Menu
GasTerra's vision

GasTerra's vision

In essence, the task of GasTerra (until 2005 the trading arm of Gasunie) has not changed since the 60s: now, just as then, we try to optimise the sale of Dutch natural gas so as to maximise the value of the gas extracted in the Netherlands. However, the circumstances in which we do this are changing continuously.

According to the Groningen ceiling set by the Minister of Economic Affairs, from 2006 through 2015 GasTerra was permitted to purchase a total of 425 billion m3 of gas from the Groningen Gas Field and 449 billion m3 in the period 2011-2020. From 2006 to 2013, the company has purchased 334 billion m3 of gas from the Groningen Gas Field, so that, according to the applicable ceiling in 2013, about 91 billion remained for the years 2014 and 2015.

In response to the increasing frequency and strength of the earthquakes in the extraction area, the Cabinet decided on 17 January 2014 to set new production ceilings. According to the Cabinet decision, in 2014 and 2015, no more than 42.5 billion m3 of gas per year may now be extracted from the Groningen Gas Field, and a further 40 billion m3 in 2016. Furthermore, at five production sites in the heart of the earthquake zone, around Loppersum, extraction has to be reduced by 80 per cent.

In preparation for the Cabinet decision, in January 2013, the Minister of Economic Affairs had ordered 14 studies to be carried out on various issues related to the production of gas from the Groningen Gas Field, such as the extent of the damage, the possibilities for reducing the number and strength of the tremors and the consequences of any potential production limitation. GasTerra was involved in a number of these research projects.

GasTerra believes that, despite the announced production limitation, it is capable of meeting its contractual commitments.

Regardless of the ceilings set by the Minister of Economic Affairs, the capacity of the Groningen Gas Field will slowly decrease in the future, so that volumes that can be produced annually from Groningen after 2020 will also decline. GasTerra will therefore be confronted by new challenges, for which the company is already preparing. In that context, national and international plans are afoot to convert equipment so as to make it suitable for high-calorific gas as from 2020. This conversion is internationally expected to last 10 to 20 years.

We see that the share of renewable resources in the energy mix continues to grow. A good social development, even if it does lead to the necessary challenges for the transmission system operators in particular. They are the ones who have to fit this fickle energy supply, mostly generated locally, into the market. Traditionally, the flexible gas-fired power stations, capable of being switched on and off quickly, took care of such variations. However, the reality is that over the past year, even the most modern and most efficient gas-fired power stations are hardly ever mobilised, but that coal-fired plants are being used. A number of gas-fired power stations have already been shut down; others are slated to be closed. GasTerra would like to see this trend reversed. Not only because we, as a gas trading company, have an immediate interest in this, but also from a social perspective. Coal, which, from a cost perspective, is now often being used in the power plants to generate electricity, produces significantly more CO2 emissions than gas.

How things will develop is largely dependent on the new European CO2 emission targets for 2030 and their impact on the price of CO2 emission rights. GasTerra would like to see Brussels come up with a clear energy policy with one single objective. The core problem, after all, is greenhouse gas emissions. There’s a single objective associated with that: reduction in CO2 emissions. No additional parallel objectives for sustainability, for example, which may, in certain circumstances, even lead to an increase in CO2 emissions. The means that must be deployed for that purpose can be left to the market. Twelve CEOs of European companies in the energy sector, including GasTerra (the so-called Magritte group), have taken the initiative themselves in this respect to work for the improvement of the position of natural gas. In November 2013, they spoke with the Cabinet members responsible. An important goal of the meeting was to influence the position of the Netherlands in the European Council next spring with regard to the framework for a climate and energy policy leading up to 2030.

Important points of interest of the group are:

  • ambitious climate target (focus on CO2 reduction) for 2030;
  • structural reform of the ETS (Emission Trading System) as the most important policy tool;
  • more targeted and efficient system of subsidies, focusing on innovative low-carbon technologies;
  • European solutions instead of fragmentation due to national policy initiatives, for example regarding the backup issue in the electricity market.

In the past, gas prices in Western Europe and elsewhere were based on the value of alternative fuels, particularly oil products. Today, gas prices are mainly driven by gas hubs. These are trading points created by transmission system operators where trading in structured gas products takes place. The importance of this trade has increased significantly in the past decade. In the Netherlands and the UK, gas prices have already been determined for several years at these trading points, even for non-structured gas products. In most other countries where the gas from GasTerra is supplied, the importance of hub prices has also increased in recent years. But in these countries, in degrees that vary from country to country, gas prices based on the value of alternative fuels (especially oil), still play a role. Under the influence of the hub prices, margins for trading companies are under pressure. GasTerra is responding to that by focusing intensely on internal costs and by developing innovative products that dovetail with the needs of the market. 

Annual Accounts

Annual Accounts

The 2013 Annual Accounts comprise the following

 

Balance sheet at 31 December (before profit appropriation)
Profit and loss account
Statement of cash flows
Explanatory notes to the Annual Accounts 

 


 

Balance sheet at 31 December (before profit appropriation)

Profit and loss account

Statement of cash flows

Explanatory notes to the Annual Accounts

1. PRINCIPLES FOR VALUATION AND DETERMINATION OF RESULTS

General
The Annual Accounts have been drawn up in accordance with the statutory provisions of Title 9, Book 2 of the Dutch Civil Code (BW). Unless otherwise stated, assets and liabilities are recognised at nominal value. The principles applied as the general basis for the valuation for assets and liabilities and the determination of results are the historical costs.

Comparative figures have been adjusted where required to improve comparison.

An asset is included in the balance sheet when it is probable that future economic benefits will flow to the company and its value can be reliably determined. A liability is included in the balance sheet when it is probable that settlement thereof will entail an outflow of resources that embody economic benefits and the magnitude of the amount thereof can be reliably determined.

Income is included in the profit and loss account when an increase of the economic potential related to an increase in an asset or a decrease of a liability has taken place, the magnitude of which can be reliably determined. Expenses are accounted for when a decrease of the economic potential related to a decrease in an asset or an increase of a liability has taken place, the magnitude of which can be reliably determined.

If a transaction results in almost all or all of the future economic benefits and all or almost all of the risks related to an asset or liability being transferred to a third party, the asset or liability is no longer included in the balance sheet. Furthermore, assets and liabilities are not included in the balance sheet from the time at which the requirements of probability of future economic benefits and/or reliability of the determination of the value are no longer met.

Continuity
These financial accounts have been prepared on a going concern basis.

Estimates and uncertainties
In preparing these financial accounts, assessments, estimates and assumptions have been made that affect the reported amounts. In particular, this concerns the net sales and cost of sales (including transport costs). The assessments, estimates and assumptions made are based on market data, knowledge and experience, and other factors that are considered reasonable under the given circumstances. Potential special features regarding estimates and assessments, if significant, are included in the notes to the balance sheet and the profit and loss account.

Foreign currencies
Cash and bank balances, trade receivables and current liabilities in foreign currency are stated at the prevailing exchange rate as at the balance sheet date.

