The Oil andGas Industryin theNetherlands

2007

A Special Report From Oil and Gas Investor andGlobal Business Reports

It is typical of the Dutch to remain so quiet and modest that it isoften forgotten that the Netherlands is a major energy-produc-ing country. Its diminutive size and no-nonsense approach rarely

make waves, but Holland is Europe’s second-largest producer ofnatural gas and the ninth-largest in the world with estimated re-serves of between 50- and 60 trillion cubic feet. The country con-tributes 30% of the European Union’s total gas production.

Despite the term “Dutch disease” being coined to illustrate thepotential damage a bonanza of natural resources can have on ahealthy economy, reflecting the situation in Holland in the1960s, today Holland is, as it almost always was, a healthy andopen economy, outperforming its neighbors and leading the wayin terms of economic reform.

The bonanza began with the discovery of gas onshore in 1959at Groningen Field, the biggest in the world at the time, esti-mated to contain 3 trillion cubic meters of gas. NAM (the Dutchpetroleum company) was, as its name suggests, actually drilling foroil and disappointed to find gas. Nevertheless, the advent of thepopularity of gas has consoled it and made for many very prof-itable years of exploitation of the massive field—a partnership ofthe Dutch government, Royal Dutch Shell and ExxonMobil.

Gas has become the most important mineral fuel produced inthe Netherlands. Oil reserves are very small, estimated at between100- and 200 million barrels. Both onshore and offshore gas hasbeen easily accessible and is found at low depths, encouraging 20years of extensive activity which began to slow in the 1990s. Netfinding costs are considerably lower than international averages:US$0.50 per barrel of oil equivalent (BOE) on the Dutch Shelf.

And, low lifting costs hover at around US$6 per BOE. A densegrid of pipelines and platforms has been built and the Small FieldPolicy has ensured that, despite the abundance of gas in Gronin-gen Field, marginal fields were developed, while Groningen hasbeen used to effectively guarantee a consistent supply.

Today exploration activity has slowed again, but major poten-tial remains. More than 70 discoveries, adding 1.6 billion BOE toHolland’s reserves, have been made during the past decade. Theavailability of an extensive infrastructure allows for short leadtimes and considerable cost savings, while generous off-take termsmean investments can be quickly recouped.

Nevertheless, the infrastructure is aging and within 20 yearsthe majority of it must be retired. Thus, the Dutch are keen to en-sure that the exploitation of marginal fields is undertaken beforethis window of opportunity closes. The majors, which formerlydominated the Dutch scene, must make way for nimbler indepen-dents. This report will look at the changing scene on- and off-shore the Netherlands and expose opportunities that remain.

The Dutch service sector is flourishing, meanwhile, with about400 companies involved in supplying goods and services to thehydrocarbons industry, between them employing just over 20,000

people. Many of these companies are world-class and 70% of thebusiness of Dutch oil and gas suppliers is generated through ex-ports, with the U.K. and Norway as main markets but also a con-siderable presence in more exotic locations, such as Kazakhstan.

2006 has been a bumper year for Dutch service companies andprospects for 2007 are even better. A high oil price and compa-nies looking further and further afield to exploit reserves requireevermore intricate solutions and Dutch service companies areamong the world’s most innovative. A recent wave of mergers,joint ventures and partnerships has broadened their scope. Thisreport will analyze their potential.

The business environment and legal framework found in Hol-land are excellent, to the extent that the Netherlands often playsan important role in the holding structure of international energygroups due to an attractive holding regime and extensive treatynetwork. Its internal energy market has been completely liberal-ized since 2003 in accordance with EU regulations.

E&P both on- and offshore has been carefully guided by thestate to ensure the best possible use of the country’s reserves andadequate incentives are provided to encourage sustainable and re-liable exploitation by companies involved. The government iscurrently keen to attract smaller, more flexible players to ensurethat remaining small pockets of gas are not overlooked while in-frastructure is still in place.

As yet, there is no equivalent to the fallow-field initiative as isfound in the U.K. However, this is expected to change as theDutch government encourages the majors to make room forsmaller fish by vacating fields in their portfolios that they are notexploiting. This study examines the legal environment and as-sesses remaining opportunities for oil and gas in Holland.

With an ever-growing demand in Europe for natural gas, Hol-land is determined to become an energy hub for northwestern Eu-rope, using not only its significant remaining gas reserves, but thecountry’s unparalleled refining capacity, its the world-class Rot-terdam port (where LNG terminals are under construction) andits geographical position within the EU. This position offers theNetherlands vast potential to profit from harmonization of EU-wide gas infrastructure under way, and thus benefit fromeconomies of scale currently not available in the small country.

