The impact of the decision by the Dutch government to
stop extracting gas from the gas fields in Groningen on
the Dutch economy and in particular its debt situation
Steven Douwes 10554467
Statement of originality
This document is written by student Steven Douwes, who declares to take full responsibility for the contents of this document.
I declare that the text and the work presented in this document is original and that no other sources other than those mentioned in the text and its references have been used in creating it.
The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.
Table of contents
STATEMENT OF ORIGINALITY 2 ABSTRACT 4 INTRODUCTION 4 LITERATURE REVIEW 6 RESEARCH METHOD 10DATA AND ASSUMPTIONS 14
SCENARIOS 16
RESULTS 32
RECOMMENDATIONS FOR FUTURE RESEARCH 40
CONCLUSION 40
BILBLIOGRAPY 42
Abstract
This study attempts to analyse the impact of the decision by the Dutch government to stop extracting gas from the gas fields in Groningen on the government debt situation. By creating three scenarios, predictions are made as to how the Dutch government debt-to-GDP ratio will develop after the decision to stop extracting gas has been made. This study has found that compared to a scenario in which gas extraction was to continue at the level set in the Regeerakkoord 2017, government debt as a ratio of GDP is indeed affected by the decision to phase out gas extraction. When the price of natural gas is higher than forecasted by the world bank and when economic growth is lower than expected, the government debt situation is worse of when gas extraction is phased out, compared to a continuation of gas extraction.
1. Introduction
Since 1959 the Dutch government has been extracting gas from gas fields in Groningen. These drilling operations have been very lucrative and important for the country’s finances. In 2017 alone, the total natural gas revenues amounted to 2,824 billion Euros (CBS, 2018). When the Dutch government decided to extract less gas in 2017 than in 2016, this had a direct impact on the EMU-balance, which worsened by 0,4% because of it according to the Miljoenennota of 2017 (Miljoenennota 2017, p. 68). After several years of drilling, it became clear that the gas drilling would cause serious damage to the soil and that it would lead to earthquakes (OVV, 2015). From 2010 up until 2016, 677 earthquakes have occurred in the province of Groningen, varying from a strength of 0 to a strength of 4 on the Richter scale (NOS, 2017). On March 29th of 2018 minister Wiebes announced that the Dutch government
was going to stop extracting gas from the gas fields in Groningen by the year 2030. For the people in Groningen this was a reassuring message. Even though the decision to stop pumping up natural gas is long-awaited by the people of the province of Groningen, this also means that the Netherlands will be dependent on other countries for gas. Therefore, in addition toa lower state income due to lower gas extraction revenues, there will be higher expenses from importing gas (van der Weijst, 2016).
Since 1958 the Netherlands are a member of the European Union (European Union, 2018). Member states of the European Union are bound to rules and regulations concerning their debt level. According to the Stability and Growth Pact, the level of government debt cannot be higher than 60% of the GDP unless the proportion of the debt shows a tendency towards
considerable reduction and converges to the reference value with a satisfactory dynamic (Kesner-Skreb, 2008). The EMU-debt was 62,1% of GDP in 2017 and the government budget was 0,6% of GDP (Miljoenennota, 2017). This would mean that the EMU-debt would eventually converge to the required percentage of 60% if no shocks were to occur that influence either the debt level or the government budget (Miljoenennota 2018, p. 49). Based on the decision made by Minister Wiebes, it can be assumed that the income from gas extraction will diminish each year from now until 2030. According to the Miljoenennota of 2018, the Dutch government expected natural gas revenues to be 10 billion Euros in 2017, but the actual revenues were 2,824 billion Euros. For 2018 the expected gas revenues are 1,9 billion Euros (Miljoenennota 2018, p. 53). As a result of less gas being extracted in Groningen, expenses from importing gas are going to increase (VEMW, 2018). What is going to be the impact of the decision to stop drilling gas on the Dutch economy and in particular its debt situation? Is it then still viable to assume that the government finances of the Netherlands will meet the Stability and Growth Pact? The goal of this thesis is to analyse the impact on the Dutch economy and in particular its debt situation.
The remainder of this thesis is comprised of 7 sections. In section 2 the literature review will be presented, followed by the research method and the model in section 3. Following the research method and model, the data and assumptions for the model will be presented in section 4. Section 5 will contain 5 scenarios, which will analyse the government debt development. The results of these analyses will be presented and discussed in section 6. Section 7 will contain the recommendations for future research. Finally, in section 8 the conclusion of this thesis is presented.
2. Literature review
The literature review is divided into four sections. The first section will describe the dependence on natural gas by the European Union and its implications. The second section will describe what kind of costs arise due to earthquakes that have resulted from gas extraction. The third section will provide an insight in the effect an earthquake has on the economic growth of an economy. The final section will describe the Resource Curse and the Dutch disease and explain why they are relevant for this thesis.
2.1 Dependence
In 1957 the Dutch government discovered gas in the province of Groningen (SodM, 2018). The gas field near Groningen is also the largest gas field in Europe (Whaley, 2009). As a result of this, the Netherlands depend on this gas for energy. Due to the decision made by Minister Wiebes to phase out natural gas extraction, the Netherlands will become dependent on other countries for natural gas. The risk that arises from being dependent on other countries for the import of natural gas can be divided into three sub-categories namely:
- facility dependence - transit dependence
- source dependence (Stern, 2002).
Chechhi et al. explain the risks described by Stern as “risks associated with facility dependence can be technical or financial in nature, while source dependence and transit dependence refer to political risks associated with government decisions of producing and transit countries” (Checchi, Behrens, Egenhofer, 2009). In 2030 the Source Dependence of Europe will be 69% as opposed to 36% in 2002, which raised concern for technical and political reliability (International Energy Agency, 2004). This tells us that Europe as a whole is becoming more dependent on the sources of natural gas. At the moment the Netherland are not yet dependent on gas imports. Because of the decision made by Minister Wiebes to lower the amount of gas to be extracted to zero by 2030, the Netherlands will have to depend on other sources of energy in the future. If these alternative sources of energy do not suffice to meet the demand of the Dutch economy, the Netherlands are going to have to import gas. As the amount of gas to be extracted is going down, along with it the Dutch supply of natural gas is going down. When in the future supply decreases, the natural gas price may rise because total natural gas supply in Europe decreases. Some similar effect has been seen in the oil industry, where small supply cuts lead to disproportional price spikes (INDES, 2004). However, in 2017 the total Dutch production of natural gas was 0,3% of the total amount
produced worldwide (BP, 2018). Based on this one could argue that a decrease of Dutch natural gas supply is not going to influence the world price of natural gas.
