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Interview

with G.J. Lankhorst, CEO, GasTerra

02.12.2009 / Energyboardroom

Starting with the bigger picture, we are all aware of the Copenhagen meeting in December where European governments will be proactive in incentivising the use of renewables. What impact will this have on the natural gas industry and how do you see its future in this more environmentally tailored atmosphere?

I think there is a great future for natural gas especially in the context of concerns on the environment, particularly C02 emissions. Although the ultimate goal is to create a fully sustainable energy mix, it will take a long time to get there – my expectation is at least half a century or perhaps even more. During this transition period to a fully sustainable energy mix, we are all going to use fossil fuels, and of these, natural gas is the cleanest and most flexible, making it the ideal partner for sustainable energy.

At the moment flexible sources for providing energy and electricity are essential. In all scenarios I see that the amount of natural gas would grow in the next decade. As I said in Buenos Aires last month at the World Gas Conference, the way to sustainability is paved with natural gas.

Speaking in a European context, the liberalisation of the market implemented by the EU affected many European energy companies, for example, the old unbundled GasUnie was split in two companies, the new Gasunie and GasTerra. How would you assess the result of this liberalisation for companies like GasTerra in the European Union?

Before GasTerra was created, Gasunie was the only supplier in the Dutch market. It did not only work commercially, but also had a public task to make sure there was enough gas for the Dutch market. Now, liberalisation has created an entirely different perspective as we are no longer solely the supplier for the Dutch market, but have to compete with other players. This has created a window of opportunity for us, both in the Netherlands and Europe.

GasTerra and its predecessor have been exporting gas since the 1960s for example to France and Germany, but this was always something we did next to making sure the Dutch market had been fully supplied. Now it is on an even basis. We are no more responsible for the Netherlands than for other countries. As a result, our focus has turned to commercial opportunities in the European market.

The liberalization also meant more competition and entrants into the market. This is always very good for a company as it helps you to focus on your product, your customers and to continuous improvement.

The fact that GasTerra has a new focus is beneficial to the company. When you look at our portfolio and compare the products we sold 10 years ago to today, you get a picture of the revolution that has occurred.

Nowadays, GasTerra is a very active player in the modern market, selling products a month ahead to the Dutch spot market TTF (Title Tranfer Facility), thus making our portfolio much richer. Apart from the Dutch market, GasTerra also has a significant presence in the UK, a very interesting and competitive market. As a result, 2008 has been a record success in terms of revenues, reaching more then €24 billion.

Naturally, in 2009 the prices dropped considerably, but we can already see a market change and GasTerra will see its revenues pick up again. Surely price volatility creates new challenges, but this is a market where we are used to fluctuations. Although currently there is an oversupply of natural gas, in three to five years from now the situation will change again. In such a market you have to be flexible and adapt quickly to fluctuations in market circumstances. GasTerra is still learning and improving, but we are quite confident that with our portfolio we are on the right track.

How does GasTerra balance the interests of its shareholders, given the fact that it is a half government, half private owned company?

The great thing about a public-private partnership is that you always have to find solutions that are in the interest of all parties. After all, no one has a golden share. The main benefit of this is that the Dutch government has never used GasTerra as a political instrument. Being a shareholder it is acting in the interest of the company and behaves accordingly.

Although GasTerra’s is a private company it is required by law to bring to the market all natural gas offered to it by producers from small gas fields .

In the interview with Mr Bart van de Leemput, Managing Director of Nederlandse Aardolie Maatschappij (NAM), he was quite optimistic about many aspects of the industry, with specific reference to reserves, believing them to be available for more than 50 years. How optimistic are you of the long-term survival of the Dutch gas industry?

In the past years GasTerra and others have tried to convince the government that something should be done to create a better investment climate for new production companies. We’re starting to see the results of those efforts now. Both new and existing parties are active, new technologies are emerging and we are more optimistic about getting additional reserves in the future. EBN, the state owned company that participates in exploration and production, is working on a strategy to achieve a target of 30 billion cubic metres in 2030. All these efforts together provide a long term future to Dutch gas production, comprising the extension of GasTerra’s role.

Providing security of supply for customers is essential for every company that wants to increase its clientele at home and abroad. How will you manage to diversify GasTerra’s supply of gas?

GasTerra is already doing that and although we don’t have a growth strategy per se, with around 80 billion cubic metres we are in a good position.

It is true that our portfolio must be diversified and the company needs to look at new sources – long term import contacts with Russia and Norway are already a reality, but they could be further extended.

Furthermore there are new opportunities: LNG is expanding and this is of great interest. GasTerra target is to add value to the gas coming to the Netherlands. A plus to this is that the company has a large and flexible portfolio; meaning that we can store in the summer and sell in winter when the prices are higher.

The European gas roundabout is very significant for the future of the Oil and Gas industry in the Netherlands as a whole and GasTerra in particular. How close do you think this endeavour is to reality in light of existing projects such as the Gate Terminal (LNG energy terminal) in the Port of Rotterdam and the Nord stream gas pipeline to Russia, to name a few projects directly related to it?