But perhaps its single-most important asset is the basic Dutchgood sense and the experience that the Dutch have gathered dur-ing the past 50 years in the energy industry. While reserves on-and offshore will decline, with applied Dutch resourcefulness, theindustry may not. �

THE OIL AND GAS INDUSTRY IN THE NETHERLANDS: AN INTRODUCTION

The Dutch WayThe scene on- and offshore the Netherlands is changing, exposing opportunities that remain in the E&Psector.

This special report was prepared byLondon-based Global Business Reports. Theauthors are Nicholas de Weydenthal and BilgeCuhadar. More information on the firm isavailable at GBReports.com. Cover photoscourtesy Keppel Verolme

February 2007 ▪ oilandgasinvestor.com N-3

Useful Contacts• The Ministry of Economic Affairs,Directorate for Energy and TelecomsPhone: +31 703798911www.minez.nl

•The Netherlands Oil and Gas Exploration and ProducersAssociation (NOGEPA)Phone: +31 703478871www.nogepa.nl

• Association of Dutch Suppliers in the Oil and Gas IndustryPhone: +31 793411981www.iro.nl

Despite being the No. 2 gas producer in Europe, theNetherlands does not display the same opulence equatedwith small nations of the Persian Gulf. The Dutch are re-

puted for their frugality, and the management of their oil andgas reserves exemplifies that.

Gas production in the Netherlands began with a bang—in1959, oil prospectors for NAM (the Dutch petroleum company)hit the onshore Groningen gas field, which was then believed tobe the largest in the world. This field alone contains two-thirdsof the Netherlands’ proven reserves. While being a bit put outto discover gas, rather than oil, in time, NAM and its partners,Royal Dutch Shell and ExxonMobil, have learned to appreciatetheir discovery just as Europe’s energy consumers have learnedto appreciate the clean and efficient fuel that is gas.

The “Small Fields Policy” was introduced by the Dutch gov-ernment in 1973 to ensure that exploration activities were car-ried out both on- and offshore, despite the huge reserves thatwere discovered at Groningen, and also ensuring that the latterwas not too rapidly depleted. Groningen has acted as a “swing”producer, balancing supply and demand and thus ensuring aconsistent supply of gas and its homogenous quality. The SmallFields Policy’s incentives included a guaranteed take-off for gasat a good price from Gasterra, the state-owned (again, withRoyal Dutch Shell and ExxonMobil) gas-trading and -distribu-tion company.

This sent the majors scouring the Dutch Continental Shelf(NLCS) for further discoveries and more than 200 small fieldsare currently operational. A huge grid of pipelines and platformswas installed and a sophisticated service sector sprang up alongthe Dutch coast. The Netherlands’ oil and gas boom was wellunder way and production attained annual levels at around 2.8trillion cubic feet (Tcf) through much of the 1970s and 1980s.

Today, though in a mature phase, Dutch fields continue toproduce around 2.6 Tcf of gas per year, about two-thirds ofwhich are produced onshore (mainly from Groningen). Thisrepresents a decline from a peak of 3.5 Tcf in 1976, but never-theless, careful management means NAM estimates these pro-duction rates can be maintained for another 25 years. However,much of this will depend on the current restructuring the sectoris experiencing.

For the past 40 years E&P both on- and offshore Holland hasbeen dominated by the majors, with NAM and its partners atthe forefront and BP Plc and Total SA also active. But as fieldsbecome depleted, their appetite for the Dutch ContinentalShelf is waning as they concentrate on more bountiful reserveselsewhere in the world. This should set the stage for smaller in-dependents to take over, and this is precisely what the Dutchgovernment would like to see happening. Yet this is not takingplace as fast as it would like.

New discoveries are becoming rarer and estimates of Hol-land’s gas reserves are now shrinking. Only seven offshore wellswere drilled in 2003, compared with an annual average of 13during 1998-2002. In the past, reserve reductions from produc-tion were offset by discoveries of new resources. This is nolonger the case. Gas production from marginal fields thereforelooks set to fall.

Nevertheless, Total’s Total E&P Nederland, the No. 2 pro-ducer after NAM, remains committed to the area if the right en-vironment can be established. Christian Guerrite, managing

director of the Total unit, is eager “to see some incentives toimprove the mining climate for very difficult and very marginalprojects via the oil and gas taxation environment to facilitatethe development of our projects.”

As only a part of Total’s global portfolio, operations in theNetherlands are often overlooked in favor of other areas of theglobe with more favorable environments. This complaint is aconstant refrain from many upstream players in the Nether-lands. Compared with other markets, and the U.K. in particular,the environment is just not friendly enough and this is hinder-ing the immediate development of marginal reserves, E&P exec-utives say.

