Big gas field is causing tremors, exposing energy firms to criminal probe and rising bills
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GRONINGEN, The Netherlands -- For decades, the giant Groningen gas field beneath the flat, green farmland in the north of this country counted among the greatest prizes for Exxon Mobil Corp. and Royal Dutch Shell PLC.
Then the earthquakes started.
The exploitation of Groningen -- the biggest gas field in Europe -- has been causing tremors for over two decades, rattling a bucolic province with no previous history of quakes and exposing two of the world's biggest energy companies to a criminal probe and rising reconstruction bills.
Amid a public outcry, the Dutch government has imposed increasingly strict limits that have more than halved Groningen's gas production since 2013. Now, authorities are proposing another 10% cut in hopes of further reducing earthquakes. And a Dutch public prosecutor is preparing to open a criminal investigation into responsibility for the earthquakes.
Shell and Exxon are pushing back through their joint venture, Nederlandse Aardolie Maatschappij BV or NAM. The venture says cutting output even more is "out of proportion and not effective," and would create uncertainty about the legal framework for its operations. It warns that continuous changes to the production level may ultimately threaten the business's profitability.
NAM said it is considering formally contesting the government's decision. It also expressed surprise at the Dutch court order to the prosecutor to open a criminal investigation this year, since the authorities had previously found no grounds for such action. The state will take a decision on whether to prosecute once the investigation is complete.
Groningen was expected to be one of the world's largest gas producers for decades to come. Last year, it made up almost 10% of both Exxon and Shell's total gas production globally and its reserves are among the companies' largest undeveloped resources.
Moreover, the field's profits have been lucrative for the Dutch government, which not only collects taxes from NAM but is also a 40% stakeholder in the field. Since production began, the field has generated almost EUR300 billion ($335 billion) for Dutch coffers.
Exxon named restrictions on Groningen as a factor contributing to a nearly 4% decline last year in its global natural-gas output. Shell said Groningen issues were largely responsible for a decline of 636 billion cubic feet in proven reserve estimates for its European joint ventures, equivalent to nearly 2% of the company's total gas reserves at the end of 2016.
Under the current arrangement, the government bears 64% of the costs related to compensation to residents, efforts to reinforce buildings, lawsuits and other items.
It isn't the first time seismic activity has caused controversy in the energy industry. A U.S. debate has raged for years over whether water injection related to drilling has caused earthquakes in Oklahoma and Texas. Earthquakes like the ones in Groningen are less known and less understood.
Groningen's quakes were first officially linked to gas production in the 1990s, nearly 30 years after work on the field began. Decades of production have caused pressure in the porous ground containing the gas-bearing reservoir to decrease, according to the Shell-Exxon venture and the Dutch government. That increased the stress on natural faults, resulting in the earthquakes, the company and government say.
The tremors have caused widespread damage, though no deaths, in a province of nearly 600,000 people.
A large majority of the temblors registered low magnitudes of between 1.5 and 2, and early on NAM dismissed them as little more than a nuisance. But the public and authorities snapped to attention in 2012, when an earthquake of magnitude 3.6 rippled through Groningen province.
The region's homes and infrastructure, built on flat land, weren't designed to withstand even such low seismic instability. The tremors occur where Groningen's gas lies -- just under 2 miles below ground level. That relatively shallow depth, and more significantly the soft, clay-like topsoil in much of the region, make for stronger ground movements than expected from earthquakes of such magnitude, according to the Netherlands State Supervision of Mines, which regulates gas extraction.
"The impact on the houses and streets is a split second. There are no rocks in between," said Hans Alders, a Dutch government official appointed to oversee efforts to strengthen and repair the province's buildings and infrastructure.
In a 2015 report, the Dutch Safety Board said NAM and the country's Ministry of Economic Affairs failed to "act with due care for citizen safety" and didn't adequately research the risks posed by earthquakes.
The government said it has recognized that mistakes have been made and has implemented the report's recommendations.
NAM hasn't disputed the findings and has made several public apologies. It has acknowledged liability for earthquake-related damage and paid out hundreds of thousands of euros in compensation, poured millions more into a fund to stimulate the region's flagging economy and put aside more than EUR1 billion, mostly for a program to strengthen and repair buildings in the area. The bill is expected to grow.
NAM said while it would meet all its liabilities, it isn't possible to predict the exact costs of strengthening and repair in the years ahead.
The gas company could also be on the hook for nearly EUR8 billion to fully compensate residents throughout the region for losses to property value and psychological damage, said Pieter Huitema, a Groningen lawyer who brought two successful civil suits on those issues.
NAM is appealing both lawsuits and said all numbers relating to the size of potential liabilities are unsubstantiated. The company said it already has a system to compensate residents for lower property values and needs more clarification on how to establish psychological damages.
Both Shell and Exxon said they are confident NAM could produce gas safely. "Safety is, and always has been, our primary focus," Exxon said in an email.
The earthquakes have unexpectedly persisted -- albeit at a lower level -- despite the Dutch restrictions on Groningen output. That unpredictability, and a belief that NAM failed to present an adequate plan to mitigate it, prompted the Dutch regulator to recommend the further output reduction earlier this year.
Jelle van der Knoop, president of the residents' association Groninger Bodem Beweging, said many residents want gas production to end altogether.
"The sooner they stop, the sooner there will be no earthquakes," Mr. van der Knoop said.
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June 26, 2017 02:47 ET (06:47 GMT)