N.V. Nederlandse Gasunie

views updated

N.V. Nederlandse Gasunie

Laan Corpus den Hoorn 102
P.O. Box 19
9700 MA Groningen
The Netherlands
(50) 219111
Fax: (50) 267248

Private Company
Incorporated: 1963
Employees: 1,984
Sales: DÍ115.4 billion (US$9.02 billion)

N.V. Nederlandse Gasunie (referred to hereafter as Gasunie) was formed to purchase, transmit, and market natural gas. The company fulfills its brief of ensuring a continuous supply of gas under all circumstances and marketing it on a commercial basis by operating a transmission network of 10,685 kilometers, 1,098 supply stations, 17 export stations, 8 compressor stations, and 7 blending stations, worth, together with other capital investment, Df l4.5 billion in 1991. Gasunie serves 138 gas boards, 30 power stations, 370 large industries, and 5 other countries. It submits an annual sales and marketing plan, projecting 25 years, for approval by the minister of economic affairs. Its wholly owned subsidiary Gasunie Engineering B.V. sells its technical expertise all over the world, and its research center, Gasunie Research, has made widely recognized contributions to the study of natural gas.

The history of Gasunie began with the introduction of natural gas as a fossil fuel in the first half of the 20th century. As early as 1923 it was already evident that Dutch soil contained bituminous minerals and the first gas in Holland flowed on February 21, 1924. The most important Netherlands find occurred during World War II, near Coevorden, and in 1947 the Bataafsche Petroleum Maatschappij—BPM, a subsidiary of Shell Nederland BV (Shell) and the Standard Oil Company of New Jersey (ESSO)—jointly founded the Nederlandse Aardo-lie Maatschappij (Dutch Crude Oil Company; NAM) to explore more extensively. The Napoleonic mining law of 1810, modified in the 1970s for North Sea operations, ensured that concessions awarded by the crown were subject to many conditions. In 1956 NAM had to pay 10% of its profits to the state as royalties and sell its gas at a reasonable price. In 1957 the state handled the sale and transmission of gas by means of the State Gas Company (SGB) but operated only in the eastern provinces, while other regions had their own plants for coke gas, such as State Mines (SM) in Limburg. SGB purchased gas from NAM at an absurdly low price of 2 to 4 Guilder cents per cubic meter but had committed itself to buying a fixed percentage of gas produced, irrespective of demand, for a period of 20 years. This contract could be ruinous for SGB if production were to increase dramatically. Production did in fact increase, to such an extent that NAM could have bankrupted the Netherlands.

The story of the Slochteren gas field, from the first discovery in 1959 to the first concession in 1963, with its initial silence and secrecy, is well documented. When Belgian senator Victor Leeman broke the news of the find unofficially at Strasbourg in 1960, NAM and the current minister for economic affairs, Jan Willem de Pous, had to open negotiations for exploitation of the field earlier than either had planned. Ironically, initial reports from NAM to New York had been filed away routinely, and it was only when Leeman’s revelations appeared in the New York Times that the managers became aware of the enormous size of the Groningen find. The two representatives sent to Holland, D. Stewart and M. Or-lean, were, together with two Dutch colleagues, C.P.M. van der Post and J.P. van den Berg, known collectively as the “Esso four” and were responsible for Gasunie’s success, indeed its very existence. They saw the enormous commercial and social potential of natural gas, and worked day and night in the basement of the Esso building in The Hague to produce a revolutionary report for its sale and application. The plan aimed at meeting all the domestic and space heating needs of domestic consumers, industrial users, and exports. They worked out the necessary investment, covering the conversion of appliances designed for gas of a different calorific value, the distribution network, and everything else needed to achieve total market penetration of gas as an alternative to domestic fuel oil and coal.

After initial skepticism and the help of an accurate model provided by the town of Hilversum, the natural gas plan was finally accepted by Shell in 1961 and submitted by NAM to Minister de Pous. Since SM was a commercial concern handling its own finances, de Pous decided to use SM to negotiate the state’s share. As it was coal that gas would replace, SM seemed better placed than SGB to effect the transition without too great a loss. The oil companies, for their part, wanted to avoid setting a precedent of state intervention which the sheiks of oil-producing countries, recently strengthened by the formation of OPEC, could seize upon to justify a greater share in the oil concessions in their own countries. Shell’s legal division played down the greater state participation demanded by de Pous by suggesting that the concession be granted to NAM, which would then bring in SM independently as a partner. Shell and Esso would have a 30% controlling interest each with SM at 40%. In conjunction with 10% royalties, this would bring de Pous 50%, which he accepted. The plan was to form a limited liability company which would buy and distribute the gas, taking over the old SGB and the pipelines of SM’s distribution company. Discussion stalled as de Pous insisted on 50% rather than 40%, since the state had formerly had total control over gas sales, and NAM in turn was adamant. A great national debate broke out. A. Vondeling of the Labour party even pressed for nationalization. His party chief, Joop den Uyl, was satisfied with the 10% of direct state participation that de Pous finally agreed on with Shell director Schepers. Shell and Esso had 25% each while SM had its 40%.