This problem is offset to some extent by advantages. Mostnoticeable is pre-existing infrastructure. Drilling extended-reachwells from an existing platform can render otherwise uneco-nomic reserves viable, something in which Total has great expe-rience. Guerrite explains, “If you discover a gas field in theNetherlands with 35 billion cubic feet of reserves, you arehappy. But to be able to produce this gas efficiently and eco-nomically, it is very useful to have existing installations in theneighborhood.

“On a stand-alone basis, the economies would be too low tovalidate it, even at the high levels of gas prices that we are cur-rently experiencing.”

Rob Atsma, chairman of Energie Beheer Nederland (EBN),agrees, “Existing infrastructure can be used to develop smallerfields not viable to develop on a stand-alone basis and thus canprolong the lifetime of existing fields.”

EBN is an independent E&P company owned entirely by theDutch government and established to represent its interest inmining ventures. In order to lower the financial threshold thatexploration activities represent, particularly offshore, would-beprospectors partner with EBN, which covers up to 40% of E&Pcosts in return for the same share of eventual revenue. EBN alsobrings its knowledge and resources to the partnership. Such co-operation can greatly facilitate the entry of smaller-size playersto the Dutch market.

Yet the majors remain less inclined to squeeze out the lastdrop, with or without the help of EBN. BP, after more than 40years in the Netherlands, is in the process of divesting its assetsin the area. Many see this as a positive move as opposed to com-panies (and NAM, in particular) that sit on their assets waitingfor such a time that they may become viable.

This attitude frustrates those eager to take advantage of thewindow of opportunity that the current aging operating infras-tructure affords and it will be closed once this is largely retiredfrom service 10 to 20 years from now. The lack of a formal fal-low-field initiative equivalent to that in practice in the U.K.North Sea is also much-lamented, E&P players comment, par-ticularly among the mid-tier players in whose hands the futureof Dutch gas E&P activity depends.

John Gerstenlauer, managing director of Wintershall, says,“Why are people just sitting on their blocks and not doing anywork on them?”

There is a need for the likes of NAM and Total to let go ofmany of their offshore assets or the government to somehow en-courage them to do so. Wintershall is an aggressive player inDutch waters, noticing that discovery rates are significantlyhigher than the industry average, and is looking to increase its

THE OIL AND GAS INDUSTRY IN THE NETHERLANDS: EXPLORATION AND PRODUCTION

To the Last DropHolland has been dominated by the majors, but as fields become depleted, they’re moving on, settingthe stage for smaller independents to take over.

N-4 oilandgasinvestor.com ▪ February 2007

oil and gas production 50% within thisdecade. Thus, the company is constantlyinvesting in developing new discoveriesand extending the life or scope of existingfields.

During the past five years, Wintershallhas invested around EU$350 million inthis part of the North Sea. In 2002, it ac-quired Clyde Netherlands, thus doublingits reserves and production base in theNetherlands and becoming the third-largest gas producer in the country, oper-

ating 25 offshore platforms. In 2005, it took part in five completed

appraisal wells and five production wells.This year alone, Wintershall intends todrill another 12 on the Dutch Continen-tal Shelf.

Petro-Canada is also welcomed newblood to the shelf, taking over HanzeField in 2002 and restarting De RuyterField in 2006, adding 28 billion barrelsequivalent of reserves to the Dutch sec-tor. Looking for gas but finding oil was abig surprise for Petro-Canada. Develop-ment studies were stopped in 1999, whenoil prices were at a record low. At thatpoint, De Ruyter was viewed as sub-eco-nomic and remained inactive until Petro-Canada took the reins following itsacquisition of Veba.

Reidar Hustoft, Petro-Canada’s countrymanager, saw this as a marginal project,with an oil price at the time of US$20 toUS$30, but was still confident about itsdevelopment. With constant evaluation,mapping and 3-D surveys, the operator

has found more oil and gas accumulationsin the vicinity.

Placing a multilateral horizontal wellbetween the oil/water and gas/water con-tacts is key to the development of thisreservoir. Hustoft says Petro-Canada has astrategy to grow in concentric circles fromDe Ruyter Field, on the basis of thisknowledge. He forecasts a production life-time of approximately six to eight years.

With concentric growth, the DeRuyter platform would consequently turn

into a processing hub. Petro-Canadathought ahead and left space to tie in fu-ture risers, with five spare well slots in ad-dition to the three in use.

Nevertheless, these examples fail tobuck the trend and not enough new play-ers are prepared to join the fray. U.S.-based ATP Oil & Gas Corp. is typical ofmany as they wait expectantly for thegovernment to force the incumbent ma-jors to free reserves. Rob Happe, ATPgeneral manager, expects, “As soon ascommodity prices come down, the opera-tors will leave, opening the door forATP.”

Tax legislation is also to blame, espe-cially following the revocation of the“Depreciation at Will” law, which had al-lowed considerable tax breaks on invest-ments. Jan Treffers, president and generalmanager of Gaz de France ProductionNederland, one of the most dynamiccompanies active on the Dutch shelf,says, “There are still undiscovered oil andgas reserves and we are willing to work on

new acreage, but the mining climateneeds to be more attractive.”

