UPDATE 2-Dutch to sharply cut Groningen gas production

* Output from Groningen set at 27 bcm through October, 2016

* Groningen production can be reduced to 18-24 bcm per year

* Imports will enable reduction of 5-7 bcm at Groningen

* Germany will phase out Groningen imports to zero by 2030 (Updates after Economy minster vows further cuts)

By Toby Sterling

THE HAGUE, Dec 18 (Reuters) - The Dutch government on Friday set production from the Groningen gas field at 27 billion cubic meters (bcm) for the coming year, in line with a court mandate to limit the risk of earthquakes, and said it would continue cutting production limits.

The Groningen gas field is Europe’s largest, but the Dutch government has been reducing output, as small earthquakes linked to production have damaged buildings in the northern province.

“We’re reducing extraction further and taking the necessary measures to ensure we’re less dependent on Groningen gas for energy,” Economic Affairs minister Henk Kamp told reporters, a decision that Finance Minister Jeroen Dijsselboem said would cost the state 1.5 billion euros ($1.6 billion) in lost income next year.

The 27 bcm level for the year to Oct. 31, 2016, is seen as an attempt to strike a balance between the safety of residents and the need to fulfil supply contracts.

In addition to industrial uses, Groningen gas is used in most of the Netherlands’ 17 million householders and several million more in neighbouring countries, though Kamp said Germany would cut imports from Groningen to zero by 2030.

Gas grid operator Gasunie is building a facility to convert gas from Norway or Russia to make it suitable for homes supplied by Groningen gas, which has a different chemical composition.

Once that facility is complete in 2020, production from Groningen could be further reduced to between 18 and 24 bcm per year, Kamp said.

“The chance of earthquakes would be least if production is zero,” he said, adding this is the long-term future of the field anyway since Groningen’s output is expected to decline dramatically by the end of the next decade as reserves are exhausted.

In the meanwhile Kamp said the government would oversee efforts to strengthen up to 10,000 buildings in Groningen to prepare them for potential earthquake shocks. Such work is paid for by field operator NAM, a joint venture of Shell and Exxon Mobil.

Thomson Reuters Point Carbon analyst Oliver Sanderson said the market had been expecting production of 27 bcm from Groningen, and European gas prices would continue to be weak as long as weather conditions remains mild.

“Warm weather and low heating demand are clearly the key driver of low prices at the moment, but bearishness is being compounded by ample supply from various sources and healthy storage inventory levels,” he said.

Production last year was initially set at 39.4 bcm, but that was cut in steps to 33 bcm, then 30 bcm as the government faced censure from the country’s Safety Board.