The exchange rate differences for gas exports and gas imports are allocated under gas purchase. Other exchange rate differences are recorded under financial income and expenses.

Fixed assets
Tangible fixed assets

Tangible fixed assets are valued at the historical purchase price or production cost, less straight-line depreciation over the economic life of the asset.

Tangible fixed assets that have not been completed as at the balance sheet date are included under 'Fixed assets under construction'. After the relevant asset has been put into use, it will be classified under the main category 'Fixed assets', which primarily includes software.

The depreciation periods applied are between 5 and 10 years.

Any impairment of assets that is expected to be permanent is taken into account.

Current assets
Receivables

The receivables are valued at the amortised cost taking collectability risks into account. Trade receivables also include sales that have not yet been invoiced.

Pensions
GasTerra is affiliated with the Gasunie pension fund. The employees of GasTerra have a pension scheme administered by the Gasunie Pension Fund Foundation. The pension scheme has been amended as of 1 January 2013 with which the additional contribution deposit obligation no longer exists for the employer. In connection with this amendment, GasTerra made ​​a one-time payment into the pension fund in 2013.

As of 1 January 2014, the scheme will be changed from a final salary scheme to a conditionally indexed career average scheme. From 1 January 2014, the financial obligations of GasTerra with respect to the fund consist of a fixed premium in conjunction with the one-time payment to the accrual and supplementary benefits account of the pension fund. When the resources that the fund has available are insufficient, the risk thereof then lies with the (former) participants.

A provision is also included as at the balance sheet date for existing additional obligations with respect to the fund and the employees if it is likely that an outflow of resources will be required in order to settle these obligations, and the scope of the obligations may be reliably estimated. The presence or absence of additional obligations is assessed based on the administration agreement concluded with the fund, the pension agreement concluded with the employees, and other commitments made to the employees. The provision is valued at the best estimate of the cash value of the amounts that will be required to settle the obligations on the balance sheet date. To the extent this obligation relates to the upcoming financial year, this is recorded in the current liabilities account.

The starting point is that pension charges to be processed in the reporting period are equal to the pension contributions owed to the pension fund during the same period. To the extent that the contributions payable on the balance sheet date have not yet been met, a liability is included for this. If the contributions already paid at the balance sheet date exceed the contributions owed, an accrued asset item is recognised to the extent that there will be repayment by the fund or a set-off against contributions owed in the future.

Current liabilities
The current liabilities are valued at the amortised cost, with which the income and expenditure arising from amortisation are recognised in the profit and loss account using the effective interest method. This takes place at fair value measurement wherein the transaction costs that are directly attributable to the acquisition are included in the measurement. This relates to liabilities with a term of no more than one year. Amounts payable also include purchases that have not yet been invoiced. Amounts received from or to be charged to clients due to a decreased purchase of gas under 'take-or-pay' agreements are recorded under current liabilities as an obligation to deliver. The obligation to deliver arising from the receipt of gas in the storage service is also recorded under current liabilities.

Financial instruments
Financial instruments comprise receivables, cash and bank and current liabilities.

The company uses derivative financial instruments within the course of its normal business activities. This relates to forward exchange contracts and gas price swaps in order to hedge the price risk of certain gas contracts.

The company applies cost price hedge accounting techniques in order to incorporate the results from hedge instruments including the forward exchange contracts and the gas price swaps and the changes in value simultaneously in the profit and loss account. Forward exchange contracts and gas price swaps are initially valued at cost. As long as the forward exchange contract or the gas price swap relates to an expected future transaction, the forward exchange contract or the gas price swap will not be revalued. As soon as the hedged position of the expected future transaction leads to the processing of a financial asset or a financial obligation, the profits or losses tied to the forward exchange contract or the gas price swap will be recorded in the profit and loss account during the same period as that wherein the asset obtained or obligation entered into has an effect on the profit or loss.

The company documents the hedge relationships and periodically reviews the effectiveness of the hedge relationships by establishing that there is no question of over-hedges. A loss due to an over-hedge is recorded at cost or lower market value directly in the profit and loss account.

GasTerra concludes gas purchase contracts and gas sale contracts as part of its business operations. These contracts are concluded for the actual physical delivery and receipt of gas in accordance with the company's expected purchases or sales levels, or usage requirements. For this reason, these fall outside of the scope of RJ 290 (reporting standard). Financial instruments embedded in contracts that are not separated from the host contract are incorporated in accordance with the host contract.

Gas sales and gas purchases
The pricing of natural gas for both the sales and purchasing sides is influenced to a significant degree by developments in the gas market prices of natural gas as well as the prices of other energy carriers.

GasTerra's shareholders have concluded an agreement relating to the after-tax profits to be made by GasTerra. This agreement stipulates that the price of the natural gas from Groningen sold by the Nederlandse Aardolie Maatschappij B.V. (NAM) to GasTerra during the year has been set such that GasTerra will retain the after-tax profits determined for that year by the shareholders.

Net turnover
Net turnover is divided into gas sales and other net turnover.

Gas sales represent the income from the supply of gas and the income from the corresponding services provided, after deducting the tax assessed on the turnover.

Other net turnover is represented primarily by the income from the delivery of services to third parties. This income results primarily from flexibility services.

The income is recorded during the reporting period in which the gas was delivered and the services were provided.

A distinction is made between services related to making transport capacity and flexibility available and actual usage. The services are considered to have been provided if the service was made available to the client during the agreed time period.

Cost of sales
In the main, the cost of sales represents the cost of the purchase of gas and the associated services, the transport costs and the costs related to underground gas storage.

Operating expenses
The expenses are determined on a historical basis, taking into account the principles for valuation mentioned previously, and are allocated to the reporting period to which they relate. Losses are recorded during the reporting period in which provisions for them may be made.

Net financial income and expenses
This item includes the income and expenses related to financing.

Corporation tax
The amount of corporation tax to be included in the profit and loss account is calculated based on the results determined according to this account, in due observance of the valid tax-related provisions and rates.

Statement of cash flows
This report provides a statement of the cash flows generated. The statement of cash flow is drawn up on the basis of the indirect method based on the operating results in the profit and loss account.


2. EXPLANATORY NOTES TO THE BALANCE SHEET

Financial instruments

General
In the course of its normal business activities the company uses financial instruments that expose the company to market risk including foreign currency rate risk, interest rate risk, credit risk, liquidity risk. The company uses derivative financial instruments to manage risks. The company does not trade in financial instruments.

Credit risk
The credit risk consists of the loss that would be generated if customers or counterparties were to remain in default and fail to fulfil their contractual obligations. The company has drawn up guidelines with which customers or counterparties must comply. These guidelines limit the risk associated with possible credit concentrations and market risks. If customers or counterparties fail to comply with these guidelines, they will be asked to furnish additional security such as bank guarantees. This prevents the company from running any major credit risks in respect of any individual customer or counterparty.

Interest rate risk
The interest rate risk is limited to potential changes in the market value of funds withdrawn and issued. It is company policy not to use derivative financial instruments to manage fluctuations in interest rates (on an interim basis or otherwise).