Nevertheless certain facts remain thatexplain the presence on the Dutch Conti-nental Shelf of the likes of Treffers. Over-heads are relatively low, though graduallyincreasing as prospectors are forced fur-ther offshore, upstream companies cancount on an excellent infrastructure andworld-class service providers, the politicalregime is stable, and operations are closeto one of the world’s largest markets.

Opportunities abound in areas such asunderground gas storage and there is nodoubt that fallow fields will soon becomeavailable, and at a good price. There is alot, however, that the government coulddo to increase E&P activity, even thoughsuch measures are unlikely to be sufficientto buck the trend of depleting reserves.

The above-mentioned need for a fal-low-field policy is certainly an area to beimproved, legal red tape needs to be cutand applications processes for new plotsshortened. Also, many would like to seeenvironmental standards, particularly on-shore, relaxed.

At this transitional moment, much re-mains unclear. However, expect the un-certainty to be addressed in a typicallyno-nonsense Dutch manner and, despitethe fears of many, it is very unlikely thatthe thrifty Dutch will not eventually con-cede sufficient incentives to E&P compa-nies so that their valuable energyresources are effectively mined down tothe very last drop. �

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Big Lift’s Happy Buccaneer and Jumbo Fair Partners’ Seaway Polaris, Acergy, are receiving crane maintenance and upgrades by Huisman-Itric atWilton harbor, Schiedam, the Netherlands.

Living in a small country, much of which is made up of landreclaimed from the sea, the Dutch certainly know how tomake the best use of what they have. Dutch oil and gas ser-

vice companies have demonstrated such resourcefulness formany years, operating in small and marginal fields, encouragedby the Small Fields Policy adopted by the Dutch government.

The Netherlands boasts a complete array of world-class sup-pliers and services to the oil and gas industry, and the town ofDen Helder, having prevailed over the local competition Ij-muiden, now rivals both Aberdeen in Scotland and Stavangerin Norway as an “offshore capital” for the North Sea hydrocar-bons industry. Rotterdam’s port and naval construction facilitiesare unrivaled anywhere in Europe.

With decades of experience in engineering, solid finances, ahealthy no-nonsense approach to business, and an extensivetrack record for innovation, Dutch firms make excellent part-ners, whether refitting a tug in the dry docks of Rotterdam orsupplying a rig in the South China Sea.

One of the most significant advantages the Dutch deploy is a

skill for realizing low-cost solutions that suit both the marginalfields of the Dutch Continental Shelf and the thrifty instincts ofthe people. Balance Point Control (BPC) has developed itsBPD 300, which exemplifies such an approach. Combining thebest features of a hydraulic workover unit and a conventionalrig, the newly patented BPD 300 reduces mud costs, clean-upcosts and well downtime.

The data acquisition system of the BPD 300 will also reducethe number of people involved in high-risk areas of the equip-ment. Every part of the system is designed to be container-friendly, which means moving it will take about four to fivedays, whereas moving an ordinary rig can take up to 10 days.Bert Platje, BPC general manager, believes, “This system willhelp new entrants coming into marginal markets, such as theNorth Sea, where there are many opportunities, in terms of thestill recoverable reserves in place.”

In a similar vein, combining cost-effectiveness and safety,Pascal Ferier, general manager at KCI Oil and Gas Engineers(part of Wood Group), boasts the advantages offered by its de-

THE OIL AND GAS INDUSTRY IN THE NETHERLANDS: SERVICE AND SUPPLY

Dutch EngineeringThe Netherlands boasts a complete array of world-class suppliers and services to the oil and gas industry,and aims to further expand its position.

The BBL pipeline is being built between the Netherlands and the U.K. (Photo courtesy of Gasunie.)

N-6 oilandgasinvestor.com ▪ February 2007

sign for self-installing platforms. “Con-ventional platforms with jackets and top-sides cost millions to install and are justnot feasible for marginal-field develop-ments, such as in the North Sea,” he says.

“Self-installing solutions are muchmore convenient. For transportation, self-installing platforms need only three orfour tugboats and no heavy-lift vessels.The beauty comes after three to fiveyears: When you are finished at one loca-tion, you do a reverse installation andmove to another location.”

Keesjan Cordia, managing director ofWorkfox, which manages and operatesaccommodation and multi-support ves-sels, points out that most of the existingplatforms in the North Sea are more than30 years old and so far only 50% have un-dergone maintenance. Effective mainte-nance and optimizing rigs for maximumutilization have become significant issues.

