As Shell-ExxonMobil JV awaits divestment of offshore assets, Dutch govt facing lawsuit over gas field closure

Nederlandse Aardolie Maatschappij (NAM), a 50/50 joint venture (JV) between the UK-based Shell and the U.S.-headquartered ExxonMobil, is expecting to close its exploration and gas production chapter in the North Sea after more than 60 years next year. However, ExxonMobil’s subsidiary, ExxonMobil Petroleum & Chemical, has underscored that the inability to settle the dispute regarding the end of gas extraction activities at an earthquake-stricken oil field in the Netherlands prompted it to take the Dutch government to court.

Thanks to a deal with NAM, Canada’s Tenaz Energy is expected to acquire the Dutch player’s offshore exploration and production business, NAM Offshore (NOBV), including associated offshore gas fields, platforms, and pipelines, alongside the gas treatment plant in Den Helder in the Netherlands, bar gas extraction near and on Ameland, for a base consideration of €165 million (around $179.7 million), before closing adjustments and contingent payments.

These offshore fields produced 1.1 billion m3 of gas in 2023, enough to supply almost 1 million Dutch households for a year. With an effective date of January 1, 2024, the acquisition is expected to close in mid-2025, following statutory merger clearances and operational transition activities. The sale of its offshore business will enable NAM to fulfill the restructuring announced in October 2021.

On August 5, the Netherlands Authority for Consumers and Markets (ACM) completed its review of the transaction and cleared it to proceed as planned. As a result, Tenaz entered into a new lending relationship with National Bank of Canada (NBC) to replace and upsize its existing revolving credit facility with a $20 million revolving facility and an additional $90 million of debt capacity under a delayed draw term loan, which can be drawn to fund closing of the acquisition of NOBV.

Once the divestment is complete, NAM will remain an energy player in the Netherlands with production from the small gas fields on land, under the Wadden Sea and Ameland, which produced more than 2 billion m3 of gas last year. The firm also operates gas storage facilities in Norg and Grijpskerk and produces oil in Rotterdam.

The company hopes to start producing oil in Schoonebeek again in 2025 and is cleaning up decommissioned gas production locations on land. The total dismantling program involves approximately 800 production wells, 350 locations, and 1,750 kilometers of pipeline. The expectation is that the cleanup will take more than ten years.

Meanwhile, ExxonMobil’s subsidiary has taken steps to sue the Netherlands by filing a request for arbitration on September 30 under the Energy Charter Treaty (ECT) against the Dutch state with the International Centre for Settlement of Investment Disputes (ICBI), accusing the country of reneging on its contractual obligations related to the phasedown of gas extraction activities at the Groningen oil field, which was previously agreed to be done by 2030.

Within the 2018 heads of agreement and the 2019 interim agreement, Shell and ExxonMobil made arrangements with the government concerning the new design of the Dutch ‘Gasgebouw’ and the wind-down of gas production from the Groningen field. Since then, the trio has spoken many times about these arrangements, but no agreements have been made. As a result, the two companies asked an independent arbitrators panel to render a judgment in February 2024. 

The JV partners hoped their move would enable them to reach a final, all-encompassing settlement with the Dutch government about the wind-down of natural gas production in Groningen. However, the arbitration was not expected to impact day-to-day damage handling and strengthening activities. Assurance was also provided that NAM would continue to pay for all earthquake-related damages within its liability, remaining responsible for safely closing and clearing away the Groningen field.

“It draws a line under an era of gas production in the province. During the arbitration, we will remain committed to reaching such a settlement, which can help to create more clarity around energy supply security for the Netherlands as a whole. The arbitration does not preclude a final and all-encompassing settlement, given that the arbitration can contribute to the necessary clarity about the implementation of the agreements made in 2018 and 2019,” underlined Shell.

Even though the original negotiations came to a standstill, Shell emphasized a few months ago that the goal remained to reach a final and comprehensive agreement with the government after the 2018 heads of agreement and 2019 interim one contained arrangements on the conditions under which the Groningen field would be closed. This concerned the actual closure date of the Groningen field as soon as security of supply on the low-calorific gas market would allow, as well as the income, expenditure, and the division of revenues between NAM and the Dutch government.

Shell and ExxonMobil were determined to get a binding judgment on what was agreed and the underlying principles, which could then be used to determine whether any of the parties involved would be entitled to compensation. The UK-headquartered energy giant, which previously indicated income generated in Groningen would be reinvested in the Dutch energy transition, including in the North of the Netherlands, reaffirmed the same in February 2024.

The UK player claims it took final investment decisions worth €6.5 billion in the Dutch energy transition since 2020 and plans to be busy with the construction of projects in the coming years as part of a long-standing tradition of reinvesting the income generated in Groningen in the Dutch economy. While Shell’s income from the Groningen field over the 1980-2020 period amounted to €23 billion, the firm invested €26 billion in the Netherlands.

