NAM may not extract more than 24 billion cubic metres of gas per gas year from the Groningen field. In winters that are colder than average this figure may be increased up to 30 billion cubic metres a gas year in order to protect security of supply. Furthermore, gas production must remain as even as possible throughout the year; monthly and seasonal fluctuations must be avoided as much as possible. A calibration point will take place once a year, at which time the minister will decide whether new knowledge or facts mean that the permit decision needs to be adjusted.

Gas Terra buys Dutch gas from small fields in addition to gas from the Groningen field. GasTerra encourages the production of this Dutch gas by, where possible, adapting the contract terms for small fields to the needs of the producers. This is GasTerra’s way of helping to implement the small fields policy. GasTerra has a statutory duty to buy this gas at reasonable terms and at prices determined in accordance with the market, if the producer asks GasTerra to do so.

Conversion from L-gas to H-gas

Due to the expectation that production volumes from the Groningen field will continue to fall, from 2020 users of Groningen L-gas will have to switch to H-gas. The conversion from L-gas to H-gas is an important issue in Germany, France and Belgium. In Germany, because of the decrease in the country's own L-gas production, a start has already been made on the conversion and this will be intensified from 2020 when the imports from the Netherlands decrease. Similar preparations are being made in Belgium and France, where a pilot project is due to start in 2018 and large-scale conversion is likely to begin in 2020. This means that L-gas exports will cease in 2030. In the energy agenda the Minister stated that there will not in principle be any conversion from low-calorific to high-calorific gas in the Netherlands, but that a no-regret measure may be adopted in order to ensure that this is theoretically possible if it turns out to be necessary.

Abroad

GasTerra buys gas from abroad as well as from the Netherlands, mainly from Norway (Statoil) and Russia (Gazprom). The quantities are limited. In the past, long-term purchase contracts were entered into for the purchase of this gas.

Since 2014 trade relations between the Member States of the European Union and Russia have come under pressure as a result of the crisis in Ukraine. However, gas trading activities have remained outside the scope of the sanctions and the situation has therefore not affected GasTerra’s commercial relationships with its Russian supplier, Gazprom. Around 7% of the gas that GasTerra purchases comes from Russia.

Security of supply

In 2014 in response to the crisis in Ukraine, the European Commission performed stress tests to test security of supply in the European Union. Two scenarios involving supply problems with Russian gas were simulated and two responses to those simulations (cooperation versus non-cooperation) were analysed. The aim was to measure the short-term effects and to obtain input for the negotiations on gas transit and supply between Russia, Ukraine and the EU. The results led the European Commission to review the Regulation concerning measures to safeguard security of gas supply The emphasis was on more intensive regional cooperation. In any case the simulations found that the Netherlands would not experience any interruptions in the gas supply. GasTerra is of the opinion that security of supply in Europe is best protected by diversification of supply, including more LNG, and free market operation.

Market trends

Gas does not have a good image in north-west Europe. In the Netherlands, this is due in particular to the safety and damage issues as a result of extraction in Groningen, and also to the belief that excessive use of fossil fuels leads to climate change. This puts gas extraction in Groningen and the small fields under pressure. Furthermore, reliance on gas supplies from Russia is damaging to the product’s reputation in Europe, especially eastern Europe.

GasTerra has adapted its strategy to circumstances. The cabinet’s production decisions and the imposition of a production ceiling means that the amount of gas available to us is limited. NAM does not offer us more to purchase than the maximum level set by the minister.

In the 2015/2016 gas year, NAM produced a total of 26.98 billion cubic metres of natural gas from the Groningen field, in line with the production ceiling of 27 billion metres set by the Council of State on 18 November 2015.

GasTerra tries to sell all the Groningen gas offered by NAM. Before the first production decision in 2014, GasTerra worked with a statutory 10-year flexible purchase ceiling. Purchases below the annual average in one year could be compensated by higher purchases later. The current annual production limits mean that GasTerra has to plan more carefully than before.