Workfox has been awarded long-termcontracts with majors such as RoyalDutch Shell and Total SA for its innova-tive Seafox, a multi-purpose supply vesselthat also includes accommodation units.Workfox is now working on Seafox 5, afirst-in-the-world multi-purpose unit ableto provide accommodation and regularmaintenance, as well as light drilling,which will be the most efficient and cost-effective unit in the North Sea, Cordiasays. Workfox is currently looking outsideof the Netherlands for another smallcompany in the same line of business topartner with.

Cutting costs while still abiding bysome of the most stringent safety proce-dures worldwide that are applied in theNorth Sea and even stricter environmen-tal regulations when operating onshoreare characteristic of Dutch know-how.

PartnershipsThe level-headed Dutch attitude to-

wards business has opened the door tomany partnerships that have allowedsmaller service providers to club togetherand offer total solutions or simply benefitfrom synergies that can both reduce costsand improve performance.

Joep Athmer, director of offshore atVan Oord Offshore, says, “Partneringmeans to facilitate a proactive approachto problem solving as a project teamrather than adopting a reactive, adversar-ial approach commonly associated withthe more traditional forms of contract.”

Together with the EnvironmentAgency and Halcrow Group Ltd., VanOord has been a partner in procurement,design and construction. “Partnering hashelped create a win-win situationwhereby the contractor is allowed tomake a reasonable return and the clientbenefits from an enhanced solution.”

Van Oord is known the world over forbeing the world’s largest dredging con-tractor. Having completed ultra-presti-gious projects in Dubai, such as PalmJumeirah, and across the globe, and able

February 2007 ▪ Oil and Gas Investor N-7

to boast of winning the biggest contract awarded to a singlecontractor (EU$2.5 billion), Van Oord is also making noise off-shore, working on a project for ExxonMobil in Sakhalin whereit has been trenching and laying pipes in shallow waters.

Besides being the market leader in shallow-water pipe-laying,Van Oord wants to push its deepwater rock-dumping agenda aswell as establish a wider presence in the Gulf of Mexico.

Bob Rietveld and Jeroen Lusthof offered more of the samespirit of camaraderie when they pooled together more than 25years of experience in harsh environments to found Vlaardin-gen-based Sea of Solutions five years ago. Working on the nextgeneration of double-deck multi-purpose pipe-laying vessels,they have since joined forces with IMT Marine Consultantsfrom the UK and Dutch WorldWise Marine to create OffshoreShip Designers. They will now be able to provide the wholerange of vessels, from tugs and supply ships to maintenance anddrilling vessels.

According to Rietveld, demand is so high at the moment thathe is trying to find a new way to put vessels into the market on aregular basis without suffering from long lead times and rejectingnew orders. Flexibility is key and the merger could provide it.

Partner par excellence in the Netherlands must be PhilBurgess, chief executive officer of Talburg Oil and Gas Consul-tants. Recently, Talburg joined forces with Single Source Multi-ple Solutions (SSMS-Group) to create synergies and shareexpertise between the North Sea and the Middle East. Burgesshas pooled together a group of companies from the Netherlands,the U.K. and Italy to start epicONE. The group includes an en-gineering firm, a fabricator, a subsea constructor, a marine in-staller, and a project manager to bring low-cost solutions toclients.

“With this unique concept of independent companies, therisk is substantially lowered and overheads are significantly re-duced,” Burgess says. The members complement each other andhave already started doing conceptual studies for independentE&P companies as well as for BP Plc in the North Sea.

The business environment in the Netherlands is such that theDutch have bucked the trend of manufacturing processes mov-ing east by enticing Singapore-based Keppel Offshore and Ma-rine to the Netherlands via the 2002 acquisition of the historicVerolme shipyard, which spans more than 54 hectares in Rotter-dam and is said to be Europe’s largest. This is despite high laborcosts. The company now repairs and converts some of theworld’s largest semisubmersibles there.

In the summer of 2006, two of the world’s more novel floatingproduction platforms arrived in Rotterdam for modificationwork. First to arrive was the Sevan Stabilised Platform SSP Pi-ranema, which has been contracted to work for Petrobras underan 11-year charter, starting in late 2006. Keppel Verolme per-formed the outfitting work. The second to arrive was Petro-Canada’s Terra Nova FPSO.

The yard’s strategic location, facilities, experience, resourceavailability, project management and safety track record all werefactors in the contract award. Harold Linssen, managing directorat Keppel Verolme, claims that creative flexibility within thewhole Keppel group has been able to keep the “company aheadof its competitors.”

Foreign companies are made very welcome in the Nether-lands, whether they choose to operate via an agent, set up a jointventure or aim at an acquisition. Halliburton partnered in 1976with a major Dutch construction company to form Cebo Interna-tional, a provider of infrastructure in the form of minerals, ce-ment and bentonite for the drilling industry in the North Sea.