As the Netherlands are going to be dependent on the import of natural gas, this means that other countries will become more dependent as well. This is because countries such as Belgium, Luxemburg and Germany already depend on Dutch natural gas since they do not have this natural resource themselves (Stern, 2002). Percebois (2006) states that ‘‘a country which imports the majority of its energy at a sustainable cost and which ensures the security of supply thanks to well-diversified sources will be dependent but vulnerable.’’ So as long as the sources of natural gas are well-diversified, the importing country will be less vulnerable to supply shocks. At the moment the sources from which countries import gas are well-diversified, but this might change in the future. The reason this might change is that natural gas is becoming more important and the number of countries that are exporting it is decreasing (Reymond, 2007). 88% of the natural gas imported in Europe comes from Russia, Norway and Algeria. Norway’s reserves are going to be depleted first since it has a very high rate of production compared to Russia and Algeria (Reymond, 2007). Even though there are more countries exporting natural gas to Europe, the fact that Russia and Algeria might end up in a monopoly position could harm gas-dependent countries. Weisser (2007) states: “The EU directly or through its members needs a clear proactive policy on “Security of Gas Supply” within a strong multilateral framework. The days of national gas markets with national solutions will rapidly disappear” (Weisser, 2007).
2.2 Costs as a result of natural gas extraction
As a result of natural gas extraction, earthquakes occur on a regular basis in Groningen. Between 2010 and 2016, 677 earthquakes have occurred in the Province of Groningen (NOS, 2017). Due to these earthquakes houses and infrastructure were damaged. The damage that is caused by these earthquakes creates costs. Costs to account for in terms of money are:
- Damage to properties - A decline of house prices
costs. The ones that are applicable to the situation in Groningen are Physical loss, Economic loss, Shock loss and Insurance loss. The list made by Coburn and Spence will be briefly discussed.
Physical loss can be described as the cost to repair property and infrastructure. In the case of the Groningen earthquakes; buildings, roads, and dykes.
Economic loss includes the cost of the loss of economic activity, the cost of the potential rescue operations and the total cost of repairing properties that were damaged.
Shock loss includes costs that arise from the shaking of the ground. An example is a vase falling off the table during the earthquake.
Insurance loss is all costs that arise from insured people putting in claims on damaged goods (Coburn et al., 2002).
2.3 Economic growth
Few papers have attempted to describe the influence of an earthquake on economic growth. The papers that have researched this relationship do not have conclusive evidence. However, the evidence in a paper by Carvalho and Noy does point towards a negative relationship between the occurrence of earthquakes and economic growth (Carvalho, Noy, 2010). Carvalho and Noy find that “only very large natural disasters followed by a radical political revolution show long-lasting negative economic effects on economic growth” (Carvalho et al., 2010). One could argue that due to this result, the economic growth in the Netherlands will not be affected in the long-run because we can assume that no radical political changes are expected in the future. Even though Carvalho & Noy found these results, in this paper it will be assumed that growth may indeed be affected. The reason for this assumption derives from the fact that the results from papers that have studied the relationship between earthquakes and economic growth have not been conclusive. Because the results have not been conclusive, the assumption that a drop in economic growth is caused by an earthquake can be assumed. Also, a drop in economic growth could be an indirect effect of an earthquake. This possibility has not yet been researched and thus it can be argued that it is possible.
Another factor that could influence economic growth in the future is the depletion of natural gas. In case of the Netherlands the natural resource would not be depleted but since natural gas extraction would decrease to zero, the same effect applies. Sterman found that energy depletion has a significant effect on economic growth. Especially in the intermediate term, the impact of a depleted natural resource can be severe on economic growth. This is because the economy has not been able to fully adjust to higher prices (Sterman, 1980). Taking this into account combined with the assumption that an earthquake might also affect economic growth, a scenario will be created in which economic growth differs over time.
2.4 The Resource Curse and the Dutch Disease
Alexander (2014) describes a resource curse as an event in which a natural resource is discovered, which decreases the level of technology in the non-resource industry and subsequently decreases total economic growth (Alexander, 2014). Based on the findings by Alexander we might assume that when a natural resource is used less, lower extraction levels, economic growth may benefit from it. The Dutch Disease is a more specific case of a Resource Curse. Corden (1984) describes the Dutch disease as follows: “The term Dutch Disease refers to the adverse effects on Dutch manufacturing of the natural gas discoveries of the nineteen sixties, essentially through the subsequent appreciation of the Dutch real exchange rate.” (Corden, 1984). For this thesis, the Resource Curse and Dutch Disease may be relevant. Since the natural resource is going to be used less, an opposite effect on the economy may occur.
Based on the fact that the natural gas field in Groningen is the largest in all of Europe, we can state that the Netherlands are resource abundant in natural gas (Whaley, 2009). In 1995, Sachs and Warner found that resource abundance is negatively associated with growth in cross-country data, concluding that the Resource Curse is a reasonable fact (Sachs & Warner, 1995). Doppelhofer et al. (2000) found that natural resources as a variable is one of the ten most robust variables in empirical research concerning economic growth (Doppelhofer et al. 2000). Through the years literature on the Resource Curse has identified different types of market failures that arise due to the Resource Curse. These market failures could reduce economic growth. The market failure that could reduce economic growth in the Netherlands is “the loss of local learning-by-doing spillovers from manufacturers that might be crowded out during a natural resource boom” (Sachs & Warner, 1995).
This tells us that it is very likely that Dutch economic growth has been affected by the natural gas extraction in Groningen and that it will also affect economic growth in the future. This assumption will be reflected in scenario 5, in which economic growth is analyzed as an influencer of government debt.
3. Research Method
In this section the research method will be discussed. A model for government debt dynamic will be introduced and 5 scenarios are created in order to analyse the main question of this thesis.
Since the decision to stop drilling was made quite recently, not much research has been done on the possible consequences for the Dutch government’s finances. However, a lot of data is available regarding the state’s income from gas extraction, the cost of importing gas, the cost of compensation for damages caused by the drilling and a number of other datasets. Van der Weijst (2016) found that the Dutch government has not been extracting gas at an optimal rate. Using his data and model we can find out how much the Dutch government is going to miss out on in terms of income. In a report written by the Algemene Rekenkamer in 2014, it was shown that natural gas income was 10% of the total government income and that the gas extraction in Groningen netted more than three times as much as all the small gas fields in the Netherlands (EZ, 2014) (CBS, 2014). In 2015 there was still 940 billion m3
natural gas left in the fields in Groningen (CBS, 2016). Since the Government is going to stop extracting this gas, total gas revenues are now going to decrease and therefore we have to take a look at the government budget and government debt.