We already knew that GasTerra would have to gradually reduce the volume of gas it sells before the maximum production level for Groningen gas was set. Both the Groningen Gas Field and the majority of the small fields are in the mature phase of their production cycle. Gas production from small Dutch fields has declined sharply in recent years because of the significant depletion of existing fields, the low gas price and the relatively high costs of producing from new fields. This means that supplies under existing contracts are falling significantly.

It is GasTerra's job to keep the sales obligations in step with decreasing supplies. This means matching the portfolio – total sales obligations – to the supply of gas as well as possible.

GasTerra is constantly looking at how it can make best use of its supply and how best to manage the associated costs. The decline in supply, the focus on costs and efficiency and the smaller margins due to increased competition mean that we have choices to make. Contracts for direct supply to low-volume clients no longer make financial sense for GasTerra. We only consider the pros and cons differently for the purchase of green gas, the volumes of which are relatively small, but which can play an important role in greening the energy supply.

European demand for gas (EU28) was higher in 2016 than in 2015 due to an increased demand for gas for electricity generation, signs of economic recovery in industry and the increased use of gas for transport purposes.

Emissions have fallen in the United States thanks to the supply of shale gas as an alternative to coal, which means that coal-fired power plants are cutting production or have even closed down. Gas is becoming more popular in China as a replacement for polluting coal-fired power plants. Europe is focusing on sustainable alternatives, but is also aware that the use of gas helps to reduce emissions.

Energy targets

A further breakdown of what the energy targets will mean for Europe in 2030 took place in 2016. Together with the agreements made during the Paris climate conference of 2015, these are the most significant developments for European energy targets.

A Climate Bill has been drafted in the Netherlands, containing national climate aims that are more ambitious than Europe expects of our country. The Bill was an initiative of the two Dutch parties PvdA and Groen Links, and will probably be submitted to the House of representatives in 2017.

Energy targets and climate agreements

A number of social parties signed the Energy Agreement for Sustainable growth in 2013. One of the things agreed is to reduce energy consumption in the Netherlands by making houses more energy efficient among other measures. Many housing associations are putting this into practice. Improved energy efficiency means in principle that households will use less gas. GasTerra therefore expects the total volume of sales to decrease in this segment in the long term. A thorough review of the Energy Agreement was conducted in 2016, in which progress was assessed and new measures to complement the agreement were announced.

The “Clean Energy for All Europeans” package presented in November 2016, also known as the Winter Package, has three aims, according to the European Commission: firstly to increase energy efficiency, secondly to become a world leader in sustainable energy and finally to offer consumers a ‘fair’ deal. The measures proposed are based on the EU-wide targets for energy efficiency and the share of sustainable energy in 2030, while the existing policy is still modelled on the targets for 2020. The rise in non-constant sustainable electricity was the impetus for dealing with bottlenecks in the electricity market.

GasTerra supports the focus on energy efficiency. It is no accident that in the Ladder of Seven, which ranks the various forms of energy according to their impact on the climate, energy efficiency comes as the first step on the way towards a climate-neutral future. It provides the most emission reduction in the short term. Sustainable energy comes next. But concentrating on electrical sustainable energy alone neglects the potential of green gas for reducing emissions, especially in sectors where increasing sustainability is difficult, such as industry. In this sense the fact that the Winter Package focuses almost entirely on the electricity markets is a missed opportunity, as GasTerra believes that an integral approach to the energy system is essential, for instance for offering flexibility in an ever more fluctuating energy mix.

Parallel to the implementation of the Winter Package, the European Commission is working on new legislation to reinforce the ETS, and to reduce emissions in non-ES sectors. These targets are also formulated for 2030, with a specific binding target for each member state. The European Commission also submitted a proposal in 2016 to adjust the regulation on the security of supply of gas.