“Being half-American as a company has helped open doors,”says Paul Schouten, managing director, and, “brings opportuni-ties to move internationally.” Last month Greek company S&BIndustrial Minerals acquired 50% of the company from its Dutchowners while Halliburton has maintained its half-share.

To diversify geographically is on the agenda of many Dutchcompanies. Some 70% of Dutch service-company business isgenerated outside the Netherlands. Their engineering prowess,sensitivity to cost and business acumen make Dutch companies

partners of choice in any environment. Sander Posthumus, marketing manager of Badotherm, a top-

quality process instrumentation manufacturer, underlines thepotential. “We want to capitalize globally on the excellent con-tacts we have here in the Netherlands in regards to the oil andgas industry. Clients like Shell require a number of suppliers thatcan deliver globally with the same quality, same prices, andwant to work with someone they can really rely and build on.That is how we can help them.”

For the benefit of the North American market Badotherm iscurrently opening a joint venture in the U.S.

Opportunities galore2006 was a fabulous year for the oil and gas supply and service

industry worldwide, and the majority of those commentingreckon any supplier not busy now must be doing something seri-ously wrong. All expect 2007 to be another great year. As inter-national E&P companies continue to divest noncore operations,opportunities for experts in an array of services abound.

This trend has not yet caught up with non-major operators inthe North Sea, such as Wintershall and Gaz de France, whichprefer to keep the expertise in-house. Meanwhile, majors likeRoyal Dutch Shell may choose to subcontract, depending on theproject.

PanTerra Geoconsultants, based near Amsterdam, is lookingbeyond the North Sea at places like the Middle East, theCaspian or Siberia where it can offer a new layer of services andhigher-level work, which would give the company the ability todo fully integrated projects. Greg van de Bilt, managing director,says he plans to take on some of the operators’ work, since hetrusts that with PanTerra’s specialization and knowledge base ithas better techniques to improve well performance.

Such is current demand, spurred by high oil prices, that oneof the major concerns is shortages of equipment. Demand fortugs, for example, simply cannot be met. All the shipyards con-structing tugs are fully booked and there is a three- to 3.5-yearwaiting time.

Fairmount Marine, a Dutch specialist in ocean towage andthe transportation of heavy lifts across the globe, has few com-petitors on a worldwide scale. The company wisely invested in anew fleet before oil prices went up. Henk van den Berg, presi-dent of Fairmount, says, “We are completely booked out, but weare planning possible acquisitions of vessels for the future.” Fair-

Marcel P. Kramer, chairman and CEO, NV Nederlandse Gasunie

N-8 oilandgasinvestor.com ▪ February 2007

mount is strengthening its position at thetop of the heavy-lift transportation mar-ket through strategic partnerships withthe likes of Fukada Salvage, Semco andLouis Dreyfus Armateurs.

With such a broad and internationalscope, the gradual depletion of Dutch hy-drocarbon reserves need not sound thedeath toll for the Dutch oil and gas sec-tor. New and grand opportunities herald.One such is liquefied natural gas (LNG).The construction of three LNG terminals(two in Rotterdam, one in Emmshaven)is currently being discussed, with associ-ated storage facilities underground. Theaim is not merely to supply the regionalmarket, but to develop the Netherlands asan international hub for LNG, includingthe possibility of supplying the NorthAmerican market.

Local companies grasp this opportu-nity. Gutteling, a manufacturer of com-

posite hoses, has just invented and certi-fied the first ship-to-ship composite hosefor the transfer of LNG at the request ofAmerican client Exmar, which owns liq-uefied petroleum gas (LPG) and LNGships. Peter Gutteling, the managing di-rector, believes LNG is the future. If theplans currently being discussed material-ize, then LNG in Holland could certainlybecome a very sizeable business.

Even greater in scale are possibilitiesfor the Netherlands to become the hub ofa pan-European Union gas network thatis gradually emerging as EU members passmeasures to liberalize their energy mar-kets. A memo of understanding signed be-tween Gasunie, the company that ownsthe Dutch gas transmission network, andGazprom, the Russian giant, October 5,2006, hints at the Dutch ambition. Witha completely liberated energy sector since2003, excellent facilities, and years of ex-

pertise in gas marketing, the Dutch areGazprom’s logical partners.

Marcel Kramer, chairman of the execu-tive board and chief executive officer ofGasunie, says, “We have a tradition ofbeing at the crossroads of Northwest Eu-rope and we have a tradition of fulfillingour role towards other markets.” As theEuropean Union gradually harmonizes itsgas-distribution network, the opportuni-ties are huge.

Meanwhile the Dutch are busy prepar-ing to convert depleted gas fields into vastunderground gas-storage facilities in an-ticipation of the pivotal role they expectto play.