Next to the fact that gas revenues are going to decrease, the decision to stop extracting gas also has an impact on economic growth. According to ING, economic growth in Groningen decreased by 5% in 2015 as a result of less gas extraction (ING, 2015). ING estimates that a decrease in the natural gas extraction of 2,5 billion m3 per year, decreases Dutch GDP
growth by 0,1%-point. The decrease of natural gas extraction in 2015 dampened economic growth by about 0,5%.
This paper is going to analyse the impact on the debt dynamics of the Dutch government as a result of the decision to stop drilling for gas in Groningen. To do this, five scenarios will be created. The first scenario in this paper looks back 20 years. The other four scenarios will look into the future. The data that results from these scenarios will be processed using a model for government debt dynamics. The analyses will run from 2015 to 2030. The year 2015 has been chosen as a starting point because the data concerning government income and expenses are fully known for this year. The data reported by the CBS for the years 2016 and 2017 is not conclusive. This might cause the analysis to give a slightly different image of the debt situation for the future. This is because the current debt situation might be different from the debt situation simulated by the models for 2018.
Standard model for government debt dynamics
For the first analysis, a standard model for government debt dynamics will be used. This model is used because when a shock hits the economy, this model allows us to clearly see how it influences government debt.
The model contains the following variables: 𝑌𝑌𝑡𝑡 = Nominal GDP at the end of period t
𝐷𝐷𝑡𝑡 = Debt at the end of period t, as a ratio to GDP at t
𝐺𝐺𝑡𝑡 = Government spending at the end of period t, as a ratio to GDP at t
𝑇𝑇𝑡𝑡 = The total amount of government income at the end of period t, as a ratio to GDP at t 𝑖𝑖 = The nominal interest rate in period t
𝛾𝛾 = GDP growth in period t 𝜋𝜋 = Inflation in period t
One way to look at debt is through the debt accumulation identity. This equation shows us what debt at a time period t consists of. Debt at the end of a period t consists of the primary deficit (𝐺𝐺 − 𝑇𝑇) plus the interest payments on the debt of the previous period plus the debt from the previous period. The primary deficit calculates the difference between government income, 𝑇𝑇𝑡𝑡, and costs, 𝐺𝐺𝑡𝑡. This gives us the following debt accumulation equation.
𝐷𝐷𝑡𝑡 = 𝐺𝐺𝑡𝑡− 𝑇𝑇𝑡𝑡+ (1 + 𝑖𝑖)𝐷𝐷𝑡𝑡−1
As this equation shows, a change in government spending 𝐺𝐺 directly affects the debt in that same period. This is useful for the analyses made later.
Because most figures in the Miljoenennota are reported as ratios to GDP we should alter the above equation so that it shows as the debt-to-GDP ratio. By dividing the debt accumulation equation by current nominal GDP (𝑌𝑌), the debt-to-GDP ratio is obtained.
𝐷𝐷𝑡𝑡 𝑌𝑌𝑡𝑡 = 𝐺𝐺𝑡𝑡− 𝑇𝑇𝑡𝑡 𝑌𝑌𝑡𝑡 + (1 + 𝑖𝑖) 𝐷𝐷𝑡𝑡−1 𝑌𝑌𝑡𝑡−1 𝑌𝑌𝑡𝑡−1 𝑌𝑌𝑡𝑡
If we then substitute this into the debt accumulation equation shown above, the following is obtained: 𝐷𝐷𝑡𝑡 𝑌𝑌𝑡𝑡 = 𝐺𝐺𝑡𝑡− 𝑇𝑇𝑡𝑡 𝑌𝑌𝑡𝑡 + 1 + 𝑖𝑖 (1 + 𝛾𝛾)(1 + 𝜋𝜋) 𝐷𝐷𝑡𝑡−1 𝑌𝑌𝑡𝑡−1
To simplify we assume that economic growth, inflation and the interest rate are constant over time. In this thesis, I will make an estimation of the debt situation in the future and to do so we also assume constant growth rates, interest rates and inflation. If government expenditure, taxes and GDP grow at the same rate, then the primary deficit-to-GDP ratio (𝐺𝐺𝑡𝑡−𝑇𝑇𝑡𝑡)
𝑌𝑌𝑡𝑡 is also constant. All values in this equation are denoted as ratios of GDP. This
simplifies to the following formula:
𝑑𝑑𝑡𝑡 = (𝑔𝑔 − 𝑡𝑡) + (1 + 𝛾𝛾)(1 + 𝜋𝜋) 𝑑𝑑(1 + 𝑖𝑖) 𝑡𝑡−1 Now we use a log linearization on the second term and we get that
(1 + 𝑖𝑖)
(1 + 𝛾𝛾)(1 + 𝜋𝜋) ≈ 1 + 𝑖𝑖 − 𝛾𝛾 − 𝜋𝜋
Now we can write the final equation for debt as:
𝑑𝑑𝑡𝑡 = (𝑔𝑔 − 𝑡𝑡) + (1 + 𝑖𝑖 − 𝛾𝛾 − 𝜋𝜋)𝑑𝑑𝑡𝑡−1
In order to measure if the decision to stop extracting gas has had a negative effect on the state of the Dutch debt situation, 5 scenarios will be created. The first scenario in this thesis looks back 20 years. In the second scenario, the phasing out of gas extraction is compared to two situations in which gas extraction continues. The last 3 scenarios look into the future and will have the same parameters except for one variable. The variables are:
1. The international price of natural gas
2. The total cost of stopping with the extracting gas including compensation for the inhabitants of Groningen
These three forward-looking scenarios have been chosen because it is expected that the variables in these scenarios will directly affect government debt. These scenarios will be analysed after scenario 1 and 2. The scenarios are now briefly discussed.
Scenario 1 looks back 20 years to get an insight in the relationship between debt and GDP. I want to get a view of the influence natural gas revenue has had on the debt-to-GDP ratio over the past 20 years. If there is a relationship between these two than I can use that relationship in the estimation of the debt situation in 2030.