The UN climate conference, COP 21, was held in Paris in the autumn of 2015. The Paris Agreement was presented on the last day of the negotiations. The Agreement set the target of limiting global warming to a maximum of 2o above pre-industrial levels. The 197 parties (196 countries plus the EU) went further than that by agreeing to pursue efforts to limit the temperature increase to 1.5o. What was new compared with earlier UN climate agreements was that agreement was reached on the need to phase out the use of fossil fuels within an undefined period of time. The Convention, that relates to the period after 2020 and takes effect as soon as 55 countries that together emit more than 55% of greenhouse gases have ratified it, requires member states to draw up ambitious national climate plans. The rich countries are expected to support developing countries with finance to reduce their emissions.

GasTerra regards the ambitions, objectives and direction of the climate policy described in the Paris Agreement as encouraging. This must be translated into concrete, effective measures. It is vital that these measures are result-oriented, i.e. that they address the central problem by means of a gradual reduction in greenhouse gas emissions. The means used to achieve this - energy saving, renewable energy sources, replacement of the most polluting fossil fuels with cleaner alternatives combined with CCS - are essentially secondary. The top priority must ideally be the environmental gain of climate policy.

The National Energy Study (NEV) carried out in 2016 sets the position of energy management in the Netherlands in an international context. It describes the major developments in Dutch energy management from 2000 to the present day, and also sketches out expectations until 2035. 2016 was an important year for energy transition in the Netherlands, as it is the year in which the Energy Agreement was assessed. The NEV provides the quantitative basis for this assessment. And 2016 is also the year in which a policy agenda setting out the lines for long-term policy was established.

Energy report, energy dialogue and energy agenda

In the Energy Report, published in January 2016, the cabinet gives an comprehensive vision of the future energy supply in the Netherlands until 2050. The cabinet aims to achieve, within an international context, a low-CO2 energy supply that is safe, reliable and affordable. In this vision, natural gas is, as far as possible, limited to the energy functions where there is no alternative available. The cabinet has taken the Energy Report as the starting point for the Energy Dialogue, a set of meetings in which various stakeholders will take part and that aim to put into practice a responsible transition towards a sustainable energy supply. The Energy Agenda was published at the end of 2016 on the basis of the Energy Dialogue. In this agenda, the construction sector is encouraged to further reduce demand for heat by energy saving and reducing the use of natural gas through the encouragement and use of electricity and heat generated by low-CO2 techniques.

The gas sector’s contribution to Energy Agreement targets

Various organisations were involved in the creation of the Energy Agreement, but the gas sector was not represented. This meant that the position of gas and the opportunities gas offers for limiting energy consumption and making the energy supply more sustainable was not adequately reflected. For that reason, GasTerra and other gas companies have decided to write a gas section for the Energy Agreement, acting under the umbrella of the Dutch gas association KVGN. Four topics were addressed: gas in the built environment; a combination of offshore gas and offshore wind; the added values of green gas; and gas in the world of transport.

This gas section was submitted to the agreement’s monitoring committee in October 2016, and will be incorporated into the current Energy Agreement. The section describes how gas plays a systemic role that can facilitate the transition towards a sustainable, smart and efficient energy supply. The resources that can be used in this context are the provision of flexibility, transmission capacity and gas storage as a back-up to renewable energy sources. The gas section emphasises that the use of gas will increasingly be customised, and that as much space as possible must be given to sustainable alternatives.

National climate summit meeting

The National climate summit meeting, an initiative of the Ministry for Infrastructure and the Environment, in close cooperation with the Ministries for Economic Affairs, Foreign Affairs, Home Affairs and Kingdom Relations, the Union of Water Boards, IPO, VNG and the Department of Public Works and Waterways, was held on 26 October 2016. The public perception is that natural gas should disappear rapidly from the built environment. The technology needed to bring this about is indeed available, but the question is whether an over-hasty removal of gas would lead to a responsible climate policy. It makes more sense to use the existing gas infrastructure to bring about a substantial reduction in CO2 emissions in the short and medium term.