Liquidity risk
To limit the liquidity risk, as at the end of 2013, GasTerra has at its disposal a commercial paper programme of €1.0 billion. The Company monitors its liquidity position through liquidity forecasts. The management ensures that the company always has sufficient liquidity available in order to be able to meet its commitments.

Foreign currency risk
GasTerra's policy up to and including 2012 has been to fully hedge the currency risks that arise from purchases and sales at the time the receivables or payables manifest themselves. From 2013, GasTerra is following a policy of controlling currency risks on receivables and payables in the balance sheet using a bandwidth. The currency risks are only – and then completely – covered by means of short term currency contracts, if the unrealised results of those risks fall outside of a bandwidth set by the company.

Market value
The market value of the majority of the financial instruments recorded in the balance sheet, including receivables, cash and bank and current liabilities, is approximate to the book value of those items.

The estimated market value and the total book value of the forward exchange contracts and gas price swaps as at 31 December are specified in the table below:

Commitments and rights not shown on the balance sheet

Purchase, delivery and transport obligations
GasTerra has long-term procurement, supply and transport commitments pursuant to gas purchase, gas sales and transport contracts. The gas purchase and sales prices depend to a large degree on the future market prices of other energy carriers, as well as the future gas market prices of natural gas.

The long-term supply commitments are covered by long-term purchase contracts, wherein the planned supply to GasTerra of the natural gas from Groningen more than exceeds the long-term supply commitments. The differences between delivery obligations and the import and domestic procurement obligations, are sold by GasTerra, in particular as short-term, in liquid marketplaces.

GasTerra's shareholders have concluded an agreement relating to the after-tax profits to be made by GasTerra. On the basis of this, the price of the natural gas from Groningen sold by the Nederlandse Aardolie Maatschappij B.V. (NAM) to GasTerra during the year has been set such that the profit of €36 million after tax determined for that year by the shareholders remains for GasTerra. As a result of the implementation of the above agreement, no notes are given on the valuation of the individual gas purchase and sales contracts.

The commitments and rights arising from long-term gas purchase, sales and transport contracts are not shown on the balance sheet.

Long-term gas purchase and sales agreements usually contain renegotiation clauses enabling the parties to review the contract conditions during the term of the agreement, subject to certain conditions. GasTerra regularly renegotiates the long-term gas sales and purchase contracts with the counterparties. It is not possible to arrive at a reliable estimate of the outcomes of these renegotiations.

€22.8 million in bank guarantees have been issued to the benefit of GasTerra by third parties.

Underground gas storage
GasTerra has long-term financial commitments with regard to underground gas storage capacity that are not included in the balance sheet and that have an average annual payment commitment of €0.5 billion (2012: €0.5 billion).

3. EXPLANATORY NOTES TO THE PROFIT AND LOSS ACCOUNT

Remuneration of Directors and Supervisory Directors
The remuneration policy of GasTerra is aimed at motivating and retaining Directors of the company who are capable of heading a large enterprise and remunerating them based on their performance. The remuneration policy as regards the company’s Supervisory Directors is one of restraint.

Directors of the company
The remuneration for the Executive Director of the company, G.J. Lankhorst M.A., is as follows:

The aforementioned variable remuneration is based on achieving the agreed objectives during the year under review. In 2013 an amount of €40,009 was recorded as a charge under the crisis levy act (2012 crisis levy: €39,276). GasTerra holds an insurance policy that offers Directors and Supervisory Directors coverage in the event of their liability.

Supervisory Directors of the company
The total remuneration of the members of the Board of Supervisory Directors for the 2013 financial year was €55,437 (2012: €58,084).

Board of Management
G.J. Lankhorst M.A., Chief Executive Officer

Board of Supervisory Directors
C.W.M. Dessens M.A., Chairperson
D.A. Benschop M.A.
J.D. Bokhoven MSc.
P. Dekker MSc.
M.E.P. Dierikx M.A.
J.M. Van Roost MSc.     
A.P.N. van Veldhoven M.A.

 

Groningen, 13 February 2014

 

(download the Annual Accounts in pdf)

Summary of financial results

Summary of financial results

Summary of financial results 2013

Message from the Board of Supervisory Directors

Message from the Board of Supervisory Directors

Meetings

The Board (including the College of Delegate Supervisory Directors) met 11 times, in the presence of the Board of Management. In these meetings, apart from a few exceptions, all members of the Board were present.

At two meetings, the Audit Commission was also represented by the chairperson of this commission.

At the invitation of the Board, the external Auditor was present at the meeting, in which the Annual Report and Accounts relating to 2012 were dealt with.

Strategy and Objectives

The company's strategy and its implementation as a set of objectives for the years ahead were discussed with the Board of Management. Maximisation of the value of Dutch gas continues to be the first matter of importance, and there is no need to adjust the strategy. Also discussed was the extent to which the objectives for the year 2013 had been realised, and the objectives for 2014 were decided on. GasTerra will continually draw attention to the role of natural gas in the transition to a completely sustainable supply of energy. In addition, the Groningen earthquake dossier had an emphatic impact on the enterprise, in view of the fact that this issue has direct influence on our neighbours in the city and province in which GasTerra conducts its business. The minister's decision that was announced on 17 January 2014 concerning production from the Groningen field has no impact on GasTerra's strategy, but it does impact the way in which the company will be able to actualise this.

Risk Management

In 2013, the Board discussed the risks associated with the enterprise and the results of the management's assessment of the set-up and operation of the internal risk management and control systems (the document of representation). Attention was also paid to the Management Letter from the external Auditor, and the corporate social responsibly relevant to GasTerra were taken under consideration too. The Board concludes that GasTerra has a robust 'control framework', that this functions effectively, and is still being further improved in relation to certain points.

Staffing Matters

The Board of Supervisory Directors and the management together annually discuss potential successors present within the organisation who could fulfil management functions.

In connection with the departure of Mr Kielman as Commercial Director, the Board established a selection committee, consisting of two members of the Board and the Chief Executive Officer. Based on the recommendations of this committee, the appointment of the new Commercial Director, Robert van Rede, took place in October 2013.

If applicable, the Board becomes involved in alterations relating to additional jobs of members of the Board of Management and other members of GasTerra's management team, and once a year discusses the complete overview of these additional jobs. Also, the overview of additional activities of members of the Board of Supervisory Directors is reviewed once a year.

Audit Committee

The Board of Supervisory Directors has one standing committee: the Audit Committee. This oversees the workings of the internal risk management- and control systems, all financial affairs, relations with the external Auditor and the application of Information and Communication Technology (ICT). At one of the meetings of the Supervisory Board, the Audit Committee reported to the Board on the activities it had undertaken.

The Audit Committee met on four occasions during the reporting year.

At year end 2013, the Audit Committee consisted of the following members:

A.J. Boekelman M.A., (Chairperson)
T.P.K. Huysinga M.A.
A.J. van der Linden
B.E. Westgren M.A.