In scenario 2, the continuation of natural gas extraction is compared to two different sub-scenarios. In this analysis, the extraction levels set in the Regeerakkoord 2017 will serve as a baseline. This baseline is then compared to a scenario in which all remaining gas is extracted by 2030 and a scenario that follows the extraction levels announced by Minister Wiebes.
In the third scenario in this thesis, an increase in the price of natural gas will directly increase government spending, 𝑔𝑔. An increase in government spending will increase debt. In scenario 3 I expect to see a steady increase in debt due to higher gas import costs and along with that a worsening of the debt-to-GDP ratio.
In scenario 4, the total cost of stopping gas extraction, it is also expected that government spending 𝑔𝑔 is going to increase. Just as in scenario 3, an increase in debt is expected due to an increase in costs for the government.
In scenario 5, economic growth, it is expected that the convergence of debt is going to change relative to the other scenarios. As we can see in the model above, if the interest payment on the debt is larger than the economic growth plus inflation, the debt could become unstable. It is expected that scenario 5 will show different growth paths of the debt-to-GDP ratio and that the debt convergences to different levels of steady debt.
In the next section, the data that is used for the standard model for government debt dynamics is presented. After the data, the assumptions that are made in the analyses of this thesis will be discussed.
4. Data and assumptions
In this section, the data that is used for the government debt dynamics model is presented first. Next, the assumptions that are made in the analyses are discussed.
4.1 Data
In order to use the model, data had to be collected for the variables in the model. The values that are used for the variables government deb 𝐷𝐷𝑡𝑡, government expenditure 𝐺𝐺𝑡𝑡, and government income 𝑇𝑇𝑡𝑡, are as reported by the CBS in that year (CBS, 2018). All these values are in millions of Euros.
The figure for the interest rate, 𝑖𝑖, is based on a forecast by the OECD, which is 0,9% (OECD, 2018). As it is quite difficult to estimate the interest rate every year between 2015 and 2030, it was chosen to use the forecasted average by the OECD and keep it constant for the entire time period. Another reason for keeping the interest rate fixed is that this study does not focus on the influence of a varying interest rate on the government debt situation. Therefore, keeping it constant excludes that variable from the analysis. If the interest rate would be a variable, government debt development would be different. A high interest rate results in high interest payments on debt. This results in higher total government debt. For a low interest rate this is the other way around. In order to only analyze the variables mentioned in the scenarios, the interest rate used in calculations is fixed between 2015 and 2030.
The value used for inflation, 𝜋𝜋, is 1,8% every year. This is in line with the target set by the ECB, as the ECB states “in the pursuit of price stability it aims to maintain inflation rates below, but close to, 2% over the medium term” (ECB, 2018). Also, the CBS estimated the inflation in the Netherlands to be close to 1,8% (CBS, 2016). Combining the ECB goal and the estimation from the CBS, inflation in the analyses is fixed at 1,8% per year. The reason for keeping the parameter constant is the same as for the interest rate; difficult to predict and not a focus of this study.
For economic growth 𝛾𝛾, a value of 1,6% will be used every year. This value is used because both PwC and Ecorys have estimated that economic growth is going to be 1,6% between 2015 and 2030. (PwC, 2017) (Ecorys, 2014).
This thesis uses two units of natural gas, MMBTu and bcm. When the Dutch government makes an announcement about the quantity of natural gas they plan to extract, natural gas is presented in bcm. This stands for billion cubic meters. The unit used for natural gas on the
world market is MMBTu. This stands for million metric British thermal units. In calculations involving conversion from bcm to MMBTu, 1 bcm equals 35687347,87 MMBTu (BP, 2016).
4.2 Assumptions
This thesis uses 2015 as the starting year of every analysis. The year 2015 has been chosen as the starting point because the data concerning government income and expenses are fully known for this year. The data reported by the CBS for the years 2016 and 2017 is not conclusive.
For government income, 𝑇𝑇𝑡𝑡, and government expenditure, 𝐺𝐺𝑡𝑡, it is assumed that these values on itself do not change between 2015 and 2030. In order to solely study the influence of the three variables mentioned above on government debt, we have to control for other variables. The fact that both government expenditure and income do not change means that the government budget, (𝐺𝐺𝑡𝑡− 𝑇𝑇𝑡𝑡), is constant for the entire time period. This is not likely, but it is also not likely that the government budget is going to increase and decrease immensely throughout the time period. Keeping it constant ensures that we can observe the influence of the variables in the best possible way.
5. Scenarios
This chapter will present the five scenarios that have been introduced earlier. Each scenario will have the same parameters except for one variable. The first scenario will look back 20 years, the second scenario will compare gas extraction levels and the last three scenarios will all look at the influence on debt by different variables.
5.1 20 years back without gas in the first place
This chapter will analyse what the Dutch debt situation would have been if the Dutch government would have never drilled for gas. Each year the Miljoenennota precisely states how much the gas revenue has been for the previous year. By looking at the Miljoenennota each year from 1998 until 2018 we can find how much revenue from natural gas the Dutch government would have missed out on if they had never started drilling for gas. Using this we can adjust the debt situation each year from 1998 until 2018. This will give a clear insight into how much the government debt depends on natural gas revenues if it depends on it at all. After we have derived the relationship between the Dutch debt situation and the gas revenues we can make an estimation for the debt situation for the future.
Using data from the CBS the following table is competed:
The first column depicts a time period of 20 years, the second column shows the revenue from gas extraction. The third column shows the debt of the Dutch government from 1998 until 2018, the debt for 2018 is an estimation made by the CBS. The last column shows the EMU-Debt as a percentage of Dutch GDP, the percentages for 2017 and 2018 are estimations based on provisional numbers.
I chose a 20-year time period because it allows us to get a clear view of the relationship between the government debt and the revenue from gas extraction. The column containing the revenue shows that during the 20-year time period, natural gas revenue has an increasing trend between 1998 and 2014. After 2014 natural gas revenue decreased with 50% in 2015 and with 45% in 2016. This trend is useful for estimating what is going to happen with debt in the future when gas revenue might also show a decreasing trend.