GILDE and KVGN

In view of the debate on the role of natural gas as a fossil fuel in a climate-neutral energy supply and the problems with gas extraction in Groningen, the gas sector has launched a dialogue with various parties that are involved in the energy transition. The (Gas as part of long-term sustainable energy management) project allows us to look jointly at the contribution of gas and the gas industry to making energy management sustainable on an affordable and reliable basis.

The KVGN is actively involved in the debate on the energy transition in the Netherlands. As part of the national energy dialogue set up by the Ministry for Economic Affairs, the association has arranged three panel debates in which the future role of gas in various sectors, such as industry, electricity generation and the built environment, is debated with various parties concerned. The results will be shared with the Ministry for Economic Affairs.

Energy podium

The website www.energiepodium.nl, an initiative of GasTerra, has been in place since 2010 and aims to broaden and deepen the debate about energy supply by the exchange of views. GasTerra is not directly involved in the production of this discussion platform. The aim is to offer a shared platform to stakeholders with various opinions. The resulting dialogue is one of our contributions to finding solutions to the challenges in the energy sector. Various spin-offs from the website have been created over the years. ‘Energy podium dinners’ are held throughout the year, in which 15 to 20 energy specialists from industry, science, the government, political and social organisations come together to exchange ideas about current topics. There is also a large-scale energy podium debate once a year, in which questions relating to the energy transition and/or major political topics are addressed. The energy podium debate in 2016 focused on the 2017 elections. Six energy representatives from the main political groupings in the Lower House discussed a wide range of energy and climate issues.

CCS

GasTerra and the gas industry see that there is a future for the capture, storage, and where possible beneficial use of CO2 (CCS). In particular large industries, which rely on gas at present, may in the long term only be able to continue using natural gas if the CO2 is captured and stored. So CCS is part of the solution, but a lot of work remains to be done with regard to the technical, economic and social aspects. Offshore storage, so a long way from inhabited areas, seems to be the most promising approach.

Traded volume

Physical volume

Virtual trading hubs

Gas is bought and sold on the Title Transfer Facility (TTF), the Dutch gas trading hub, via the ICE-Endex and PEGAS exchanges or via brokers in Over-The-Counter (OTC) deals. In OTC trades, parties deal directly with each other. The standardisation of the screen products (such as hourly, daily, monthly, quarterly or yearly gas) provides reliable price indications for gas as a commodity product. GasTerra prefers trading via the exchanges.

GasTerra also sells non-standard products on hubs such as the TTF. These are structured products which offer clients greater flexibility. They have been a commercial success; in 2016 GasTerra sold more structured products than in the previous period.

The TTF and its British equivalent, the National Balancing Point (NBP), are the largest gas hubs in Europe. The TTF grew more strongly in terms of volume than the NBP in 2016. Trade on the Dutch hub rose to record heights in 2016, reaching a volume of 2,197 billion cubic metres (2015: 1,708 billion cubic metres). This meant that the TTF was able to retain its leadership in OTC trade which it had taken from the British hub a year before.

The popularity of the TTF and the long-established prominence of the Netherlands in the European gas sector are due to market liberalisation and an outstanding infrastructure. Continental parties are not exposed to any exchange-rate risk because trading is done in euros. This is an advantage to the TTF over the NBP, where trading is done in pound sterling.

The German hub NetConnect Germany (NCG) and its Italian counterpart PSV also performed well in 2016. However, the TTF remains the key price marker for long-term contracts and for gas on other trading exchanges in continental Europe.

The churn rate on the TTF rose again in 2016 compared to the previous year. The churn rate is the ratio of volume traded to volume that is physically delivered. The average churn rate in 2013 was 18.5; in 2014 it rose to 31, in 2015 to 37 and in 2016 the churn rate was 42.

LNG

Global LNG production is expanding strongly, especially in Asia and the United States. Capacity is expected to increase by 180 billion cubic metres over the next four years. Australia has an estimated contract volume of LNG exports of 97 billion cubic metres for 2018, while the corresponding figure for the United States is approximately 60 billion cubic metres1. Some of this US gas has been contracted by European parties. It is usually not certain in the early stages where the gas will be delivered. Contracts often offer the buyer the option to have the LNG delivered to a location of its choice, which means that it is possible for LNG delivered in Europe to be shipped on to other markets.