Biofuels are not being ignored eitheras the Dutch prepare for the future.Argos Oil, which started as a fuel whole-saler 22 years ago, has developed into amultilateral energy provider. Present inbusiness segments that include bunker-ing, logistics, storage, wholesale and re-tail, Argos is now looking at biofuelsand is the Netherland’s leading biofuelsproducer.

Its plans are pan-European as PeterGoedvolk, managing director at Argos,explains. “We want to be a versatile en-ergy supplier with ambitions of becominga mini-major one day present throughoutEurope.”

Coming from a land that has literallypushed back the sea, Dutch resourceful-ness and ambition can go a long way. �

“If the plans currently being discussed materialize,

then LNG in Holland could certainly become a very

sizeable business.

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The Dutch government has for years encouraged the produc-tion of natural gas from its North Sea continental shelf. Ithas been doing this through the Small Fields Policy, aimed

at conserving the reserves in the huge Groningen gas field,which was discovered in 1959, and maximizing offshore gas pro-duction from marginal fields.

The benefits of this policy consist not only in the increasedvolume of gas produced offshore, but also in prolonging the ca-pability of Groningen Field to act as a swing producer. Anotherkey component of the policy is the guaranteed off-take of off-shore gas by Gasterra (formerly Gasunie Trade and Supply).

Since the early 1990s, however, a declining pattern in explo-ration activity has been observed, while the annual productionrates have stabilized. In response to these developments, theDutch government has taken several measures to improve con-ditions for the gas industry. Most significant was the introduc-tion of depreciation-at-will (DAW) in 1995. This measure gavegas firms the opportunity to postpone tax payments, raising theprofitability of investment projects. The Dutch governmentabolished this fiscal facility when revising its tax plan in 2003.

A fierce debate ensued. It is important to note the tax andfiscal regime present in the Netherlands to subsequently under-

stand the position of the government. In theory, two factors de-termine the design of tax systems regarding mining activities:the existence of economic rents due to natural circumstancesand the presence of market failure. The former explains whymining activities should be taxed relatively strongly, while thelatter could account for higher or lower levels of taxation.

Economic rents generated by the mining industry followmainly from the scarcity of its resources and partly from thecosts involved in their extraction. These rents belong to theowner of the resources, in this case, the state. To receive these,the resources must be discovered and exploited.

If private firms execute these activities, they require compen-sation for their costs and remuneration for the risks undertaken.This implies that taxation of the resource rents must, on the onehand, leave sufficient incentives for private firms to engage inE&P and, on the other hand, recuperate an appropriate part ofthe rents to the state.

In general, profits from oil and gas production are subject tothree types of fiscal charges: royalty, corporate income tax andpetroleum taxes. Most European countries, including theNetherlands, Norway and the U.K., have a concessionary sys-tem. In such a system, private firms have exclusive rights to ex-

THE OIL AND GAS INDUSTRY IN THE NETHERLANDS: FINANCIAL FIELD

The Dutch Fiscal Regime The depreciation-at-will incentive to develop Dutch oil and gas resources has been rescinded, but newpolicy is likely to be developed in its place to encourage activity.

plore and produce at their own risk andexpense. In the Netherlands, oil and gasE&P is carried out via a partnership be-tween the state and private firms.

The state is represented by Energie Be-heer Nederland (EBN), which bears 40%of production and exploration costs, andin turn receives 40% of profits from oiland gas production ventures. In theNetherlands, royalties have to be paid ononshore fields only. Only one fiscalregime is applied to offshore and onshoreproduction. This regime holds for allfirms, domestic or foreign, active on theDutch shelf.

The regime imposes a 50% tax to newexploration licenses after a deduction of10% for uplift costs. The profit sharerefers to the profits of the company afterthe deduction of EBN’s participation.This implies that the government receives40% of the profit from EBN’s participa-tion and 50% of the profit of the privatefirms, making the total government sharein the profit 70%.

The Dutch corporate tax was set at25.5% on January 1, 2007, down from34.5%, and is credible against the stateprofit-share, implying that any change inthe corporate tax structure does not affectthe total tax take. Before abolition of de-preciation-at-will, exploration costs couldbe charged as an expense and be writtenoff immediately. Capital expenditures canno longer be depreciated at will.

DAW enabled firms to treat invest-ments in platforms and pipes as expensesin the determination of taxable income.Without it, investments have to be en-tered on the tax form on a unit-of-produc-tion basis or on a straight-line basis. Theimmediate impact of DAW, comparedwith other regimes, was postponement oftax payments, which gave an interest ad-vantage to firms.

In contrast, the government bore an in-terest disadvantage as it received tax pay-

ments later. If firms raise the level of in-vestments, the net impact of DAW onthe government budget could be positivedue to a higher level of gas productionand, hence, increased tax earnings. Thekey question in the debate on DAW is,therefore, to what extent interest lossesdue to postponed tax earnings are com-pensated for by an increased tax base.