Since the gas revenue is added directly to the government budget in the Miljoenennota, adding the gas revenue to the debt shows what the total debt would have been without the gas revenue. Doing this results in the following table.
cannot be higher than 60% of GDP unless the proportion of the debt shows a tendency to considerable reduction and converges on the reference value with a satisfactory dynamic (Kesner-Skreb, 2008). If there would not have been gas revenues from 1998 until 2018, the SGP would not have been violated between 1999 and 2007. Between 2008 and 2014, debt as a percentage of GDP increased every year and increased to an alarmingly high level of debt as a percentage of GDP. In this time period, it would not have been likely that debt showed a tendency to decrease considerably over time. This would likely have resulted in sanctions from the European Parliament or at least pressure by the EU-Members to do something about the debt situation. A fine could be given amounting up to 0,2% of GDP plus a variable component if a country repeatedly fails to take effective action to correct the deficit (Angerer, 2015). It is highly unlikely that such a fine would have been given to the Netherlands as a result of their high debt between 2008 and 2018. This can be argued since the European Commission recommended that fines for Spain and Portugal be cancelled while those countries both had higher debts than the Netherlands has in the scenario shown above (European Commission, 2016).
Something that also stands out in the period 2008-2018, is that in this period the gas revenue was the highest. So, despite high revenue from natural gas extraction government debt increased. This shows that high gas revenue does not necessarily mean that debt is going to decrease. On a side note, it must be noted that the time period 2008-2015 was when the financial crisis hit the world. An increase in debt despite high gas revenues was inevitable. From the tables shown above, we can conclude that if there would never have been natural gas revenues, Dutch government debt would have increased to very high levels. The highest level of the debt-to-GDP ratio in the past was 68%, in a scenario where there would not have been natural gas revenues this ratio would have been 90,76%. Although it is unlikely that the actual debt-to-GDP ratio would have increased to 90,76%, this scenario study shows that the Dutch government has been depending heavily on natural gas revenues in order to maintain an acceptable level of government debt.
5.2
Continuing natural gas extractionThis scenario analyzes the development of debt under two different levels of natural gas extraction. The level of natural gas extraction set in the Regeerakkoord 2017 will be the baseline with which these two different levels will be compared. The baseline is compared to the level of gas extraction announced by Minister Wiebes and to a scenario in which all the remaining gas is extracted by 2030. Before the analyses are done, first the total amount of natural gas left in the ground will be calculated. Subsequently, the costs of continuing extraction will be calculated and finally, the scenarios will be explained in detail and analyzed.
As mentioned earlier, the gas extraction operation has caused damage to properties, a decline of house prices, feelings of anxiety and insecurity, health issues and concerns about the chance of dykes breaking (van der Voort et al., 2015). As a result of the decision to stop drilling for gas, these negative externalities will decrease which will save the government money in the future. On the other hand, there is still a lot of natural gas left in the ground. In the province of Groningen an estimated 665 billion m3 of natural gas is still in the ground in
2017 (Volkskrant, 2017).
The amount of natural gas left and its valuation
An estimated 665 billion m3 of natural gas is still left in the ground. Minister Wiebes has
decided that between 2018 and 2030 the average amount of gas extracted from the ground has to go down every year. Gas extraction can vary based on whether it was a hot or cold year, but on average the following amount of gas is going the be extracted in bcm.
2030 is projected to be $8/MMBTu, which would value the gas reserves at $157,3 billion dollars. If for simplicity we assume the Dollar/Euro exchange rate is not going to change between now and 2030, the natural gas reserves in 2030 would be valued at €133,2 billion. To put this amount of money in perspective, in 2011 Japan was hit by a tsunami and an earthquake with magnitude 9 on the Richter scale. The costs to rebuild Japan were estimated to amount to €130 billion (NU.nl, 2011).
The value estimation of the amount of natural gas left in the ground is made using an exchange rate of €0,847014739. This was the exchange rate at 11-06-2018.
So, the decision to reduce natural gas extraction to zero in 2030, results in an estimated €133,2 billion Euros forgone if we would value the reserves today.
Costs of continuing extraction
Even though the decision to phase out gas extraction leaves a lot of money in the ground it also prevents costs due to the extraction of gas. As mentioned earlier, up until now the Dutch government has to pay 11,5 billion Euros as a result of damages done to houses.
The costs of damages to buildings as a result of earthquakes are very likely to be exponential. This is because, for example, a crack in a wall is fixable but if this crack becomes bigger and the wall falls down, the house could come down as well. An entire house breaking down is costlier than strengthening a few walls with beams. Siqueira et al. found that their model can be used as a tool to describe crack growth in structures and that crack growth is indeed exponential (Siqueira et al., 2010).
The natural gas in the fields near Groningen is extracted at a depth of 3 kilometers. The earthquakes thus occur at this depth, while on average an earthquake occurs at a depth of 10 kilometers. This is the reason that earthquakes in Groningen are felt so severely (SodM, 2018).
In 1986 the first earthquake was measured (KNMI, 2017). Since then seismic activity has increased and the strength of the earthquakes has also increased. The most seismic activity was measured in 2013 when 30 earthquakes with a strength of 1.5 or greater on the Richter scale, were measured (KNMI, 2017). In an interview in 2013, the CEO of the NAM told the newspaper Trouw it could be possible that earthquakes with a strength of 5 of the scale of Righter could occur in the future. Up until that moment, the strongest earthquake was measured at 3.6 on the Richter scale (Trouw, 2013).
Taking this into account one could argue that if gas extraction were to continue at the same level it has been at for the last years, total damages would significantly increase. A study by van Elk et al. (2018) showed that if natural gas extraction were to continue at the level set in the Regeerakkoord 2017, seismic activity with a strength of 1.5 or more on Richter scale is slightly going to increase over the next 25 years (van Elk et al., 2018). The figure below
shows how seismic activity is going to develop in the future if natural gas extraction is kept at the level set in the Regeerakkoord 2017.
If we take into account, the model created by Siquiera et al. and the findings by Van Elk et al.. We may assume that continuing natural gas extraction at the same level as set in the Regeerakkoord 2017, cracks in houses will grow exponentially and thus the costs of damages to houses due to earthquakes would increase exponentially in the future. Considering this we can conclude that phasing out natural gas extraction will ensure that seismic activity is not going to increase. Although it is not certain that a decrease in seismic activity will decrease the total costs of damages to houses, we may assume that costs will be lower in the future because of it.
