European gas rises to six-week high as Netherlands cap production

By ISIS ALMEIDA
Bloomberg

European natural gas climbed to the highest in more than six weeks after the Netherlands, the European Union’s biggest producer, announced further output caps.

First-half gas production from Groningen, Europe’s biggest field, will be limited to less than half of the cap announced in December for the whole of 2015, Dutch Economy Minister Henk Kamp said Monday.

The government will decide in July whether to cut the annual limit further. Prices in the UK’s National Balancing Point and the Dutch Title Transfer Facility hubs extended gains after adding more than 4% Monday.

The Netherlands, one of the most fossil-fuel intensive economies, may become a gas importer by 2025 as production from its Groningen province falls and progress in unconventional sources stalls, the International Energy Agency said in April. The nation was forced to limit gas extraction to avoid tremors that led to a public backlash in the Groningen area.

“The announced restrictions are clearly short-term bullish,” said Georgi Slavov, head of basic resources research at London-based brokerage Marex Spectron Group. “It’s not easy to say how much of this has already been priced in the spike from the last few days because there are other supply-negative and demand-positive factors affecting the price formation for TTF at the moment.”

Gas for next-month delivery in the UK, Europe’s biggest traded market, jumped as much as 4% to 52 pence/therm ($7.92/MMBtu), the highest since Dec. 29, according to broker data compiled by Bloomberg. Dutch fuel gained as much as 4.7% to 23.20 euros ($26) per megawatt-hour, the highest since Dec. 10.

Output Limit

Production from Groningen will be limited to 16.5 billion cubic meters (580 billion cubic feet) in the first half of 2015, Kamp said in a letter to parliament. The Netherlands already produced 7.6 billion cubic meters from all its fields in January, according to Gasunie Transport Services, the network operator. Groningen accounts for about 75% of Dutch output, according to the US Energy Department.

“Dutch gas production‎over January was down by 0.6 billion cubic meters, which is a reduction that is consistent with the new lower half yearly cap,” said Trevor Sikorski, head of gas, coal and carbon at consultants Energy Aspects. “Seeing some 6.5 billion cubic meters wiped off of Groningen gas production would lead to a 9 percent year-on-year decline in Dutch gas production.”

The Dutch government will decide in July whether to cut annual output to 35 billion cubic meters from the current cap of 39.4 billion cubic meters, according to the statement. In December, the limit was reduced from 42.5 billion cubic meters.

Dutch production would fall by 7.5 billion cubic meters if the cap is set at 35 billion, more than the previous 3 billion cut previously forecast, according to Societe Generale.

Spare Capacity

“Finding 4.5 billion cubic meters shouldn’t be so difficult,” said Thierry Bros, a Paris-based analyst at Societe Generale. “We should have additional LNG and there is still a huge spare capacity on the Russian side,” he said, keeping a “slightly” bullish view for the first quarter and a bearish stance for the summer.

Gas Transport Services, the Dutch network operator, concluded that Groningen production of 33 billion cubic meters/year is sufficient to supply all gas users during years with cold winters, Kamp said in the statement. An additional 2 billion would be extracted for back-up purposes, he said. A drop to 33 billion cubic meters would represent about 3% of western Europe’s production, according to Capital Economics.

“The equivalent in the oil market would be all of Nigeria or Brazil’s oil production going off-line,” said Hussain Mehdi, an economist at London-based Capital Economics. “One would expect this to result in a significant uptick in prices, especially if the winter drags on.”

Front-month Dutch gas prices fell 23% in 2014 as Europe’s mildest year on record cut demand for heating.

“After the mild winter and therefore relatively low demand,” the Dutch announcement is “not a big surprise,” said Hans van Cleef, a senior energy economist at ABN Amro Bank NV in Amsterdam. “TTF prices are trading somewhat higher, but increased tensions between Europe and Russia may also have some effect on this.”

Ukraine Talks

Leaders from Russia, Ukraine, Germany and France will meet Wednesday in Minsk, Belarus, to try to find a solution for the conflict in eastern Ukraine. A dispute between Russia and Ukraine threatened to cut supplies to Europe last year for a third winter since 2006. Russia supplies about 30% of Europe’s gas needs, half of which flow through Ukraine.

Spot gas prices also gained in the UK as supplies were cut from Norway, Britain’s biggest foreign supplier. Flows into the Shell-Esso Gas and Liquids pipeline to Scotland will be reduced by 11.6 million cubic meters/day for 48 hours, pipeline operator Gassco AS said on its website Tuesday.

UK gas for within-day delivery rose 2% to 51.95 pence/therm at 3:35 p.m., as the day-ahead contract advanced as much as 7.8%, the biggest jump since Nov. 3, to 52.7 pence/therm, broker data showed.

“Increased buying activity on the back of the Groningen announcement has seen prices across the board continue to make gains,” said Marcel Boonaert, head of trading at Wingas UK. “Prompt prices are following suit, with tight intraday supplies and planned Norwegian maintenance tomorrow adding to the bullish sentiment.”

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