Commencing on 6 February 2013, Mr T.P.K. Huysinga was appointed as a member of the Audit Committee, taking the place of Mr L.J. Kalmijn. As of 1 June 2013, Mr A.J. Boekelman took over the chairmanship from Mr J.C. De Groot after he had withdrawn as a member and/or chairman of the Audit Committee. Mrs Y. Peters was a member of the Audit Committee from 1 June until 1 October 2013. As of 1 October, Mrs B.E. Westgren was appointed as a member of the Audit Committee, taking the place of Mrs Y. Peters.

Self-Evaluation

The Supervisory Board discussed its own performance in 2013, and will see to it that the recommendations established in the course of this will be implemented. Taking things as a whole, a positive picture emerged from the evaluation. The next evaluation will take place in 2015.

The Audit Committee conducted a self-evaluation in 2012. The points of attention resulting from this were taken up in 2013. A subsequent self-evaluation will take place in 2014.

Contacts with the employees

On an incidental basis, members of the Board have, by means of informal talks, informed employees of the progress of affairs. Leaving aside exceptions, the Board always meets in the company's building.

Management meetings with the Works Council were twice attended by members of the Board in 2013.

Personal Details

As of 1 June 2013 J.C. De Groot M.A. stepped down as a member of the Board. The vacancy which has thus arisen will be filled as quickly as possible.

Annual Accounts

The recommendations from the Board of Supervisory Directors to the General Meeting of Shareholders, to be held in Groningen on 13 February 2014, are as follows:

We have examined the Annual Accounts for 2013, prepared by the Chief Executive Officer in accordance with Article 23 of the Articles of Association. We concur with these Annual Accounts and recommend that:

  1. the net profit for 2013 - set at €36 million - be entirely appropriated for payment to the shareholders;
  2. the 2013 Annual Accounts be adopted without alteration.

The Board of Supervisory Directors wishes to express its appreciation for the results attained in 2013 and is grateful for the way in which the Board of Management and employees devoted themselves to the enterprise during the financial year, and for the results that were achieved. The Board wished all success to everyone working at GasTerra, in their endeavours to achieve the objectives set for 2014.

The Board of Supervisory Directors,

C.W.M. Dessens M.A., Chairperson*
D.A. Benschop M.A.
J.D. Bokhoven MSc.
P. Dekker MSc.
M.E.P. Dierikx M.A.
J.M. Van Roost MSc.
A.P.N. van Veldhoven M.A.

Market Trends

Market Trends

Despite the economic crisis and the low coal and CO2 price compared to the price of gas, the gas market in 2013 in Europe was tight. This was due to the long, cold winter and the reduced supply of LNG.

Gas-Fired Power Stations

Several Northwest European energy companies announced in 2013 that they will be shutting down several gas-fired power stations. There are plans to put even the most modern, efficient gas-fired power stations in mothballs. Because of the current price levels of gas, coal and CO2 emission rights, producers prefer to use coal-fired plants. At the same time, the demand for electricity is relatively reduced as a result of the economic crisis and production from renewable resources continues to increase. Gas-fired power stations are therefore rarely used. GasTerra views gas as precisely the ideal complement to these resources in the transition phase to a fully sustainable energy supply. Gas-fired power stations can be flexibly switched on and off and thus form a good complement to the less predictable renewable energy production. Besides, gas is the cleanest fossil fuel. How the position of natural gas for electricity generation will develop in the long term is largely dependent on the price of coal and the new European CO2 reduction targets for 2030 and their impact on the price of CO2 emission rights.

Virtual Trading Points

Also in 2013, the English National Balancing Point (NBP) and the Dutch virtual trading point TTF (Title Transfer Facility) were the most liquid trading points in Northwest Europe. The substantial growth in the volume traded on the TTF in recent years continued in 2013. Trading on the NBP decreased, while there was strong growth on the German hubs NetConnect Germany and Gaspool. Nevertheless, the volume traded on the German hubs remained far behind that on the TTF and NBP. The prices on the Northwest European continental hubs largely follow the prices on the TTF. This indicates that the cohesiveness of Northwest European hubs is good under normal circumstances.

LNG

The prices for liquefied natural gas (LNG) are currently higher in Asia and South America than in Europe. In the Netherlands in 2013, hardly any LNG reached our shores. Other European countries as well, notably the United Kingdom, received less LNG in 2012 and 2013 than in previous years. Belgium, France and Spain delivered some of the imported LNG onwards to Asia and South America. It is anticipated that only from 2016, after the launch of new LNG production in Australia and the U.S., will more LNG be able to arrive in Europe.

Security of Supply in Europe

Due to the long, cold winter, the reservoirs in Europe in the first quarter of 2013 fell below average. It was not until November that the reservoirs were again filled to a normal average level. Despite the great contribution of reservoirs to supplies in this cold period, this is not reflected in the valuation of flexibility. The summer-to-winter spread (the price disparity between the winter and summer prices) has further decreased this year. It can be concluded from this that there is now sufficient reservoir capacity in Europe. With the current prices, there will be limited or no investment in reservoirs, but as soon as a shortage in reservoir capacity were to arise, then GasTerra is of the opinion that this will be reflected in price signals which would bring investments in their wake. In the field of electricity, several Member States have taken various measures to ensure that sufficient electricity can be produced, for example, by the use of capacity mechanisms. Due to the negative impact of these national interventions on the functioning of the internal European electricity market and the possible illegal state aid that goes with it, the European Commission is critical of unilateral national measures in this field. 

Sales

Sales

In 2013, GasTerra supplied 89.3 billion m³ of gas. That is 5.9 billion m³ more than in 2012. This increase can be explained by selling more gas on the TTF and to export customers. The average gas price in 2013 was 27.1 eurocents per m³.

Virtual Trading Points

TTF
In addition to the direct sale of gas to customers, gas is also sold by GasTerra on the virtual trading point Title Transfer Facility (TTF) through brokers or directly on the ICE Endex trading platform. In 2013, GasTerra sold 29.0 billion m³ of gas on the TTF. That volume is higher than what was supplied on the TTF in 2012 (27.3 billion m3). The total physical volume supplied on the TTF was 46 billion m³ as against 43 billion m3 in 2012. GasTerra's share therefore amounts to 63%.

The total volume traded on the TTF by market operators amounted to 848 billion m3, an increase of 73 billion m3 compared to the previous year. The substantial growth undergone by TTF in recent years has thereby intensified.

The prices for trading on the TTF were on average higher in 2013 than in previous years. The annual average Day-ahead price rose by 2.0 eurocents/m3 relative to 2012 and the average annual Month-ahead price by 1.7 eurocents/m3. The following graph shows the Day-Ahead and Month-ahead price evolution of the products. 

Foreign Trading Points
In 2013, GasTerra traded 1.6 billion m3 and supplied 7.9 billion m3 on the British National Balancing Point (NBP) trading point. Furthermore, in 2013 0.1 billion m3 were traded on the German Net Connect Germany (NCG) and Gaspool trading points.