A solution to prevent houses from being damaged in the future is to make houses earthquake resistant. Schulze et al. (1987) found that little research had been done on the costs of making homes earthquake proof. What they did find, was that the benefits of making a home earthquake proof outweigh the costs. They estimated that the total costs of making buildings earthquake proof in Los Angeles would be between $5.2 billion and $8.91 billion in 1980 dollars (Schulze et al. 1987). Based on numbers by the Bureau of Labor Statistics $100 in 1980 is worth $297 in 2018, this is roughly €250 (BoLS, 2018). In current numbers, the earthquake proofing of Los Angeles would cost between €13 billion and €22.2 billion. These costs obviously do not directly translate to Groningen, but it gives an indication of the capital needed to make buildings earthquake proof. Het Financieel Dagblad (2018) reported that 23.500 building in the province of Groningen have to be adjusted in order to be earthquake proof. The first 2500 buildings were examined and based on this examination costs are estimated to be €350 million (Financieel Dagblad, 2018). If it would cost the same for every building, total costs would amount to €3.29 billion. The assumption that costs are the same
Two scenarios for future natural gas extraction
As mentioned before, the baseline extraction level of the Regeerakkoord 2017 will be compared to two different extraction scenarios. The first level the baseline will be compared to is the scenario in which natural gas extraction decreases as Minister Wiebes announced. This will be called the Wiebes scenario. The second level the baseline will be compared to is a scenario in which all remaining natural gas in Groningen is extracted by 2030. This will be called the extreme scenario. The extraction rates for all scenarios is shown below.
Based on the table government debt can be calculated for every year between 2015-2030, these calculations are shown in the appendix. In all scenarios the economic growth rate, 𝛾𝛾, is 1,6%. For the price of natural gas, the average forecasted by the world bank has been used. The costs of compensation are also the average estimate of €11,5 billion. The graph below shows the development of the debt-to-GDP ratio that resulted from the calculations.
45,00% 50,00% 55,00% 60,00% 65,00% 2014 2016 2018 2020 2022 2024 2026
Debt-to-GDP ratio with different extraction levels
Table 4The Wiebes-line shows the development of the debt-to-GDP ratio when gas extraction is phased out by 2030. The debt ratio shows a decreasing trend and in 2030 the satisfactory EMU-value of 60% is reached. The line shows a bump between 2018 and 2022, this is when the earthquake compensation costs are accounted for. Since the Wiebes-scenario does not have natural gas exports, the costs of compensation cause a larger bump in the debt-to-GDP ratio than in the other scenarios. Even though the debt ratio is too high between 2015-2030, it shows a decreasing trend and converges to a satisfactory value. Thus, in the Wiebes scenario the debt situation of the Dutch government would be stable and sustainable in the long run.
The Baseline-line also shows a decreasing trend. Between 2015 and 2019 the debt-to-GDP ratio is quite similar to the Wiebes-scenario. After 2019 the lines diverge. This is due to the import of gas in the Wiebes-scenario and because the Baseline-scenario is not affected by gas imports. The scenario is not affected by imports because the amount of gas extracted is the exact amount of gas that is used for consumption. After the costs of compensation are accounted for, the debt-to-GDP ratio decreases more rapidly and reaches the EMU-value in 2024. In this scenario, the extra costs that will arise in the future due to the continuation of gas extraction are not included. This is because we cannot predict how high those costs are going to be. A scenario in which an estimate for those costs is made will be presented later. When the continuation of natural gas extraction does not result in higher compensation costs, the government debt situation will be stable and sustainable in the Baseline-scenario and preferable to the Wiebes-scenario.
The Extreme-line shows a rapidly decreasing debt-to-GDP ratio. In 2019, just before 2020, the EMU-requirements are met. The debt ratio shows a very slight bump when compensation costs have to be accounted for. Due to the large amount of gas exports, the effect on the debt-to-GDP is only small. For this scenario the same holds as for the Baseline-scenario; as long as the continuation of natural gas extraction does not result in higher compensation costs, the debt situation is stable and sustainable.
24
The assumption that the continuation of natural gas extraction does not result in higher compensation costs is not likely to hold. In fact, as discussed before, the costs of compensation might be exponential. If this is indeed true, the Dutch government debt
situation might be better off in the Wiebes-scenario than the Baseline- or Extreme-scenario.
The graph above is created with the assumption that the costs that arise due to earthquakes are exponential. The goal of this analysis is to show how these costs have to develop in order to have an equal debt-to-GDP ratio in 2030 across all scenarios. As the graph shows, the debt situation in the Baseline-scenario is worse than the Wiebes-scenario in every year. This is because now we have accounted for the earthquake costs. Compared to the Wiebes-scenario, the debt situation in the Extreme-scenario is lower every year until 2030, in which they are equal.
This table shows how costs would have to increase every year if the total amount of government debt would be the same in 2030 across all scenarios. In the extreme-scenario the earthquake costs have to increase 19,6% every year, which would
accumulate to €108452 million. It is not reasonable to assume that this is going to happen in the future. In the past the
Netherlands have extracted similar amounts of natural gas per
Extreme Baseline Wiebes 45,00% 50,00% 55,00% 60,00% 65,00% 70,00% 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032
Debt-to-GDP ratio with exponential earthquake costs
year as used in the Extreme scenario. After 59 years of extracting natural gas, the costs due to earthquakes have amounted to €11.5 billion. Based on those numbers it is not reasonable to assume that in 13 years the costs will increase to €108452 million.
In the Baseline-scenario the total increase in costs between 2018-2030 have to amount to €34233 million in order to end up with the same debt-to-GDP ratio. This is an increase of 2,22% every year. Even though it is still unlikely that the extraction costs will accumulate to €34233 billion by 2030, it is a more reasonable scenario.
Purely based on the numbers presented above, it can be argued that continuing gas extraction would be economically speaking the best decision. This is because in reality it is not likely that the costs that arise due to continuing gas extraction are going to be larger or equal to the benefits.
5.3 The international price of gas
This paragraph discusses a scenario in which the international price of gas is the only variable affecting government debt.
In the past years the international price of natural gas has gone up and down. According to data from the World Bank, the price of natural gas in Europe in 2014 was $10.1/MMBTu, in 2016 it was $4.6/MMBTu and in 2018 it was $6.5/MMBTu. This shows a downward trend in natural gas prices from 2014 until 2016 and an upward trend from 2016 until 2018. The World Bank forecasts that in 2030, the year in which the Dutch Government plans to completely stop extracting gas, the price of natural gas in Europe will be $8/MMBTu (World Bank). What the forecast of the World Bank tells us, is that in the coming years the price of natural gas is likely to increase. For this scenario the assumption will be made that between now and 2030 the price of natural gas is going to increase. As the development of the natural gas price cannot be predicted with 100% certainty three estimations will be made. One estimation in which the gas price rises above the forecast made by the World Bank, one in which the price drops below the forecast and one in which the price develops as the World Bank has forecast.