Christian Gueritte, managing directorof Total E&P Nederland, says, “It [DAW]had a very good effect in promoting newdevelopments because tax-wise it pro-vided very good leverage in terms of po-tential rate of return for the operators andit didn’t change much in terms of overallrevenues for the tax authorities.”

For many outside investors, the with-drawal of DAW has reduced the Nether-lands’ attractiveness. It can be seen as apossible deterrent to new entry for inde-pendents, and the removal of DAW is re-garded by many as a reason for thesignificant decrease in offshore drilling.

Less drilling will lead to a lower level ofdepletion of offshore gas fields, a declinein resource rents the government receivesand a loss of economic activity. This issomething the Dutch ministry of eco-nomic affairs is hard-pressed to avoid. Butthe problem is two-sided: the ministry hasto reach consensus, not only with opera-tors but also with the finance ministry. Itis psychologically difficult to lobby the fi-nance ministry for a tax break with com-modity prices at today’s levels and oilcompanies announcing record-breakingprofits.

Pieter Jongerius and Yvette Peters ofthe directorate-general for energy at theDutch economic-affairs ministry, believethat, although all projects benefited fromDAW, only a part of the projects reallyneeded this facility. “Depending on thechoice of the financial criterion, 60% to70% of all projects which are profitablewith the DAW also appear to be prof-

February 2007 ▪ oilandgasinvestor.com N-11

0

10

30

20

40

50

60

70

80

90

100

1990 1995 2000 2005 2010 2015

Historical production non-Groningen

Historical production Groningen

Non-Groningen supply according to production plans/annual reports(art 113 Mining decree)

Expected supply from as yet undeveloped Groningen accumulations

Expected supply from as yetundiscovered non-Groningenaccumulations

Maximum production Groningen (art 55 Gas Act)

Volu

me

(Bill

ion

m3 )

Geq

Gas-Production Forecast, Netherlands

Source: The Netherlands O&G E&P Association

Production declines from existing fields and producers’ few plans for finding and developing newsources of gas have the Netherlands’ gas-output future on a downward slope.

itable without it,” Jongerius says. So it is clear that other, non-financial,

factors, such as pre-drilling activities (ge-ological research, interpretation of data),environmental and licensing procedures,and insufficient access to profitableprospects by new firms will determine themagnitude of offshore activities in thenear future. Improving financial condi-tions by implementing DAW would,therefore, not affect that magnitude.

However, a financial, tax-break incen-tive for smaller projects could. Reducingthe tax burden on marginal projects with-out relieving the tax burden on largerprojects would have positive effects ongas activities and the government budget.Gueritte stresses, “The government doesnot want to do it for all the projects, in-cluding the existing projects. They don’twant to give the free ride to all the play-ers. Now we are discussing the applica-tion of an incentive for just specificprojects.”

The question also remains whether thegovernment should take other measuresregarding offshore gas activities such as,for example, a fallow-field initiative.Looking at past relationships between oilprices and offshore activity, it is expectedthat exploration and developmentdrilling will increase in the near future. Alarge number of projects appear to beprofitable, even if relatively strong finan-

cial criteria are used.A major factor influencing offshore ac-

tivity seems to be market structure. Manyof the firms currently active on the DutchShelf apply rather high financial criteriain their investment decisions due to in-sufficient competition in the upstreammarket. To encourage offshore activitiesin the medium term, policy measurescould be directed at increasing competi-tion. Options to do so include improvinglicensing procedures and increasing the

transparency of the market to attract newplayers.

Experiences in other countries couldoffer useful lessons. The U.K., for in-stance, has introduced several measures toattract new players to the North Sea.These include the fallow-field initiative,which encourages activity on acreage thathas had no activity for a number of years,and a measure facilitating access to exist-ing infrastructure.

The government is working on a solu-tion that would bring together a fallow-field initiative modeled on the U.K.’s,with a modified depreciation-at-will in-centive specifically for marginal and diffi-cult projects to avoid free-riding. Theeconomic-affairs ministry has demon-strated its flexibility in interpreting thecurrent law in place in favor of a fallow-field policy, even though no formal law isin place.

Jongerius adds, “Additional research isneeded to assess the cost-effectiveness ofseveral options to encourage investmentsat the Continental Shelf. In that furtherresearch, attention should also be givento the benefits of the ‘small fields’ policy.Only then is it possible to determine theoptimal design of government policy re-garding the exploitation of the domesticnatural gas resources.”

Or simply put, expect further incen-tives from the government soon. �

N-12 oilandgasinvestor.com ▪ February 2007

“The government is

working on a solution

that would bring

together a fallow-field

initiative modeled on

the U.K.’s, with a

modified depreciation-

at-will incentive….