Traditionally, Japan, South Korea and Taiwan have been the most important outlets for LNG. Sales in Japan are expected to fall, as a consequence of Japan’s decision to re-open some of the nuclear power plants that were closed after the disaster at the Fukushima nuclear power plant in 2011. Nevertheless a strong growth for LNG is expected from 2017 onwards, with China and India being the main growth markets. In China, demand for LNG could receive a strong boost if the country decides to replace some of its coal-fired power plants by gas-fired plants, but the impact on demand for LNG does depend on the amount of pipeline gas that China will buy from Russia.

The supply of LNG to north-west Europe is at the same level as last year, but supplies are expected to increase from 2017 onwards, provided there is a global surplus of LNG and the price at which LNG is available to north-west Europe is appropriate. Europe acts as a global balancing market in this respect. It is also important that LNG can be sold at an adequate profit in north-west Europe, and that it is competitive with pipeline gas from Russia. The growth of the LNG market could contribute to convergence of global gas prices.

GasTerra does not trade in LNG but it does monitor developments. LNG is part of the supply-demand balance of natural gas and so has an effect on the price (both on the hubs and elsewhere).

LNG is becoming a more popular alternative compared to fuel oil in shipping, but this market remains small. Growth is strongest in Western European waters and on the Eastern coast of America. In road transport, gas is a cleaner alternative to petrol and diesel for heavy goods vehicles. In private cars, gas (CNG) seems to be losing out to electric vehicles, which have become rapidly more popular in recent years.

Competition from coal

Demand for gas by power plants rose in 2016, mainly due to the change in the relationship between the price of coal and the price of gas. The gas price dropped substantially in the summer of 2016, while the coal price rose on the back of falling production in China. This meant that at some points gas was once again competitive with coal.

The trading price for CO2 emission rights is still very low. A few years ago the United Kingdom impost an extra tax on CO2 emissions from power plants. This made the competitive position of gas compared to coal much better than it is in the Netherlands. Nevertheless, GasTerra is in favour of reforming the ETS rather than price intervention.

The price of coal and the price of CO2 emission rights are both still relatively low. This means that coal-fired electricity generation is still cheaper than the gas-fired alternative for existing power plants. Various energy companies in north-west Europe have therefore shut down their gas-fired power plants or announced that they intend to do so. Many Dutch gas-fired power plants are also standing idle at the moment or are under threat of definitive closure.

Closing gas-fired power stations may have consequences for security of supply and achieving our climate targets. Burning coal releases more CO2 than burning gas. Furthermore, older coal-fired power stations in particular cannot be switched off and fired up again as quickly as gas-fired power stations, so in the transition to a sustainable energy supply they are less suitable as a back-up to the frequently unpredictable renewables. A number of European countries are taking measures in this context to secure their supply. These 'capacity mechanisms', which apply both to coal-fired and gas-fired power stations, mean that energy companies are paid for the reserve capacity that they have to retain to guarantee that the electricity stays on.

Discussions are taking place at European level about improving the trading system for CO2 emission allowances (ETS). This should lead to higher CO2 prices and therefore encourage industry to invest in measures that reduce emissions such as the use of gas. It should also improve the competitiveness of gas-fired power stations compared with coal-fired power stations. GasTerra supports attempts to reform the ETS.

Under the Energy Agreement, the Netherlands has agreed to close coal-fired power stations that first came into use in the 1980s: three on 1 January 2016 and the other two on 1 July 2017. This will leave five coal-fired power stations operating in the Netherlands, three of which came into use in the last two years (two at Maasvlakte and one at Eemshaven). Despite this agreement there is increasing social and political pressure to also close down these power stations eventually.