Assuming the world bank correctly forecasts the price of natural gas, we can argue that the Dutch government is going to miss out on a lot of gas revenue and that gas imports are going to be costlier. As the gas price rises, this could benefit the Dutch government in the short term. Revenue earned from the gas that is still going to be extracted is going to be worth more in the future. So, a decrease in the amount of gas extracted will not necessarily mean that revenue is going to decrease immediately in the short run, but in the long run one could argue that this is in fact the case. Since 2010, the amount of natural gas imported from Russia has doubled and the import from Norway has increased by 50% (CBS, 2016). The increasing import in combination with the increasing price of gas will have a significant impact on the Dutch debt situation.
The price fluctuations of natural gas show similarities to the price fluctuations of crude oil. When small supply cuts hit the oil market, the price of oil spikes disproportionately (INDES, 2004). The same could happen to natural gas in the future. Serletis and Shahmoradi (2005) found that the price of natural gas is procyclical and lags the cycle of industrial production (Serletis & Shahmoradi, 2005). They studied the price of natural gas in the US and found that “natural gas prices are positively contemporaneously correlated with US consumer prices and lead the cycle of consumer prices (Serletis & Shahmoradi, 2005). In this scenario we
assume that natural gas prices are increasing steadily. In reality the price of natural gas develops with the business cycle.
Another factor we need to keep in mind is the source dependency in Europe. In 2030 source dependency is estimated at 69% (International Energy Agency, 2004). This estimation was made before the Dutch government announced its decision to decrease natural gas extraction in Groningen. With that in mind, one could argue that the source dependency could be even greater in 2030. This because Germany, France, Luxembourg and Belgium to some extent all depend on the Netherlands for the import of natural gas (Stern, 2002). As more countries in Europe become more dependent on natural gas from other countries, natural gas prices will probably increase along with the increase in the demand for gas. In scenario 3 we will look at different prices of natural gas. The scenario will contain 3 different sub-scenarios:
• A scenario with a high natural gas price, PH
• A scenario with an average natural gas price, PA
• A scenario with a low natural gas price, PL
The different prices will be plotted into a graph which will illustrate the effect of the gas price on the total government debt of the Dutch Government. Figure 5 below shows the natural gas prices for scenario 3 in $/MMBTu.
9,6 8 5,6 6,4 0 2 4 6 8 10 12 2016 2018 2020 2022 2024 2026 2028 2030 2032
Gas Price Forecast
High Medium Low
5.4 The total cost of stopping with gas extraction
In this paragraph, a scenario will be introduced in which the total cost of stopping with gas extraction is the variable affecting government debt.
Since 1960 several earthquakes have hit the province of Groningen. The social impacts due to those earthquakes experienced by the local residents include:
- damage to properties - a decline of house prices
- feelings of anxiety and insecurity - health issues
- concerns about the chance of dykes breaking (van der Voort et al., 2015).
This ultimately led to the decision by Minister Wiebes to phase out the gas extraction in the province of Groningen. In order to make this happen several changes have to be made to the system that provides Dutch households with gas. In 2017 the former minister of Economic Affairs, Henk Kamp, altered the Gas Law so new housing was no longer required to have a connection to the natural gas system (Ministerie van Economische Zaken, 2017). This law helps the Netherlands to become less dependent on natural gas in the future. In the short term this creates high costs for developers and homeowners as they have to choose between using natural gas or investing in other forms of energy.
The natural gas that comes from the fields in Groningen is of a so-called low calorific type. Almost all gas from other fields in the Netherlands, Norway and Russia is of a high calorific type. In order for factories and households to use this high calorific gas, the gas has to be mixed with nitrogen. This is done in a nitrogen plant (DVHN, 2016). The current minister of Economic Affairs wrote a letter to 200 large companies in the Netherlands that they had to stop using natural gas from Groningen by 2022 (Ministerie van Economische Zaken, 2018). All these companies and eventually all households have to switch to a different system that supplies their gas. The Minister does not plan on reimbursing companies for the cost of switching. Although the minister does not want to pay for the switch, it is not unthinkable the Dutch Government eventually will subsidize the switch.
Next to the cost of changing the gas system and the cost of changing the type of gas that is used in the Netherlands, the Dutch Government also has to pay the inhabitants of the province of Groningen who were affected by the earthquakes. The total sum of money estimated to be needed for reimbursing the inhabitants of Groningen in the next 5 years is 18 billion Euros. The NAM, Nederlandse Aardolie Maatschappij, is responsible for 36% of this
payment and the Dutch Government is responsible for 64% (RTL Nieuws,2018). This amounts to roughly 11,5 billion Euros for the Dutch government. To put this into context, the total gas revenues in 2017 were 2,8 billion Euros. Therefore, the compensation of 11,5 billion Euros amounts to more than 4 years of gas revenues if the Dutch government would continue extracting at the same level as in 2017. It might be safe to state that the sum of €11,5 billion is going to weigh down heavily on the government debt. The total cost could turn out to be higher than the aforementioned €11,5 billion. When asked about an estimation for reimbursing the inhabitants of Groningen in an interview with the newspaper Trouw, the CEO of the NAM stated: “When I think of strengthening the region, I think of considerably lower amounts than 1 billion. " (Trouw, 2013). This was 5 years ago and since then the estimated costs have increased by €11 billion. As the extraction of gas is not going to stop any time soon, the costs will probably increase even more.
Since it is difficult to estimate the total costs accurately, three sub-scenarios have been created. In scenario 4 the variable is the total cost of stopping with extracting gas. Thus, the three sub-scenarios are:
- A scenario with higher than expected compensation costs, CH
- A scenario with compensation at an expected level, CA
- A scenario with lower than expected compensation costs, CL
€13.800.000.000,00 €11.500.000.000,00 €9.200.000.000,00 €- €2.000.000.000,00 €4.000.000.000,00 €6.000.000.000,00 €8.000.000.000,00 €10.000.000.000,00 €12.000.000.000,00 €14.000.000.000,00 €16.000.000.000,00 2016 2018 2020 2022 2024 2026 2028 2030 2032
Cost of compensation forecast
5.5 Economic growth
In this last paragraph about scenarios, a scenario in which economic growth is the variable affecting government debt is introduced.
