Dutch Gas Special
Group Economics Hans van Cleef
Lower gas production means lower growth 30 July 2015 Dutch economic growth weighed down by reduction in Groningen gas production ceiling Public finances acceptable for now, but for how long? Twofold consequences for the consumer
Figure 1: Dutch gas production versus consumption and export (x billion m3)
The Netherlands: implications of lower natural gas revenues Total Dutch gas production stood at nearly 75 billion m 3 in 2014. To meet the entire Dutch demand for gas (about 45 million m 3) plus export commitments (about 30 billion m 3), new options such as the importation of gas will need to be explored now that gas production in the province of Groningen has been reduced.
90 80 70 60 50 40
30 20 10 0
2000 2002 2004 2006 2008 2010 2012 2014 Consumption
Net exports
Production
Source: Statistics Netherlands (CBS)
Lower production means lower economic growth
Figure 2: Natural gas revenues as share of total Income from wealth 5%
Transference of capital & income 1%
Others 3%
Sales of commodities and services 6%
Social insurance premium 34%
Source: Eurostat
In late June, Economics Minister Kamp decided to cut the gas production ceiling for the Groningen field to 30 billion m 3 for 2015. This reduction was larger than expected and, as noted in our previous Energy Monitor, will have considerable consequences. The move was prompted by the need to enhance the safety of the region by reducing the frequency and force of future earthquakes. But the negative consequences in terms of lower economic growth, financial constraints on government and consumers, and greater dependence on gas imports cannot be overlooked. These disadvantages may be partly offset by the extension of the life of the gas fields in Groningen due to increased pressures resulting from the production cut. The implications of the reduction in gas production are analysed in greater detail below.
Taxes 51%
Earlier this year, the CPB Netherlands Bureau for Economic Policy Analysis warned that the decision to reduce gas production would dampen economic growth in the Netherlands. It estimated that the earlier cut in Groningen gas production to 39.4 billion m 3 would slow growth by 0.2 percentage point and 0.1 percentage point for 2015 and 2016 respectively. Now that production has been slashed by significantly more than expected, the impact on Dutch economic growth will be even greater. The further reduction from 39.4 billion m 3 to 30 billion m3 is expected to put an extra drag on growth in 2015 of about 0.3 percentage point. As a result, it could be argued that Dutch economic growth in 2015 could have been 2.75% instead of 2.25%, which is ABN AMRO expects at this time.
Public finances acceptable for now, but for how long? The rule of thumb is that a 1 billion m3 cut in gas production leads to a loss of EUR 200-220 million in revenue. Gas production in Groningen is being reduced from 42.5 billion m3 in 2014 to 30 billion m3 in 2015 (about 23 billion m3 less than in 2013). As a result, the treasury will lose roughly EUR 2.5 billion, assuming that prices and production in the small fields and offshore will stay the same. The current budget deficit is smaller than permitted, which means that, for the time being, there is some room for lower natural gas revenues. However, an extended period of lower revenues may be a cause for concern. At a certain point, this would inevitably have a negative impact on public finances.