Supply and Sales

In 2016, GasTerra supplied 63.9 billion cubic metres of gas. That is 6.4 billion cubic metres less than in 2015. This decrease can be explained mainly by the production ceiling on the Groningen field. Prices were significantly lower than in 2015. The average price per cubic metre in 2016 was 15.3 eurocents compared with 20.8 eurocents in 2015. 

Supply to the connection

In 2016 GasTerra supplied 1.7 billion cubic metres of gas at the connection to energy companies and power stations (2015: 1.4 billion cubic metres).

In 2016, GasTerra supplied 3.7 billion m3 of natural gas to its industrial customers (2015: 3.9 billion m3). This was below expectations. Various reasons can be given for this. Customers are making little use of their combined heat and power plants (CHPs) which generate heat and electricity at the same time. As was the case last year, for many customers it is cheaper to buy electricity than to produce it themselves, resulting in low demand for gas for these plants. However, we have seen a positive development here as well, as the gas price fell compared to the electricity price, making gas more attractive for specific uses than for electricity generation.

Product improvement

GasTerra is working hard to retain its customer portfolio. We consult our customers to ascertain whether our terms and conditions and our products are still competitive. Most of the product improvements were changes to cater for our customer's wishes and requirements. We also have to make choices related to marketing lower volumes. The positive effects of continuous product development was expressed in the sales contracts for the next few years. Just like last year, GasTerra took advantage of the marked increase in the number of smaller, often local, energy companies. These parties are contracting more gas every year, because they see their customer portfolios growing. The company benefits from this because of the higher sales.

Making processes more sustainable

We assist our industrial customers in their efforts to make their production processes more sustainable through the Environmental Plan for Industry (EPI). Through this programme GasTerra supports industrial customers in improving their energy-efficiency, reducing their emissions and making their production processes more sustainable. An EPI project was carried out with two customers in 2016.

GasTerra also supports the production of and trade in green gas by buying this gas on a long-term basis from various producers on attractive terms. We bring the various market operators together and participate actively in bringing about favourable regulations and a good network of green gas producers.

For a summary of all projects, please see our Green section.

Supply to the gas hub

Trade on the TTF is mainly conducted through standard framework contracts. This means that only the price, volume and delivery period are agreed for each deal. A deal may be made direct via the exchange, via a broker, or bilaterally with a customer. GasTerra prefers the first option. As many market operators trade through brokers, we also use this channel a great deal. The number of brokers increased again in 2016. This gives market operators more freedom of choice.

In 2016, GasTerra supplied 17.7 billion m3 of gas via the virtual trading point TTF (2015: 21.9 billion m3). This means that the supply to these target groups was below expectations. This can be explained by the fact that GasTerra was not able to purchase as much production volume. A total volume of 52.8 billion m3 was physically supplied via the TTF in 2016.

Average prices on the TTF were lower than in 2015. The annual average day-ahead price fell by 5.4 €ct/m3 compared with 2015, the annual average month-ahead price fell by 5.3 €ct/m3 in 2016.

Trends in physical and traded volumes TTF

Abroad

In 2016, GasTerra exported 40.8 billion m3 of gas to Germany, Belgium, France, Switzerland, Italy and the United Kingdom (2015: 43.0 billion m3), mainly through long-term contracts with a few large international energy companies. This decrease can be explained mainly by the termination of a number of long-term contracts.

Several export contracts were renegotiated in 2016. If it is not possible to reach agreement, arbitration may follow. GasTerra was involved in four arbitration procedures in 2016, two of which had not been concluded by the end of 2016. 