The ensuing Gas Bill of de Pous was a lucid account of what to do with gas and how to do it. There was to be vigorous exploitation as the envisaged lifetime of the entire field was set at 30 years. A commercial sales policy to provide the nation with the highest yield was to be implemented and a balanced approach was to be taken as regards competing energy supplies, with the expectation that nuclear energy would cater to most needs by the year 2000. Ministerial approval for long-term strategy was to be submitted annually, as well as approval for rates and conditions of delivery. Two years of enormous preparatory effort by managers and specialists from the three partners, Shell, Esso, and SM, was crowned with success when, on April 6, 1963, N.V. Nederlandse Gasunie was incorporated. Its share capital was purposefully low and its profits, which mainly pay dividends, were also meant to be low in order that the bulk of return on capital might go to the state and to NAM. Uniquely, the producer from whom it buys the gas—the state and NAM—is also the shareholder to whom it pays dividends. From the beginning no single personality imposed his vision on the company and the first director, P.A. Zoetmulder, had to work hard to create a team from staff who brought with them their own working methods. The company has continued to be run as a team, supervised by three managers—technical, commercial, and financial—themselves accountable to a general managing director and a board of supervisors. Gasunie has built up a formidable pool of expertise and more than a fifth of its employees have been with the company for more than 21 years.

Upon its establishment, Gasunie employed 97 people. The company’s first order of business was setting a price for gas, and the Esso four had the novel idea that the market value of gas to the large consumer should be taken from the nearest alternative, fuel oil, while taking account of export revenue and its advantages over oil—for example, the lack of a need for storage—without undercutting oil altogether. For domestic consumers too, household fuel provided a comparable basis for setting a price. Finally, the commission of Regional Gas Services (SROG), formed at the insistence of the government after long bargaining with Gasunie, set a sliding rate that benefited those who used large quantities of gas for space heating. This price stayed the same for ten years, despite fluctuations in the price of oil.

In 1963 Gasunie contacted Bechtel Group of San Francisco, which possessed the building expertise lacking in Holland. As a result the most ambitious construction project ever seen in Holland was established, lasting from 1963 to 1968, with a second phase to 1972. Thousands of kilometers of pipeline were laid all over the country. As even the pipes had to be imported, technical director A.H. Kloosterman overcame foreign suppliers’ attempts to fix prices and negotiated his way among the contractors. No expense was spared in winning over recalcitrant landowners and stubborn local authorities, but these were few in number due to good public relations, generous compensation, and generally high standards of land restoration. The 1966 crossing of the stormy Schelde River to Belgium was a feat in itself, with constructors working partly under water to avoid disturbing the ship traffic to Antwerp. This extensive transmission network was still increasing in 1991 and is safeguarded by regular helicopter flights. Simultaneously, a five-year national gas appliance conversion program was launched, aiming at one million conversions a year. Again, Gasunie and SROG cooperated, enlisting a special company, Gascon N.V., which in turn enlisted U.S. support. Shriver Gas Conversions of Virginia sent 24 technicians to pave the way. Natural gas had to be made available as soon as household conversions were complete, to ensure an uninterrupted supply. Gasunie worked with great dedication, often at night, to lay pipes and install equipment, bearing the main cost of the conversion by paying the municipality Dfl50 for each conversion. On December 7, 1968 there was a ministerial celebration when, after four and a half years, conversion was formally complete and more than 90% of the Netherlands was switched on to natural gas, the highest percentage in the world.

Two more important projects were completed in 1968. With the aid of further U.S. expertise, the world’s largest compressor station was started at Ommen, built to the highest-known standards of safety and automation, while Gasunie moved to prestigious new headquarters in Groningen. During the 1960s the hard work and heavy investment program followed the pattern of economic growth in postwar Holland as a whole, with low inflation, low unemployment, and a high level of exports contributing to this growth. Unlike some sectors of the economy, Gasunie was not, however, a victim of its own success nor of the higher demand and wage increases that followed. The success of the export contracts with Belgium, Germany, and France greatly increased in the 1970s following upward revision of proven gas reserves. This was a factor in the establishment of the hard guilder currency that was to prove so punishing to some smaller export companies.