The total physical volume traded on the NBP has declined slightly in 2013. Trading on NCG and Gaspool has grown but lags far behind that of NBP and TTF in extent. NBP and TTF remain by far the most liquid trading points in Europe.

The prices trend on the TTF, NCG and Gaspool was comparable. The NBP price follows the same trend, but is more seasonally affected. The price differentials between the Northwest European continental trading points continued to decline in 2013. This is an indication of increased gas market integration. The prices of the other continental trading points broadly followed the prices on the TTF.

Belgium, France and Italy
In Belgium, Zeebruges consolidated its position as a physical hub. Trading on the Zeebruges Trading Point, a virtual trading point launched on 1 October 2012, was very limited in 2013.

France has three separate trading points. PEG Nord, the most important of the three, was far less liquid in 2013 than the TTF and trading on PEG Nord has decreased. The transmission capacity between PEG Nord and the PEG Sud and PEG TIGF market areas forms a physical barrier between North and South. Partly because of this, the gas prices on PEG Sud and PEG TIGF are significantly above those of PEG Nord.

The volume traded on the Italian trading point PSV rose sharply in 2013. Because of an increase in the capacity limit, the price differential between TTF and PSV decreased.

Liquidity
Although no hard figure exists whereby the liquidity of a market can be expressed, there are aspects that collectively give a good picture of the liquidity. This concerns the trading volume, the churn rate (the number of times a physical m3 is traded), the products traded, the volatility of the prices and the spread between bid and ask prices.

Based on these aspects, it can be concluded that the TTF has become more liquid in 2013 and the liquidity of NCG and Gaspool has also increased. Less volume was traded on the NBP, but it is still a very liquid trading point. The Italian trading point has had a boost in liquidity in 2013, but is still small compared to the TTF. The liquidity of the French trading points decreased in 2013 due to a decrease in the volume traded. In terms of liquidity, the Belgian trading points have remained virtually unchanged from 2012.

Energy companies

In 2013, GasTerra supplied 10.6 billion m3 of gas, of which 7.5 billion m3 were supplied to power companies via TTF. This volume was higher than expected (8.8 billion m3). This was due to the long, cold winter and because sales during the year increased. Continuous renewal of the product range and adaptation of the contractual terms to changing market conditions are the underlying reasons for this. Thus, GasTerra offers energy companies steadily increasing possibilities for choice. Examples of this are the choices for various delivery points, the degree of (price) risks, the degree of temperature flexibility and contracting or not contracting for flexibility during the day.

GasTerra concluded contracts with a significant number of new customers for structured products with delivery on the TTF. Thanks to the sales during 2013 for delivery in 2014, it is expected that the volume to be supplied in 2014 will remain at approximately the same level as in 2013. 

Industry

In 2013, GasTerra supplied 4.1 billion m³ of gas to its industrial customers. It concerns supplies to inter alia the chemical industry, breweries, paper mills and the food industry. This volume represented a fall in sales to these customer groups compared to the previous year. The worsened economic conditions and limited deployment of CHP plants were to blame for this.

In collaboration with the customer, GasTerra is responding to these conditions by adapting and improving the products and services it supplies to its customers. In 2013, therefore, the launch of a more active approach to customers, improved information provision and the establishment and development of a digital customer portal took place. From 2014, our industrial customers can visit this portal to conclude contracts, request quotes and call up current sales prices. In addition, they have access here to customer-specific information, such as contract documents and invoices.

Customer Satisfaction
In the first quarter of 2013, GasTerra carried out a customer satisfaction survey amongst its industrial customers. In general, industrial customers were shown to be positive about our service provision. They gave GasTerra on average a 7.9 mark. The respondents reported that they see GasTerra as an expert, customer-focused and transparent organisation, but less as an innovative and sustainable business. It transpired that not all customers were aware of our projects in the field of CSR. In addition, they indicated a need for more information from GasTerra, specifically on key market trends and prices. GasTerra has given effect to this by regularly publishing a newsletter in addition to providing customer-specific market information.

Overseas Sales

In 2013, GasTerra supplied 53.2 billion m³ of gas to customers abroad. That is 4.6 billion m³ more than in 2012. This increase can mainly be explained by the long, cold winter. The customer portfolio remained unchanged.

Renegotiation of some long-term contracts took place in 2013. Previously, the pricing formula for long-term contracts used to be based on the price of oil. Increasingly, prices under these contracts are being based on gas prices on the trading points.

When parties to renegotiations do not mutually reach agreement, they may submit their dispute to arbitration. In 2007, GasTerra made use of this opportunity after stalled price renegotiations of two long-term gas supply contracts with the Italian energy company Eni. In both procedures, the arbitrators vindicated GasTerra and awarded price increases retroactively. The two final judgments in these procedures were handed down in 2012 and 2013. 

Below, a brief overview is given of the main developments in the energy field for each of the countries to which GasTerra exports gas.

Belgium
Of the exported gas, in 2013, we sold 5.4 billion m3 to Belgium. This country has no natural gas production and is therefore completely dependent on imports of natural gas. Besides purchasing from the Netherlands, Belgium imports mainly LNG and gas from Norway via pipelines. Belgium is able to import nine billion m3 per annum via the Zeebruges LNG terminal. Belgium has a long-term contract from 2007 to 2027 with Qatar for the supply of three billion m3 of LNG per annum. That makes Qatar, together with Norway and the Netherlands, the largest gas supplier for Belgium. Recently, a number of LNG cargoes destined for Belgium were diverted and shipped to Asia. The higher premiums in the Asian market appear to be the basis for this.

The electricity market in Belgium is characterised by the large-scale use of nuclear power stations (approx. 50%) and gas-fired power stations (30%). In October 2011, Belgium decided to phase out its nuclear energy capacity between 2015 and 2025, but with the proviso that sufficient replacement capacity can be found.

France
In 2013, GasTerra supplied 6.5 billion m³ of gas for the French market. France also imports gas primarily in the form of LNG and via pipelines from Norway and Russia.

France makes extensive use of electricity generated by nuclear power, but in recent years, a number of gas-fired power stations have also been built. These power stations are in limited use because of the import of cheap electricity (specifically from coal-fired power stations in Germany). France has several LNG terminals. Due to limited internal transmission capacity, LNG is primarily important for the south of the country. Nevertheless, even France shipped LNG originally intended for the French market to Asia. This was probably under the influence of the high prices. Because of the loss of this gas, the demand for pipeline gas from Northern Europe increased. Of this gas, more must now be transmitted to the South of France. Because of infrastructure bottlenecks between the North and the South of France, the prices in the South of France are higher than in the North of France.

Germany
In 2013, GasTerra supplied 22.4 billion m³ of gas to German trading parties, 42% of the total exported. Germany also imports gas primarily from Norway and Russia.

In response to the disaster at the Japanese nuclear power station in Fukushima, the German government announced in 2011 that the oldest nuclear power stations were to be shut down immediately and nuclear energy was to be phased out in the period up until 2022. This decline in production, however, is currently not being replaced by the use of gas-fired power plants, but by the use of coal-fired power plants and the growth of renewable energy resources, specifically wind and sun. Many gas-fired power stations have closed down or are slated for closure by the Federal Network Agency. In connection with the necessary network stability, not all applications for closure are being honoured. At the same time, the growth of solar and wind energy is progressing, because, thanks to grants, the producers of energy from these sources receive a guaranteed price per delivered MWh and because renewable electricity by definition is given precedence on the network.

