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* Annual output to be cut to 40 bcm by 2016
* Previous outlook was 49 bcm per year until 2020
* Will reduce government revenue by 1 bln euros by 2016
By Sara Webb and Anthony Deutsch
AMSTERDAM, Jan 17 (Reuters) - The Netherlands will cut gas production at Groningen, the largest gas field in western Europe, by about a quarter over the next three years, the Economics Ministry said on Friday, bowing to public concerns over earth tremors in the area.
The decision to cut production will mean lower revenues for the government at a time when it is already struggling to meet the European Union's budget deficit targets, even after years of austerity measures.
"The studies showed that there are risks and consequences, including earthquakes," of the gas extraction in Groningen, Prime Minister Mark Rutte told reporters at his weekly press conference before the details were announced.
"They not only cause material damage but also serious emotional damage. The cabinet understands that people are worried."
The first tremors were reported in 1986 nearby in Assen, and since then about 1,000 have been recorded in the area, with a maximum magnitude of 3.6 on the Richter scale, according to the Dutch Meteorological Institute. Local residents want gas production to stop after the tremors caused cracks and other damage to homes and buildings.
Government revenues from the Groningen gas field amount to about 12 billion euros ($16.3 billion) a year.
The reductions in output will cut state income by 600 million euros in 2014, 700 million in 2015 and 1 billion euros in 2016, excluding additional costs earmarked for damage, infrastructure and investments in the local economy that were agreed by the cabinet on Friday, according to the Economy Ministry.
The ministry said production would be cut in 2014 and 2015 to 42.5 bcm and in 2016 to 40 bcm, adding that it was technically possible to reduce Groningen's output to 30 bcm a year and still meet domestic demand.
The field's production amounted to 53.8 billion cubic meters (bcm) in 2013, mainly due to an unusually long and cold winter. The annual outlook to 2020 was previously for around 49 bcm.
Gas from Groningen is sold mostly to utilities and large industries in the home market, although some gas is piped to Germany, Italy, France and Britain.
The gas market has been expecting a decision to cut output, which has already driven up gas prices, analysts said.
"The decision is overall bullish for gas prices, but contracts did not move much today as the market already priced the news in earlier this week," said Oliver Sanderson, senior gas analyst at Thomson Reuters Point Carbon.
Dutch wholesale gas prices for delivery next winter have risen by 65 euro cents since the start of the week. They traded at 27.78 euros per megawatt-hour (MWh) at 1300 GMT on Friday, only slightly higher than the opening value for the day.
The gas field near Slochteren in the north of the Netherlands is operated by a joint venture between Royal Dutch Shell and Exxon Mobil called Nederlandse Aardolie Maatschappij BV.
Gas from the field goes to GasTerra, a Groningen-based international company that trades in natural gas.
Discovered in 1959, the Groningen gas field has been expected to continue to pump natural gas for at least another 50 years.
The field has produced more than 2 trillion cubic meters so far and has more than 700 billion cubic meters remaining.