During this time, SM, now renamed Dutch State Mines (DSM), had to close the mines but saw a chance to turn to chemicals and retrain thousands of workers. Such was the effectiveness of Gasunie’s Df13.4 billion investment that the share of gas in Dutch energy needs stood at 14% more than the initial estimate of 30%, and would climb to 54% in 1976. Space heating was a spectacular success and annual per capita consumption increased from 300 to 3,300 cubic meters in 9 years. The Dutch standard of living improved, directly because of heated homes and indirectly through social security payments such as unemployment benefits, funded by state revenue from gas. Confidence was at its peak at the beginning of the 1970s and supplies seemed endless. This mood soon changed, however, when NAM realized that production capacity could not keep pace with growing demand, and it seemed that too much gas was being squandered at too low a price. Confirming this caution, the Rome Report published in 1972 changed official thinking about natural resources. As nuclear energy could no longer be expected to fulfill all energy needs by the year 2000, owing to its costliness and public opposition, Gasunie had to change its long-term policy completely. It was time for vigorous conservation rather than exploitation. The Groningen gas field would therefore be considered a strategic reserve, not to be tapped, except to supplement production from smaller fields, which were being developed and included those on the recently partitioned North Sea. This policy was maintained, and in 1987 Groningen gas accounted for only 55% of total sales.

Despite a bomb attack in 1972 by Black September terrorists on the compressor stations of Ommen and Ravenstein, Gasunie continued to ensure the maximum long-term security of Holland’s energy supply and to invest unstintingly in equipment that guaranteed uninterrupted supply even on the coldest days. In 1974 the minister for economic affairs, Ruud Lubbers, renegotiated the state’s share of revenue from domestic consumption of Groningen gas from 85% above a certain agreed price level, an agreement reached in the early 1970s, to 95%. He reopened foreign contracts made at a time when gas was a novelty and had lower market value, because it took too long for increased value to be reflected in increased price. There was a freeze on new contracts and a law against selling gas to wasteful power stations. More importantly, a law on minimum prices was passed and used in the Energy Bill of 1974 to set a price that would encourage saving and investment in insulation. Meanwhile Gasunie had already begun buying gas from abroad at market prices. In 1973 domestic fuel oil was double the price of gas but the minister, Gasunie, and VEGIN—the association of gas distributors—agreed to phase in the price increases over a number of years. In the 1970s, for the first time, Gasunie was in a position to sell its engineering expertise which had been built up in the 1960s. Success in the Netherlands, mainly on offshore projects, led to demands from abroad. These were finally established with the creation of Gasunie Engineering in 1975, established as a limited company on May 4, 1983 and owned by Gasunie. It has worked all over the world since, to the advantage of many other Dutch companies. Gasunie has also invested heavily in research into the transmission, application, and quality of gas. Since 1978 Gasunie Research has been based at the Bernoulli laboratory at Westerbork. It works in association with VEGIN and with several universities to improve appliances and has gained recognition for its work with condensation problems.

During the 1970s negotiations for the import of gas in highly explosive liquid form from Algeria came to nothing, and Norway emerged as the major new supplier. The higher price paid for Norwegian gas was traded off against greater security of delivery. The challenge of supplying the same quality gas as Groningen has been met successfully. The first mixing station was set up at Ommen, and a more advanced station opened at Wietringermeer in 1984. Other plants, including one to add nitrogen extracted from the air, were added over the years following the discovery of new types of gas, some eight varieties by 1991. This added to the complexity of the Central Command Post (CCP) in Groningen, a constantly updated computer system to monitor and direct all operations including financial ones, to calculate daily supplies, and to regulate pressure throughout the network.

Following the start of the Gulf War in 1979, the oil price doubled in two years. Minister Van Aardenne again hoped to renegotiate foreign contracts to improve their price responsiveness, even though an oil price index had been built into contracts in the 1970s. To do this he employed an ex-diplomat, D.P. Spierenburg. Several factors were employed as arguments, namely Holland’s strategic position on the continent, its network, Gasunie’s history of helping troubled clients, and Groningen’s stabilization of supply and demand fluctuations. Acceptable agreements were reached in 1981.