A problem with the growing share and the guaranteed price of renewable energy in the German energy mix, combined with the use of coal-fired power stations, is that it is difficult to influence the generation of renewable energy and the old coal-fired power stations cannot be quickly switched on and off. Therefore, in situations where there is a high supply of electricity and little demand, Germany exports the surplus electricity at low (and sometimes even negative) prices. In the coalition agreement of the new German Federal Government, a more market-based approach has therefore been agreed to restrict the growth of renewable resources to some extent.

Italy
16% of the gas that GasTerra exported in 2013 went to Italy (8.6 billion m3). Italy also imports LNG and gas via pipelines, mainly from Norway, Algeria, Libya and Russia.

Security of supply is a major national issue. New LNG landing facilities and the laying of new pipelines are meant to ensure diversification of gas supplies. Italy's ambition is to become the central hub for gas by transmitting pipeline supplies and LNG from South-Eastern Europe, Asia and Africa to Northwest Europe. Recently, a third LNG terminal was taken into operation and the transmission system operator is engaged inter alia in facilitating two-way capacity via Switzerland to Germany, so that not only can gas be imported but it will also be possible to export it. Furthermore, it was announced that, for the supply route for their gas to Europe, the partners in the Shah Deniz II gas field (Azerbaijan) have opted for the TAP pipeline via Greece and Albania to Italy rather than the Nabucco pipeline through the Balkans to Austria.

United Kingdom
In 2013, GasTerra supplied 9.5 billion m3 of gas to the United Kingdom, of which 1.6 billion m3 via NBP. This constitutes 18% of the total exports in 2013. In addition, the United Kingdom imports gas, mainly from Norway, as well as LNG. It is possible that more room will be made available in the United Kingdom for the use of gas-fired power stations. As a consequence of the European Large Combustion Plant Directive, a number of polluting coal-fired power stations must be shut down here. That means an additional demand for gas in the short term. In addition to a high deployment of offshore wind, the British government also sees a role for nuclear power. In October 2013, an agreement was concluded with EDF, the operator of the nuclear power stations in France, for the construction of a new nuclear power station in the United Kingdom.

Switzerland
In 2013, GasTerra supplied 0.8 billion m³ of gas to a Swiss trading company.

Summary
The gas market in Northwest Europe has been further integrated. Price differentials amongst the various trading points have decreased further. An obvious recurring theme throughout Europe is the competition between coal and gas for electricity generation. It is clear that, at present, gas cannot compete with coal. Socially, GasTerra finds this an undesirable situation and as a result, GasTerra is participating in the Magritte group, mentioned elsewhere in this Annual Report.

Furthermore, we see that despite this deterioration of the competitive position of gas relative to coal and the general economic climate in Europe in 2013, there is still a shortage on the gas market. Causes must be sought in the long, cold winter of 2013, the diversion of LNG to Asia and the reduced supply because of declining European production. Above all, the increasing flexibility with which LNG can be and is being diverted is a trend which GasTerra expects will manifest itself to an ever greater extent in the future, as the result of which a global gas market will become progressively more a reality.

Procurement

Procurement

In 2013, GasTerra purchased 89.3 billion m³ of gas. This is an increase of 5.9 billion m3 compared to 2012. Of this, 60% originates from the Groningen Gas Field (53.4* billion m3 and 29% from the small fields (26.3 billion m3). The remaining 11% were procured at trading points or imported (9.6 billion m3).

Groningen Gas Field

60% of the gas that we purchased in 2013 originated from the Groningen Gas Field. In total, GasTerra purchased 53.4* billion m3 of gas from this field in 2013 (2012: 47.2 billion m³). This increase relative to 2012 can be explained by the cold winter in the beginning of the year and the associated higher gas sales and replenishing the emptied reservoirs in the summer.

The Groningen Ceiling: old and new
With this aforementioned purchased volume, GasTerra has kept to the purchasing ceiling set by the Minister of Economic Affairs. From 2006 through 2015, GasTerra was permitted to purchase a total of 425 billion m3 of gas from the Groningen Gas Field and 449 billion m3 in the period 2011-2020. From 2006 to 2013, the company has purchased 334 billion m3 of gas from the Groningen Gas Field, so that, according to the applicable ceiling in 2013, about 91 billion remained for the years 2014 and 2015.

In response to the increasing frequency and strength of the earthquakes in the extraction area, the Cabinet decided on 17 January 2014 to set new production ceilings. According to the Cabinet decision, in 2014 and 2015, no more than 42.5 billion m3 of gas per year may now be extracted from the Groningen Gas Field, and a further 40 billion m3 in 2016. Furthermore, at five production sites in the heart of the earthquake zone, around Loppersum, extraction has to be reduced by 80 per cent.

In preparation for the Cabinet decision, in January 2013, the Minister of Economic Affairs had ordered 14 studies to be carried out on various issues related to the production of gas from the Groningen Gas Field, such as the extent of the damage, the possibilities for reducing the number and strength of the tremors and the consequences of any potential production limitation. GasTerra was involved in a number of these research projects.

GasTerra believes that, despite the announced production limitation, it is capable of meeting its contractual commitments.

In the period from 2006 to 2013, the following quantities of Groningen gas have been purchased by GasTerra (quantities in billion m3):

 

2006 32.2
2007 29.9
2008 38.9
2009 37.8
2010 50.1
2011 44.7
2012 47.2
2013 53.4*

 

Decrease in Low-calorific gas (L-gas) production
Gas from the Groningen gas field contains relatively high levels of nitrogen compared to gas from other fields. This results in Groningen gas having a lower calorific value. After the Groningen gas field was discovered, all gas appliances in the Netherlands were made compatible with the calorific value of this so-called L-gas or Low-calorific gas. Later, smaller natural gas fields were discovered that were shown to contain gas with a higher calorific value. In order to make this high-calorific gas (H-gas) suitable for appliances designed for L-gas, nitrogen is added at special-purpose processing facilities. In parts of Germany, Belgium and France as well, L-gas from the Netherlands is used. There, since 1996, new appliances have been made compatible for use with both L-gas and H-gas.

It is expected that the volume of production from the Groningen Gas Field will markedly decline after 2020. That has consequences for consumers. Even with the full use of the existing nitrogen plants, not all existing consumers can be supplied with L-gas from 2020. That means that, over time, they will have to switch to H-gas. Research by the Energy Delta Gas Research Consortium (EDGaR) showed that conversion in the Netherlands will not become necessary until 2030.

