4 Dec 2017

The short-run demand curve of Groningen’s gas

Tom writes*

Since its discovery in 1959, the Groningen gas field has been exhausted for approximately 80 per cent of its total supply (NOS 2017). These drillings have caused more and more earthquakes in the region, sparking intense protests by the locals, who demanded gas drillings to be downscaled severely (Dempsey and Suckale 2017). The gas has been very profitable for the Dutch government, as it has earned €290 billion over these 60 years (NOS 2017) and despite many protests in Groningen, the government has been very hesitant to downscale the gas extraction in Groningen. As what follows will suggest, the main reason for this is the monopoly of the gas produced in Groningen on the gas provision in the Netherlands and parts of Germany, France and Belgium, leading to a static demand curve for Groningen’s gas.

In the Netherlands, 7 million households are dependent on the gas produced in Groningen (Rijksoverheid 2017). On top of that, 4 million households in Germany and 2 million households in France and Belgium also rely on gas from Groningen (Bremmer 2017). The demand for this necessary good, as it provides people with one of their basic needs, is relatively inelastic, so a shift in the quantity demanded, i.e. a shift on the demand curve, is unlikely, because people simply want and need to keep their houses and water warm to a certain extent. It becomes, however, even more complex, when we consider the more technical elements of this story. The problem of the Groningen gas is that it is of special quality. Most natural gas, also gas from Russia, is ‘high calorific’, whereas the gas extracted from Groningen is ‘low calorific’, also called L-gas. As a result, most houses in the Netherlands, and also the German, French and Belgian regions depending on Groningen, are built with a system that can only handle L-gas (Bremmer 2017). This means that alternatives for natural gas from Groningen can simply not be used, since all alternative supply of natural gas is H-gas, unless this high calorific gas is transformed to L-gas by adding nitrogen to it in expensive installations (GasTerra 2015). These, however, take time to be built and, therefore, to replace the L-gas from Groningen.

A demand curve can shift due to various reasons, but none of those reasons is present here, at least not in the short term. A change in income or tastes or preferences is not going to alter the fact that people need natural gas to keep their houses warm (see earlier point). In the short term, the population size will not change significantly, as to affect the demand, and on the long term the problems described above might already have been solved. And, lastly, there are no substitute goods available in the short term, whereas currently it is not so much the issue of complementary goods, but rather of a complementary system, which is all constructed to facilitate the use of particularly natural gas from Groningen.

This does not mean, however, that inhabitants of Groningen province are protesting in vain. From this year, 2017, onwards, only gas devices that are fit for H-gas as well, (Luyendijk 2016) are allowed to be sold and installed in the Netherlands. Germany will complete its transition from L-gas to H-gas and France in 2020 and France and Belgium will have done so in 2024 (Bremmer 2017). Until then, further downscaling the gas extraction in Groningen will simply not be possible.

Bottom line: In the long term, however, reducing or even ceasing to extract from the Groningen gas field, though not profitable for the Dutch government, is absolutely possible.

* Please help my environmental economics students by commenting on unclear analysis, other perspectives, data sources, etc. (Or you can just say something nice :)


ag8 said...

Tom, I like your blog post it's good! I have a question, is there any possibility for there to be a shift in the supply side? I understand that right now it is profitable for the government, but are other incentives (such as the protests and the sismic activity) enough for there to be a reduction in the Groningen gas production?

Also, is The Netherlands in an ongoing transition towards L-gas to H-gas devices? Because there is allways a difference between selling only a certain type of device and shifting towards one specific type of device.

Anonymous said...

Very informative post. While reading when a question surfaced in my mind, you quickly answered it. Good analysis, good economics and a realistic outlook on the future.

Tom Geukemeijer said...

Interesting questions!
1. There has already been an inward shift of the supply curve. The government has already implemented a ceiling for the maximum gas production per year. Whilst in 2013 over 50 billion m3 of natural gas was extracted from the region of Groningen, in 2016 this was only 24 m3 of natural gas. So the protests and the seismic activity indeed have led the Dutch government to reduce the gas production in Groningen already to a certain degree.

2. Yes, there is to a certain extent an ongoing transition. There are only devices sold in the Netherlands that can deal with both H-gas and L-gas. They are not, however, changing everyone's existing devices as quickly as possible to be able to cope with H-gas as well. What is being done, though, is the construction of installations in which H-gas can be transformed to L-gas by adding nitrogen to it. So in that sense, a transition is going on.

I hope to have answered all your questions

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