In 2016 various reports were published about the arbitration procedure with Eni regarding payment arising from the earlier arbitration decision. On 23 June 2016 the arbitration tribunal handed down a final judgement in the arbitration procedure instigated by Eni with regard to a long-term supply agreement with GasTerra. In the arbitration judgement, the tribunal completely rejected Eni’s claims for a price review as of 1 October 2012. While awaiting the outcome of the arbitration procedure, GasTerra billed a lower price from 1 October 2012, as agreed with Eni, provisionally and purely for invoicing purposes. As a consequence of the complete rejection in the arbitration judgement of Eni’s claims for a lower price, GasTerra has billed Eni for the difference between the provisional price and the contract price, resulting in an additional sum of 918 million euros including interest. Eni has notified GasTerra that it will not pay this additional sum. Despite the tribunal’s complete rejection of Eni’s claims for a price revision as of 1 October 2012, Eni still considers itself entitled to a price revision as of 1 October 2012. GasTerra disagrees with Eni, and has launched an arbitration procedure to recover the sum owed by Eni. Eni has granted GasTerra a bank guarantee of 1.010 billion euros as security in the event that the result of the arbitration procedure is favourable to GasTerra. Although GasTerra is convinced that the result of this arbitration procedure will be in its favour, it has not included this in the annual accounts, in line with its consistent approach to renegotiations or related arbitration procedures on gas purchase and sale agreements.

Trends in average monthly TTF prices

Conversion from L-gas to H-gas

Conversion from L-gas to H-gas is an important issue in Germany, France and Belgium. In Germany, because of the decrease in the country's own L-gas production, a start has already been made on the conversion and this will be intensified from 2020 when the imports from the Netherlands decrease. Similar preparations are being made in Belgium and France, where a pilot project is due to start in 2018 and large-scale conversion is likely to begin in 2020. In the energy agenda the Minister stated that there will not in principle be any conversion from low-calorific to high-calorific gas in the Netherlands, but that a no-regret measure may be adopted in order to ensure that this is theoretically possible if it turns out to be necessary.

Virtual storage service

GasTerra provides market operators with options to contract for virtual storage space via the gas and electricity exchange ICE Endex. This virtual storage service (VSS) is offered in the form of Standard Bundled Units (SBUs) and it allows market operators to inject or extract gas from the virtual storage facility. GasTerra provides this service on the TTF. ICE Endex auctions the volume as an independent party on instructions from GasTerra, so that purchasers remain anonymous to GasTerra. 

The first auction for the 2016/2017 gas year took place in November 2015, at which 1.757 million SBUs were sold in the form of one-year product. The remaining capacity was auctioned again as one-year product in February 2016. At this auction, 7.341 million SBUs were sold for the 2016/2017 year. Another auction was held on 30 November 2016 for the 2017/2018 one-year product and 4.549 million SBUs were sold at this auction. This left 4.549 million SBUs for the 2017/2018 year, which were sold at the auction on 25 January 2017.

Procurement

In 2016 GasTerra purchased 63.9 billion cubic metres of gas from Groningen, small fields, on trading exchanges and via imports.
 

Groningen

Production of Groningen gas remained within the relevant ceilings in 2016. GasTerra and NAM are working closely together to ensure that volumes from the Groningen field are distributed as evenly as possible throughout the year.

  Groningen decision Production
2015/2016 gas year 27 billion cubic metres 26.98 billion cubic metres
2016/2017 gas year 24 billion cubic metres (in a year with normal weather) 6.5 billion cubic metres up to 31 December 2016

GasTerra purchased 27.7 billion cubic metres of gas from the Groningen system in the 2016 calendar year (2015: 29.4 billion cubic metres). This figure is different from the production figures for the Groningen field as reported by NAM and linked to the Groningen production ceiling. This difference is caused by a number of factors, including own use for production and the annual difference between injection and production from underground gas storage facilities. In addition, GasTerra reports volumes on a calendar year basis, while the production ceiling is linked to gas years.

Small fields

GasTerra purchased 20 billion m3 from the small fields in 2016 compared to 22 billion m3 in 2015. In the past decade, the purchase of gas from small fields decreased by about two billion m3 per annum. This is because the reserves in the small fields are becoming depleted, resulting in reduced pressure in these fields and a steady decline in production. Although reserves are still being found in new small fields, this does not fully compensate for the fall in production. The outlook for the coming years shows a further decrease. These projections are based on statements from the producers.