Conversion of appliances from L-gas to H-gas
The transition from L-gas to H-gas will have to begin abroad, in connection with the different situations in the Netherlands and the countries that purchase Dutch L-gas. Because of the existing long-term contracts, this will take place first in Germany (2020) and afterwards in Belgium and France (from 2024). GasTerra views it as its responsibility to inform both customers and others who are directly involved in good time and give them guidance on how to prevent shortages of L-gas. Thus in 2013, GasTerra, GTS and the Ministry of Economic Affairs brought this message to the attention of foreign customers, transmission system operators, government departments and regulators. Germany has meanwhile incorporated the start of the conversion plan into its Netzentwicklungsplan Gas and is now working on the assumption of a gradual reduction in L-gas from the Netherlands between 2020 and 2030. The message has been conveyed to Belgium and France as well, but given the ten-year planning horizon of the transmission system operators, conversion between 2024 and 2030 is not yet included in concrete and public plans. In our contacts with our foreign customers, it has become clear that there are already plans in the making for the transition to H-gas.

How quickly the transition of the Dutch L-gas consumers to H-gas will happen after 2030 will need to be determined during the course of the 2020s. This is dependent on developments in the demand for natural gas (especially in the built environment), the remaining production from the Groningen Gas Field and the possibility of involving nitrogen plants.

Small Fields

In 2013, GasTerra purchased 26.3 billion m³ of gas from small fields. This is a limited increase of 0.4 billion m3 compared to the procurement in the previous year (25.9 billion m3).

In the past decade, the purchase of gas from small fields decreased by about two billion m3 per annum. This is mainly because many small fields are becoming emptier. As a result, the pressure in these fields decreases, and the production declines steadily. This decrease is not compensated to the same extent by production from new fields. For the Netherlands as a whole, production decreased again in 2013 compared to 2012. However, within the portfolio of GasTerra, that is not the case and in 2013, there was stabilisation. This can be attributed to the conclusion of new contracts and the transition to production-driven supply as described below. The outlook for the coming years shows a further decrease. These projections are based on statements from the producers and assume a stable level of investment. That level is not sufficient to bring about a breach in the production trend. More new developments are needed for that.

Production-driven supply
In 2013, GasTerra agreed a new operational regime with the producers. The 'Buyer's Request Regime' has thereby been replaced by the 'Seller's Nomination Regime'. This means that from now on supply is no longer demand-driven, i.e. at the request of GasTerra, but production-driven. Producers determine themselves how much gas they supply. This allows them to adjust the supply to the technical facilities of the fields. GasTerra anticipates that by means of this process, the supply of gas by producers will be accelerated. All of this has been incorporated into a new Natural Gas Sales Agreement (NGSA), which all producers have accepted in 2013.

Pricing
Besides the conditions of supply, pricing was also a topic for discussion in 2013. GasTerra proposed basing the purchase prices from 1 January 2013 on TTF virtual trading point prices. This proposal, recorded in the new NGSA, was accepted by all producers. 

Procurement from Virtual Trading Points and Overseas Markets

GasTerra procured a total of 9.6 billion m³ of gas in 2013. This was done both through trading points, and by imports, specifically from Norway, Russia, Germany and the United Kingdom. This procurement under foreign contracts remained similar to 2012.

Due to changing market conditions - increased competition and the fact that the Dutch market is entirely based on TTF - GasTerra paid particular attention in the 2013 renegotiation of long-term contracts to the adjustment of the price formulas which, in any event, must reflect the current reality. Furthermore, there are also other conditions of the "classical" long-term contracts that are under pressure. It takes great effort to reach agreement amongst parties on what long-term contracts in the future should look like.

GasTerra did not conclude any procurement contracts for foreign gas with new parties in 2013. A number of small contracts expired, including the final supply contract from the Norwegian Ekofisk fields on 1 October 2013. This brought an end to nearly four decades of gas supply under this contract. 

Including correction for prior delivery years of 0.2 billion m3

Virtual storage service

Virtual storage service

GasTerra has been providing market operators with options to contract for virtual storage space since 2011. This service is known as its virtual storage service (VSS). In total, there is a storage volume of 1.95 billion m3 available. This amount is auctioned in the form of so-called Standard Bundled Units (SBUs) of 1440 kWh each. There are thus 13.2 million SBUs available. ICE Endex conducts auctions on instructions from GasTerra, so that purchasers remain anonymous to GasTerra. The service is provided on the TTF and is attractive for market operators because it is virtual and is therefore not affected by gas quality, and also cannot be cancelled due to technical faults. Until now, the service was auctioned on each occasion for a single storage year (from April to April). For the storage season 2013/2014, a total of 2 million SBUs were sold.

Five-year product

Market research revealed that market operators would like to secure capacity for a longer time. Therefore GasTerra - in addition to the fixed price one-year product - also developed a five-year product. This product is characterised by a price formula that has been indexed to the summer/Q1 spread. The auctions of the two products were held on 20 and 21 November 2013 and were successful. Of the five-year product (for storage years 2014/2019) 11.8 million SBUs, or 1.75 billion m3 in working gas volume, were offered for auction. Of this, 4.1 million SBUs, or 600 million m3 were sold. Of the one-year product (for the storage year 2014/2015), 4.5 million SBUs were offered for auction. Of these, 3.7 million SBUs (or 80%) were sold. The remaining amount of 5.4 million SBUs will be auctioned in February 2014 in the form of a one-year product.

Transmission

Photo: Gasunie Photo: Gasunie

Transmission

By procuring transmission capacity from transmission system operators, GasTerra acquires the right to feed gas into the so-called 'entry points' of the transmission network or to extract gas at the 'exit points'. The costs for procuring transmission capacity in 2013 were €509 million.

The transmission costs are comparable to 2012 (€505 million). With this, the structural and effective decrease in transmission costs over recent years has come to an end. 

This trend was partly caused by the shift from having the delivery point at exit points to trading on the TTF. When trading on this virtual point, GasTerra only pays for the injection of the gas; the costs of extraction are for the account of the buyer. This shift seems to have come to an end in 2012: those customers who opt to trade on the TTF, in preference to trading at exit points, have already made the switch.

Tariffs

In the Netherlands, GasTerra purchases the transmission capacity from Gasunie Transport Services B.V. (GTS), operator of the national gas transmission network. The transmission tariffs in the Netherlands are regulated by the Authority for Consumers and Markets (ACM; until 1 April 2013, the Dutch Competition Authority - Nederlandse Mededingingsautoriteit or NMa). In 2013, the ACM published the Method Decision 2014-2016, which is the basis for setting the tariffs. GasTerra is broadly in agreement with this Method Decision. The transmission costs will turn out to be significantly higher in 2014 than in the previous two years. This is because, in 2012 and 2013, GTS was required to retrospectively refund approximately €400 million to the market and incorporated this into the tariffs for 2012 and 2013. Now that this refund has ceased, the tariffs in the Netherlands are going up.

