With all the attention being paid to the U.S. domestic energy market, it can be easy to forget that oil and gas activities are continuing apace all around the world. U.S. energy producers are well-advised to monitor activities elsewhere in order to learn lessons that can be applied to domestic energy plays. One potential case study that may be of particular note to Utica shale producers involves the current issues facing the Groningen natural-gas field in the Netherlands.
The Groningen field is the largest natural-gas field in Europe, and one of the largest in the world; according to some estimates, the Groningen field contains roughly six times the amount of natural gas contained in the Utica shale. Production in the Groningen field began in the 1960s. The field is currently operated by a joint venture, Nederlandse Aardolie Maatschaapij (“NAM”), which is co-owned by Royal Dutch Shell and ExxonMobil; the Dutch government also maintains a large degree of control over operations in the field. The field is located in the midst of a heavily populated area, including the nearby city of Groningen with a population just over 200,000 people.
Perhaps the most crucial lesson to be learned from the Groningen experience is how the field has been impacted in recent years by induced seismicity. The first earthquakes in the field were not recorded until the late 1980s and early 1990s, decades after production activities began. Although that area of the Netherlands had never been tectonically active up to that point, NAM denied any connection between the Groningen field operations and the earthquakes until a major joint study was published in 1993, and did not fully acknowledge that the earthquakes were “safety issues” until after a major earthquake in 2012. NAM and other groups further downplayed the risks of induced seismicity by pointing to studies showing that the maximum magnitude of any potential earthquake in the field would not be significant––however, subsequent revisions of those studies steadily increased the estimated severity of the earthquakes that could occur.
Landowners in the Groningen area eventually took matters into their own hands, filing a major lawsuit involving 900 homeowners and 12 housing cooperatives. Interestingly, one of the key components of the damages sought by the landowners was the reduction in property values caused by the earthquakes. In 2015, the court ruled in the plaintiffs’ favor, holding that the plaintiffs could request immediate compensation for any lost property values, even if their property had not been physically damaged and they were not trying to sell the property. NAM has already set aside over a billion dollars to cover damage to buildings; the costs of paying owners for reduced property value and for reinforcing existing buildings are estimated to be “far higher.” These risks have already expanded the scope of potential liabilities beyond what the energy companies, and their insurers, anticipated. In order to alleviate further damage, the Dutch government recently announced that it would severely limit the amount of production allowed from the Groningen field––a move likely welcomed by landowners (and insurers), but not by producers.
There are key differences between the Groningen field and the Utica shale that of course must be kept in mind. For instance, the induced seismicity problems in the Groningen field stem from the extraction of the gas itself; in contrast, some experts attribute the induced seismicity in the Utica shale to disposal of fracking byproducts after the resources have already been extracted––and even that alleged connection is still a matter of scientific debate. In addition, the geology of the two formations differs, as the Groningen field consists of porous sandstone while the Utica consists of more tightly compacted shale. The seismic events in the Groningen field also occur at much shallower depths than events in U.S. energy fields such as the Utica shale or in Oklahoma. Therefore, the kind of induced seismicity seen in Groningen may never occur in the U.S.
The lessons of Groningen may be distinguishable from the situations confronting U.S. producers for the reasons discussed above, but that does not mean that they are wholly irrelevant. The lessons learned by NAM can be used in a number of ways, including increasing efforts to scientifically diagnose the source of induced seismicity early so that potential damages can be avoided or minimized, and increasing available limits of insurance coverage, and potentially purchasing additional types of insurance, in order to account for unforeseen risks. Perhaps most importantly, producers would be wise to recognize that they could be the subject of claims regardless of which way the science turns out, and they should be prepared to respond accordingly. U.S. producers would be wise to heed NAM’s experience at Groningen––it’s not often that you get a potential look at what might happen to your activities in the future, and get a chance to plan accordingly.