Gas extraction from small fields is under pressure. Low gas prices, difficulty in obtaining licences and social and political pressure are harming current gas production and making the implementation of new projects more difficult and less financially viable. This could eventually lead to a low supply from small fields and has led the gas production companies, through their trade association NOGEPA, to urge the Dutch government to reduce the taxation burden on this activity. The investment climate in the Netherlands is currently less favourable than in the United Kingdom, where taxes are lower. Cutting taxes would make investment in gas extraction in the Netherlands (more) attractive. It could also prevent the loss of existing infrastructure.

Purchasing conditions

The Seller's Nomination Regime has been in place for the sale and purchase of small field gas for a few years now. It means that supply is not demand-driven as it used to be, i.e. at the request of GasTerra, but production-driven. As a result producers are better able to adjust the supply to the technical facilities of the fields. The volume to be delivered can be announced entirely on a day-ahead basis. GasTerra has taken account of the wishes of producers in introducing this commercial approach. The producers for their part provide GasTerra with non-binding production projections for the short, medium and long term. Meanwhile all producers can provide automated projections in accordance with the new conditions.

GasTerra maintains close contact with producers with regard to purchasing terms, in line with its responsibility for small field policy (offering normal market conditions). GasTerra is continuing to work on making things easier for producers on the operational processes front, for example by simplifying contracts and data exchange. Finally, GasTerra is working with producers and the umbrella organisation NOGEPA to optimise existing infrastructure, knowledge and networks.

Procurement from Virtual Trading Points and Imports

GasTerra procured 16.2 billion m3 of gas in 2016. This was done both through virtual trading points (7.6 billion m3) and through imports from Norway, Russia, Germany and the United Kingdom (8.6 billion m3). Imports from Germany will shortly cease as a result of the depletion of the contracted gas fields. Due to the long-term nature of the other import contracts, there was little change from previous years in this segment.

Around 7% of the gas that GasTerra purchases comes from Russia. This gas is purchased based on a long-term procurement contract, in which the rights and obligations of both parties are set out. The trade relations between the Member States of the European Union and Russia remained strained in 2016. On 1 July 2016 the EU prolonged economic sanctions against Russia by just over six months until 31 January 2017. However, gas trading activities fall outside the scope of the sanctions and the relevant commercial relationships have not been affected.

Renegotiations took place on a number of import contracts in 2016 just as in previous years. The most important theme in the renegotiations that have not yet been concluded is the transition in the market from oil-indexed to gas-indexed prices. As a result of this the roles of various parties in the value chain have been redefined in order to take proper account of contractual agreements. Issues, apart from price, that play a role here include flexibility, payment of transmission costs and the supply point. If parties cannot reach agreement by renegotiating together, they can bring their dispute to an arbitration tribunal. There were two arbitration procedures in 2016, neither of which were resolved by the end of the year.

Transmission

GasTerra books transmission capacity in order to be able to meet its supply obligations under supply contracts. In the Netherlands, GasTerra purchases the transmission capacity from GTS, operator of the national gas transmission network. In addition, GasTerra books transmission capacity with various international transmission system operators (TSOs).

The costs of procuring transmission capacity in 2016 were €501 million. This was €31 million less than in 2015 [€532 million], mainly due to a decline in purchase and sales volumes. The trend for new transmission bookings to be made mainly on a short-term basis, which had started previously, continued in 2016.

The final transmission booking via the BBL pipeline to England took place in 2016, due to the termination of a long-term supply contract in November 2016. This will lead to a significant fall in transmission costs next year.

In 2016 GasTerra once again made use of the opportunity to offer on the market transmission capacity that it had booked but no longer required because of changing circumstances. Buyers were found for some of this capacity.

GasTerra has a 24-hour desk, the Commercial Dispatching Center, for transmission nominations to operators of gas transmission networks. This launches and manages communications with clients and producers in order to ensure that contractual obligations are met. Supply and demand in the GasTerra portfolio are aligned, so that this remains in balance in the transmission networks. The Commercial Dispatching Center handled about 700 messages a day in 2016.