Abroad

GasTerra is not only active in the Dutch transmission market. Since 2006, GasTerra has also been purchasing capacity from transmission system operators BBL Company and the English National Grid for the export of gas to the United Kingdom. With the increased liquidity on the German hubs, from 2013, GasTerra is also procuring capacity from several German transmission system operators. When booking capacity, GasTerra makes use of the PRISMA booking platform launched in 2013. On this platform, gas traders can book transmission capacity with various transmission system operators. Meanwhile, nineteen European transmission system operators have joined PRISMA

Results

In accordance with the objective, all necessary transmission capacity was contracted in good time and there are therefore no penalties to report for exceeding transmission capacity.

Risk Management

Risk Management

Risk management is applied to the activities that GasTerra carries out for the purpose of achieving its business objectives. This gives a high degree of confidence that the objectives will be achieved. A thorough risk policy is a prerequisite for the company to achieve its objectives in a controlled manner. Risk management is an integral part of the Management Control System at GasTerra. GasTerra carries out risk management at three levels: on strategic, tactical and operational levels.

On strategic and tactical levels

Prior to the annual planning and control cycle, GasTerra drafts a strategic plan. This plan is based on the current and anticipated developments on the European gas market and incorporates the strategic long-term choices. The plan also includes a description of opportunities and threats (risks).

GasTerra then translates this strategic plan for the short and medium term into a Business Plan and a budget. In monthly and quarterly reports, the results are compared with the targets set out in the Business Plan. This Business Plan contains a risk analysis at the tactical level. The validity of this risk analysis is assessed a further two times during the year. The analysis includes both specifically named risks and the measures that are needed to manage these risks.

At the operational level

Risk management at the operational level is performed at the level of individual departments. It consists of a risk analysis, control measures, documentation and reporting. The assumption is that the line management in all parts of the organisation are responsible for identifying relevant risks and for implementing appropriate control measures. 

Review

GasTerra periodically reviews the effectiveness of its risk management by carrying out internal audits. Moreover, activities in this area are assessed within all departments and at all levels on an annual basis. This evaluation is summarised in the so-called 'Document of Representation'. All these activities are supervised by the Audit Committee appointed by the Board of Supervisory Directors. 

Principal Risks and Uncertainties

By means of regular discussions of risk, we pinpoint the principal risks and uncertainties facing GasTerra. In doing so, strategic, operational and financial risks are examined, as well as risks in the fields of financial reporting, legislation and regulations. The principal risks and uncertainties relate to the following issues:

Earthquakes in Groningen
Due to a number of earthquakes in 2012 and 2013 and the resulting damage and the uncertainty regarding the frequency and strength of earthquakes in the future, there has been much social unrest in the region in the past year. State Supervision of Mines (Staatstoezicht op de Mijnen or SodM) concluded in 2013 that the earthquake risk in the Groningen Gas Field is greater than previously thought. Last year, the Minister of Economic Affairs therefore had 14 studies carried out to gain more insight into the cause of earthquakes, the possible consequences, the possibilities of preventing or reducing the frequency and magnitude of earthquakes, the possibilities of preventing or reducing the damage caused by the earthquakes and the manner in which damage by earthquakes is dealt with. GasTerra has participated in several of the Minister's studies.

The Minister has since published a decision. The Cabinet decision means that in 2014 and 2015, no more than 42.5 billion m3 of natural gas per annum may be extracted from the Groningen Gas Field and in 2016, another 40 billion m3. Furthermore, at five production sites in the heart of the earthquake zone, around Loppersum, extraction has to be reduced by 80 per cent.

GasTerra believes that, despite the announced production limitation, it is capable of meeting its contractual commitments. The company will do its utmost to contribute to the successful implementation of the Cabinet decision.

Regulation
GasTerra is confronted with an increasing degree of regulation at national and European level in various areas (specifically Energy and Finance). We note that the regulations that are relevant for GasTerra are increasingly fragmented. This fragmentation gives rise to inefficiencies in management and to the obligation to continue following many national regulations in order to be certain that we are complying with the applicable ones.

Examples of these fragmented regulations are the introduction of European Regulation No. 1227/2011 concerning integrity and transparency in the wholesale energy market (REMIT), EU Regulation No. 648/2012 concerning OTC derivatives, central counterparties and trade repositories (REMIT, EMIR) and EU Directive 2004/39/EC concerning markets in financial instruments (MiFID).

In addition, certain European regulations, such as Regulation 715/2009, which governs the conditions for access to the natural gas transmission networks, as well as the subsequent procedural rules for congestion management (CMP), are not introduced simultaneously in various Member States. Finally, this regulation creates mechanisms for the allocation of transmission capacity on cross-border transmission links (CAM). This type of European regulation also requires the necessary advocacy of GasTerra's interests. In chapter three you can read more about these regulations.

GasTerra controls the aforementioned risk in two ways:

  1. The close tracking of regulatory developments at European level and at national level in the countries where GasTerra is active. Where possible, GasTerra tries to influence the developments. The implementation of new regulations is picked up in good time to be able to achieve it in time.
  2. At policy level, through discussions with government and EU leaders. GasTerra is a proponent of an unambiguous European energy policy so as to reduce fragmentation.

Credit risk
The credit risk consists of the loss that would be generated if customers or counterparties were to remain in default and fail to fulfil their contractual obligations. The company has drawn up guidelines with which customers or counterparties must comply. These guidelines limit the risk associated with possible credit concentrations and market risks. If customers or counterparties fail to comply with these guidelines, they will be asked to furnish additional security such as bank guarantees. This prevents the company from running any major credit risks in respect of any individual customer or counterparty.

Financial instruments
Interest rate risk

The interest rate risk is limited to potential changes in the market value of funds withdrawn and issued. It is company policy not to use derivative financial instruments to manage fluctuations in interest rates (on an interim basis or otherwise).

Liquidity risk
To limit its risk, as at the end of 2013, GasTerra has at its disposal a commercial paper programme of €1.0 billion. The company monitors its liquidity position through liquidity forecasts. The management ensures that the company always has sufficient liquidity available to meet its commitments.

Foreign currency risk
GasTerra's policy up to and including 2012 has been to fully hedge the currency risks that arise from purchases and sales at the time the receivables or payables manifest themselves. From 2013, GasTerra is following a policy of controlling currency risks on receivables and payables in the balance sheet using a bandwidth. Currency risks are only - and fully - hedged by short-term foreign currency contracts, if the unrealised results of those risks fall outside a range set by the company.

Borrowing Requirements

As a trading company with few fixed assets and without inventories, GasTerra has a limited borrowing requirement, and only in the very short term, often for only a few days. This borrowing requirement is met by either issuing GasTerra's commercial paper, with a maximum not used in 2013 of one billion euros, or financing by means of short-term bank loans. Up to and including October 2013, GasTerra had a committed credit line facility of €50 million under contract.

Objectives of Business Plan

Objectives of Business Plan

GasTerra's main objective is unchanged: to maximise the value of Dutch natural gas. This main objective has its concrete expression in the Business Plan in the following objectives:

  1. Aiming to sell the entire volume of natural gas offered to GasTerra
  2. Realising value for the entire portfolio
  3. Anticipating a changing market
  4. Careful and efficient implementation

Doing business in a socially responsible manner is an integral principle of GasTerra's activities and a part of all its main goals.