NAM was jointly founded by Shell and Esso, now ExxonMobil, in 1947 for the exploration and extraction of petroleum in the Netherlands. Following the discovery of the Groningen gas field in 1959, the extraction of natural gas was added to the firm’s repertoire. While the Dutch state concluded an outline agreement on ending gas extraction in Groningen and dealing with the quake-related damage in 2018, ExxonMobil claimed it reneged on the contractual obligations shortly after signing the deal.

“The Dutch state did not hold any meaningful settlement talks and the consultations have since been terminated by the previous government. It is our opinion that the previous government had no intention of reaching an amicable settlement. On several occasions, it unilaterally took measures that arbitrarily and disproportionately disadvantaged ExxonMobil as an investor. These actions have damaged our confidence in the Dutch investment climate,” highlighted the U.S. oil major.

After multiple earthquakes shook the area, it was said that these seismic activities were related to gas extraction at the Groningen field, thus, the Dutch government decided to cap the natural gas production from the field. Since the imposition of the cap on Groningen gas output in 2014, the production from the field nosedived by 73% from 42 bcm in 2014 to 11 bcm in 2019 and the field’s share in total Dutch production dropped from 62% in 2014 to 38% in 2019.

The parliamentary inquiry committee into natural gas extraction in Groningen published its final report in February 2023. Marjan van Loon, President and CEO of Shell Netherlands, stated in response to the inquiry that Shell appreciated the work done by the parliamentary inquiry committee.

The CEO of the Dutch branch added at the time: “The people of Groningen bore a large part of the burden of gas extraction and only saw a small part of the benefits. Groningen has been shortchanged: the Gasgebouw parties, including Shell, did not listen well enough to the people of Groningen when they expressed their concerns about the damage to their homes and the safety risks of gas extraction.

“For decades, too little has been invested in the liveability and economy of the North. As a company, we have important lessons to learn here. Looking to the future, we believe that things can and must be better. We are in talks with the government to find a way to give substance to this.”

In January 2024, NAM received instruction from the Ministry of Economic Affairs and Climate (EZK) to stop production from the field. The State Secretary for Mining decided to end production from the Groningen gas field in October 2023, however, it was not yet a definitive end, as production was restarted shortly before being shut down again. NAM interpreted this to mean that production from the field would be restored when circumstances demand such a move.

Given its colorful history, the Groningen field was expected to be closed for good in April 2024. The parliamentary inquiry committee concluded that the interests of Groningen were not sufficiently taken into account in the extraction of natural gas. The committee’s 11 recommendations were adopted by the cabinet and elaborated into 50 measures.

While residents receive compensation for the damage caused by gas extraction through various schemes and homes are reinforced for future earthquakes, these measures should make the claims handling and reinforcement operation easier.

It is yet unclear what ExxonMobil’s invocation of the ECT will accomplish, however, it does have the potential to end with a multibillion-euro compensation claim, as these investor-state disputes usually revolve around compensation for lost profits. Many believe the decision was made to up the pressure on the new Dutch government, spearheaded by a far-right-leaning coalition predominately run by Gert Wilders’ Freedom Party.

“We ask the new government to enter into dialogue in order to find a solution that is acceptable to both parties. Such an arrangement would be good for the Netherlands and all those involved, including the people of Groningen. ExxonMobil hopes that an amicable settlement can be reached between the parties and looks forward to constructive agreements with the Dutch state,” underscored ExxonMobil.

Twelve countries, including the UK, Germany, France, the Netherlands, and Ireland, have opted to pull out and quit the treaty in the aftermath of a corporate tribunal ordering the Italian government to pay more than £210 million in 2022 to Britain’s Rockhopper as compensation for an offshore oil drilling ban. Some have criticized ExxonMobil’s move to invoke ECT while others justify it as a sound business decision given the loss in profit the firm will incur due to the closure.

Bart-Jaap Verbeek, Senior Researcher at SOMO – The Centre for Research on Multinational Corporations, commented: “For sixty years, ExxonMobil has profited from gas extraction in the Netherlands, resulting in earthquakes and damages to homes. This has disrupted the lives of many Groningers, but the companies that caused this damage are dodging damage repairs. That ExxonMobil is now filing a claim for losses shows a total lack of moral sense.”

While the European Union (EU) also took steps to sever its Energy Charter Treaty ties, the EU’s escape route from the treaty needed mechanisms to override and render the sunset clause ineffective before crossing the threshold to ensure the ECT’s 20-year protection of existing energy investments would not hinder its climate action.

“As governments take stricter measures to meet climate and environmental targets, oil and gas companies are only trying to save their own skin. With ISDS, these companies have a powerful tool to block or weaken necessary climate policies, or to pass on the costs to society as a whole. That makes ISDS a roadblock to a just transition and it should be abolished as soon as possible,” highlighted Verbeek.

Belgium shed more light on the solution to sunset clause woes by explaining that 26 member states agreed at the General Affairs Council on June 25 that the European Union would sign an ECT inter se declaration, which complements an inter se agreement, giving effect to the Komstroy judgment of the European Court of Justice regarding the non-applicability of ECT arbitration provisions intra-EU.

While these member states and the EU inked the declaration the following day, the decision to leave the EU will not take effect until next year.