The gas roundabout is pretty realistic. A lot of the elements needed are in place or already under construction such as the LNG terminal. In terms of storage possibilities, many projects are being carried out; for instance the Bergermeer gas storage facility led by Taqa; or the short-term salt caverns created here in Groningen by partners such as GasUnie.

Our partner NAM also has big storage facilities in the north of the country close to Groningen. In the next 10 years these could be extended to get more production capacity. Thus, on the physical side, new infrastructure will be completed in the next decade.

But for a good hub you need more than that, you also need good trading possibilities through spot market facilities such as the TTF and exchanges such as APX/Endex, which have become very important gas trading tools in Europe.

The third element is knowledge. GasTerra, just like NAM and GasUnie, has thorough knowhow of markets, strategy and technology, but we need an environment in to share it with new players and new people. The founding of the Energy Delta Institute in 2002 by GasTerra, Gasunie, Gazprom, RWE, Shell, and others was a way of creating a business school for those working in the gas industry, located in Groningen. This initiative also contributes to the Netherlands’ ambition of becoming the place for natural gas in North West Europe.

At the University of Groningen, a research programme was recently started for which the government and private industry raised €44 million over four years. Delft University – near Rotterdam – is a centre of geological studies. And the research centre of ECN in Petten shares its knowledge with all companies in the gas industry and studies unconventional and alternative sources of gas, such as biogas and the role of gas in terms of sustainability. All those elements are crucial for a successful hub strategy, not only with respect to the physical infrastructure but also for creating the right investment opportunities.

We have discussed many advantages of the Dutch gas industry; one challenge which comes to mind in the Netherlands is ageing. How will you attract young people to fill the looming gap?

It is important to realise that GasTerra is only a company that buys and sells gas. It doesn’t have operations for technical people, and comprises mainly economists and lawyers. We have established our own staff, and have lots of young people in the company – 37 is the average age which is quite young in the energy world. GasTerra is constantly training its staff and practices job rotation to offer employees regularly new challenges within the company.

Besides, many of our young employees have been students in the Energy Delta Institute where they meet people from companies from all over the world and exchange their knowledge. GasTerra is working hard on management development We offer our talents an attractive work environment , additional studies. A number of them get the opportunity to spend a couple years with our partners, NAM, Shell or ExxonMobil.

You increasingly portray yourself as a European energy company. How successful has GasTerra been in penetrating into new European markets and what is your strategy to stay a European player?

Before liberalisation, our portfolio was sold 50% to Holland and 50% abroad, in practically all long-term take or pay contracts. Nowadays GasTerra is even more integrated in international markets and has important partners in Belgium, Germany, France, Switzerland and Italy, and it has extended contracts as well as increased volumes in some cases.

Secondly we have created access to the UK market. The old unbundled Gasunie invested in the Anglo-Dutch pipeline BBL. The UK has become an important market for GasTerra and now about 10% of our portfolio is sold there. The investment decision was originally based on a long-term contact with Centrica, but now we also are selling gas on the British virtual trading point NBP (National Balancing Point) ourselves. This is one of the most important elements now: the emergence of spot markets such as NBP and TTF which creates a great opportunity to buy and sell on a short term basis. Short term deals rapidly have become a very important element of GasTerra’s sales strategy.

Looking towards the future, what are your main ambitions and expectations for the next three to five years?

It remains to be seen how long the current oversupply of gas will last, but in three to five years Europe will probably be facing the opposite scenario so the search for new sources of natural gas will continue. But recently industrial demand has decreased, so it will be very interesting to see what will happen with prices on the spot market.

In any case, GasTerra will still have a very proactive role in making the gas market more stable and profitable. Right now the real challenge is not to get enough supplies but to get enough buyers. Having said that, it is important that we don’t let ourselves be misled by the current short-term situation and focus on the long-term. GasTerra is doing so and is paving the way towards a more sustainable energy market not only for the Netherlands but for Europe as a whole.

What will be the role of natural gas for the Dutch and European energy market and how is GasTerra adapting to that?

I think the Dutch gas market can be the core of the North-Western European market, the most attractive place to do business as a gas producing and trading country. I also strongly believe that the Dutch gas market must play a pivotal and proactive role in the road to sustainable energy. The ambitious goals on reducing CO2 emissions can’t be realized without the smart use of natural gas. It is one of GasTerra’s prime targets to see how we can increase the value of gas by making it the preferred partner for renewable energy.

As you know, energy prices on average have risen sharply since 2002. This has increased people’s awareness and concerns over whether there will be enough affordable energy in the future. National governments actively respond to that by creating policies that encourage and enable people to do something substantial themselves. Therefore, I expect more focus on decentralisation of energy production. I don’t believe that the future of electricity production lies with base load facilities, but rather with decentralized renewable energy production combined with flexible sources, notably natural gas. One of our major projects is the development and promotion of a small high efficiency CHP unit for households which uses gas to produce heat and power that can be sold to the utility company. This boiler will be on the market from 2011 on. It would cut CO2 emissions considerably and save the average household 20% on its energy bill, making it very attractive, both from an economic and a environmental point of view.

In the Netherlands, there are five million households with boilers, each having a ten year lifespan. Evidently at one point they will need a new boiler and with these micro CHP units they would save more energy. This is one of GasTerra’s best examples of how it is contributing to a greener, decentralized energy market.

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