Setting a rate for the large greenhouse industry, which had been revolutionized by gas in the 1970s, provoked a conflict with the European Commission. Despite Gasunie’s agreement with VEGIN and the agricultural board to implement annual increases from 1981, the Dutch government was accused of protectionism. The maximum price, which gardeners needed to estimate the current price of their own products and which had been agreed to the end of 1985, was declared null and void. Just when the gardeners were considering switching to coal, the oil prices fell in two successive years. Gas fell with it, from 45 Guilder cents per cubic meter to 15.7 Guilder cents per cubic meter in 1986. In 1991 the problem resurfaced. Gasunie is waiting with some concern for the European Commission’s verdict on a new contract signed by the same parties in 1989.

Restrictive policies and enthusiastic economizing by domestic consumers resulted in a decline in demand in the early 1980s. Gasunie aimed to preserve its market share in Europe and ease sales restrictions by extending existing contracts at their current levels. Customer flexibility. however, was restricted further. The option of buying between 70% and 170% of contracted volume to meet peaks and troughs was reduced to 90-110%. Gasunie further indexed the price of gas to domestic heating oil rather than fuel oil. New contracts were opened with power stations, as the 1975 ban became obsolete, because new gas turbine stations were more efficient than the coal-fired ones and 20% cheaper to run. The massive price drop after 1985 curtailed some price wars but also signaled a drop in income for the state. In 1987, Gasunie was on the side of VEGIN when applying to the minister for a drop of 18 rather than 12 cents per cubic meter to keep in line with the price of oil. The minister refused, promising instead not to apply an environmental levy, which has since come into force and was condemned by managing director A.H.P. Grotens. The Hague has always used gas profits to finance the budget deficit and government pressure on Gasunie’s policies is part of the company’s structure. To balance the books further, the government privatized DSM in 1989 and incorporated its holding stake in Gasunie as Energiebeheer Nederland BV (Netherlands Energy Management—EBN).

After average sales growth of 1.3% between 1980 and 1989, compared to 9% in the 1970s, Gasunie has entered the 1990s by securing contracts of 200 billion cubic meters into the next century, thereby contributing 5% of state revenue after the year 2000. Reserves, including new finds, have recently increased to 2,500 billion cubic meters, equal to 1975 levels, leaving Gasunie well positioned for the dramatic increase in demand of 23% over 20 years, forecast for both western and eastern Europe and due mainly to its ecological advantage over other fuels. This confidence is reflected in a number of investments, such as the new head office, due for completion in 1993, costing Dfl70 million, the combined heat and power installations (CHPs) on which it cooperates with VEGIN, and the Northern offshore gas transmission pipeline project (NOGAT) coming onshore near Den Helder, which will deliver North Sea gas by the end of 1991. Most important for its own task of matching supply and demand is dealing again with the expected decline in production speed once the pressure in the Groningen field becomes too low. Just as transport and blending were the dominant issues in previous decades, now volume flexibility, the fine tuning of supply and demand, needs attention. A detailed study undertaken with NAM shows that underground storage facilities, including salt caverns, are the best solution, and the depleted Norg field southwest of Groningen is planned to take 3 billion cubic meters.

Gasunie is affiliated with the western European gas lobby, Eurogas, to state its case with the new supranational authorities. If the position of gas is well assured far into the next century, there is growing uncertainty about who can do what in this market. Gas provides 16% of European energy needs as opposed to 25% in the United States. Although Europe has more reserves than the United States, its gas is three times as expensive. Most of the move to end state monopolies, initiated by European commissioner Sir Leon Brittan, is aimed at those who own both transmission and distribution facilities, such as British Gas and Gaz de France, and aims to allow producers to sell directly to big consumers. Gasunie’s only real monopoly is Groningen gas, but in practice, as the producers of most gas fields, NAM and EBN, also own Gasunie, it has effectively monopolized the sale of gas in Holland. Gasunie’s conflict has been with the distributors represented by VEGIN which claims that price transparency has always been lacking at production level and represents an opaque spot in the company structure, with producers selling to themselves. Gasunie in turn advocates secrecy at the export level, where years of hard bargaining are at stake.

The tide has turned against Gasunie. On June 5, 1991 the European Commission approved the so-called principle of common carriage or third-party access, which will oblige Gasunie to transport other producers’ gas through its network at a fixed tariff. A.H.P. Grotens has always been against this new competition and had indicated the need for security of supply and proper investment. Dfl350 billion is needed by 1995 to prevent European supply problems. Both supply and investment are endangered by too much competition, as illustrated by the fragmentation experienced in the United States. And pricing methods may change once again. Foreign competitors, aiming at the electricity generation market may fix prices with coal rather than oil in mind. Gas might even start competing with gas and cease altogether to shadow oil. Even when the Groningen field is depleted next century, Gasunie will probably play a leading role in supplying its European customers with gas purchased from abroad.