Regulation of natural gas production

Ownership and organisation

What is the ownership and organisational structure for production of natural gas (other than LNG)? How does the government derive value from natural gas production?

Gas production in Germany is in constant decline, falling from 18.6 billion cubic metres (bcm) in 2006 to 12.7 bcm in 2010, and falling further to below 5.3 bcm in 2020. Domestic production is expected to further decline by an average of 5 per cent per year in the coming years. Unlike in Canada or the United States, the production of unconventional gas is not likely to become a game changer. The issue of unconventional natural gas production is politically highly controversial in Germany and enjoys only limited or no political support. Particularly with regard to fresh water and environmental protection, public opinion is a major factor in decision- and rule-making.

In the production sector, five main companies produce natural gas: Mobil Erdgas-Erdöl GmbH (ExxonMobil), BEB Erdgas und Erdöl GmbH & Co KG (Shell and Esso), DEA Deutsche Erdoel AG, Wintershall Holding AG and Neptune Energy Deutschland GmbH. In 2020, production amounted to 50.36 billion kilowatt-hours, which is below 50 per cent of average annual production in the years prior to 2009. Domestic gas production accounts for 5 per cent of national gas demand with almost all exploration and production sites situated onshore in Lower Saxony, which leads to approximately 97 per cent of national gas production occurring there. Only one site is located nearshore in the North Sea. There are no governmental subsidies for gas production – conversely, the federal states gain an income through concession fees of about €220 million per year.

Regulatory framework

Describe the statutory and regulatory framework and any relevant authorisations applicable to natural gas exploration and production.

Land ownership does not cover natural gas as a natural resource. Instead, the right to explore and exploit natural gas is awarded on the basis of permits. Such licensing for the exploration and exploitation of natural gas is predominantly regulated at the federal level by the Federal Mining Act. The mining authorities at the state level are responsible for administering the licensing for the exploration and exploitation of natural gas resources. First, it is necessary to obtain a permit for exploratory work. In the case of a successful exploration, a separate exploitation permit is required. Essentially, these permits constitute the ‘mining right’. The mining rights are transferable with the consent of the mining authority. Without such a full transfer, it is also possible to entitle a third party to use such mining rights. Each permit covers a specified area and resource and gives the exclusive right to explore and exploit that area for that resource. The details of exploration and exploitation activities are subject to operational plans that also require consent from the authorities. These operational plans cover all phases of exploration and exploitation and are, as indicated above, matters of mining law that are administered by the mining authorities established by the different states. These authorities need not be solely responsible for mining activities and some states even share their mining authority, especially in areas where mining is not a traditional economic activity.

Beyond matters of mining law, drilling through the aquifer or pumping water up or down typically requires licensing in accordance with federal and state water laws.

Fracking as a means of unconventional natural gas production has garnered substantial public attention in Germany in recent years, mainly owing to the rise of deep geothermal activities. While fracking has historically been an accepted method in German natural gas production, there are now severe restrictions in place for this technology.

All such licences are typically granted by means of an administrative decision. The authorities have the general power to enforce their decisions in the administrative enforcement procedure, including administrative orders to rectify any violations of an existing permit (eg, in the event of a violation of an ancillary obligation), penalty payments or substitute performance.

Unconventional gas production

Are there different rules for, or any restrictions on, unconventional natural gas production (including fracking)?

Germany’s natural gas supply largely depends on imports, in particular from Russia. In the context of the security of energy supply, it has been discussed whether the production of unconventional natural gas (in particular shale gas), which exists in considerable amounts in Germany, could be an alternative. The discussion was fuelled by the substantial increase in shale gas production in the United States. In public discussion in Germany, environmental concerns played a large role. In 2018, the German parliament addressed this issue with multiple legislative changes. These effectively ban commercial fracking for the purposes of shale gas exploitation – the ‘fracking moratorium’. It is unlikely that the negative approach towards fracking will change under the new Scholz government that came into office at the end of 2021.

Required security and guarantees

Are participants required to provide security or any guarantees to be issued with a licence to explore for or to store gas?

Mining authorities may require security as part of an operational plan, thereby ensuring that legitimate public interests are protected. This also applies to operational plans for underground gas storage facilities. The type of security and the security amount is at the discretion of the authority. Given the potential decommissioning of exploration or storage facilities during the course of carbon reduction measures, such guarantees may get invoked in the future.