As mentioned earlier, economic growth in the province of Groningen went down by 5% as a result of decreasing the amount of extracted gas. This occurred in 2015 and the trend of decreasing gas extraction is going to continue until 2030. It might be safe to say that the economy of the province of Groningen is going to be affected by this. The province of Groningen relied heavily on the gas extraction operation. In 2013, when the Dutch economy as a whole had negative growth, the only province to grow economically was Groningen (ING, 2015). Taking this into account, it might also be safe to state that any movement in the gas extraction operation is going to influence the economy of Groningen directly and therefore will influence the Dutch economy as a whole.
Scaling down the gas extraction operation also influences the relationships with other countries in Europe. The Netherlands have contracts to deliver gas to Germany, France, Luxemburg and Belgium (Stern, 2002). In 2017 this amounted to 27 billion m3 of natural gas.
These contracts to deliver gas to these countries run until 2030 (NOS, 2018). The Dutch government is not allowed to simply stop the gas delivery contracts it has with these European countries. This is because Europe is seen as one central market. Quitting the contracts would mean the Dutch government would favour its own inhabitants over those of other countries since they would no longer deliver gas to those countries but would still deliver gas to Dutch civilians. This is against European law (NOS, 2018). Ignoring the contracts would mean decreasing gas exports and decreasing gas revenues. Just the fact that the Netherlands intends to phase out gas could cause other countries to refrain from buying Dutch gas. This could further decrease revenues and could also slow down economic growth.
Since the Dutch government plans to phase out natural gas, it is investing in other forms of energy. This also means that investments in other gas fields, such as the gas fields in the Noordzee are decreasing. Energy companies follow this trend and are also investing less in off-shore gas fields in search of other forms of energy. Investments decreased from 475 million Euros in 2014 to 131 million Euros in 2017, a decrease of almost 75%. This decrease is mostly caused by a decreasing gas price but also due to rules and regulations for emissions and high tax rates compared to other countries (AD, 2018). The gas price is expected to pick up in the coming years, but the rules and regulation and the tax rate are not expected to change in favour of energy companies.
Another factor affecting economic growth in the future is the Brexit. The Netherland have a strong trade relationship with the United Kingdom and the Brexit is going to influence this relationship. According to Hugo Erken et. al., economic growth of the Dutch economy could be 4,25 to 3 percent lower in 2030 as opposed to a scenario where the United Kingdom would remain in the European Union.
Finally, earthquakes could also influence economic growth. Carvalho and Noy have researched the influence of natural disasters on economic growth. Early evidence pointed towards a negative relationship but other evidence they found stated that only a natural disaster followed by a radical political change influences economic growth (Carvalho, Noy, 2010). The evidence in both cases is not conclusive. Because different levels of economic growth, whether they are related to earthquakes or not, influence the level to which debt convergences, a scenario with different levels of economic growth will be created. As a baseline the estimated annual growth projected by Ecorys will be used. Ecorys is an international advisory bureau that has done a scenario study of the Netherlands in 2030 commissioned by the Ministry of Foreign Affairs. In this study, they found that the Dutch economy on average is going to grow with 1,6% annually (Ecorys, 2014). PWC did a study on the world by 2050 and they also projected a 1,6% GDP growth per year (PWC, 2017). Since it is difficult to exactly predict economic growth three sub-scenarios have been created in this scenario.
1. A scenario with a higher than expected economic growth, GH,
2. A scenario with economic growth at its predicted average, GA
3. A scenario with a lower than expected economic growth, GL.
1,60% 1,92% 1,60% 1,28% 0,00% 0,50% 1,00% 1,50% 2,00% 2,50%
6. Results
This chapter contains the results of the scenario studies introduced earlier. The results for scenario 1 and 2 have already been discussed, therefore the results of scenario 3,4 and 5 will now be presented.
Scenario 3: The international price of natural gas
The influence of the price of natural gas on the Dutch government debt from 2018 through 2030 has been calculated. In order to do this data provided by the Dutch government on the phasing out of the natural gas extraction is used.
Source: Rijksoverheid
The table shows the path of gas extraction in bcm, between 2018 and 2030. There are three scenarios. The left column shows what gas extraction is going to be when the climate between 2018 and 2030 is cold. The middle column shows the amount of gas extracted when the climate is considered on average and the column on the right shows gas extraction for a warm climate between 2018 and 2030. For this analysis the average will be used. On average the Netherlands use 20 billion cubic meters every year for its own usage (Nieuwsuur, 2018). Taking this into account we can calculate the amount of natural gas in bcm that is available for export or how much is needed via import.
Using this we can calculate the amount of natural gas that is going to be imported in MMBTu. If we combine this with the natural gas price projections made by the World Bank, we can estimate costs of natural gas imports in Dollars. This is then converted to Euros using the Dollar-Euro exchange rate. The final result of these calculations is shown below, more detailed calculations are available in the appendix. The numbers that are in brackets indicate a negative value. The Dollar-Euro exchange rate that is used is €0.847014739.
The total costs of natural gas imports are then added to the government expenditure and thus government debt will increase. The graph in the appendix shows the development of government debt as a result of increased costs due to natural gas imports.
Now that we have calculated the government debt for 2015-2030, we can divide the government debt by the GDP to see what the debt-to-GDP ratio is and how it will develop in the future. To do this, the GDP reported by the CBS for 2015 is used. This gives the following table:
Table 8
The table above shows the calculations made in order to make the graph. The GDP grows at a rate of 1,6% per year. As we can see in the graph, the debt-to-GDP ratio decreases every year and develops to values below 60%. The green line shows the Baseline-scenario mentioned before. In this scenario natural gas extraction continues at the level set in the Regeerakkoord 2017. The Baseline-scenario meets the SGP requirement of 60% in 2024. In the PL scenario, the debt-to-GDP ratio reaches the 60% value between 2025 and 2026. In
the PA scenario, this occurs in 2028 and in the PH scenario debt has not yet reached a value
of 60% or lower in 2030.
Compared to the Baseline-scenario the government debt situation is worse across all P-scenarios, yet in two scenarios government debt has reached a satisfactory value. Concluding, when the price of natural gas is the variable affecting debt, the impact of the decision to stop extracting gas is that across all scenarios the debt-to-GDP ratio will be higher. Figure 8 PL 60% PA PH Baseline 55,00% 56,00% 57,00% 58,00% 59,00% 60,00% 61,00% 62,00% 63,00% 64,00% 65,00% 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032
Debt-to-GDP ratio
when natural gas is variable
Scenario 4: The total cost of stopping with gas extraction
The variable we analyze in this scenario is the total cost of stopping with gas extraction. This directly influences government expenditures and therefore government debt.
The graph above shows the paths of the Dutch government debt in three sub-scenarios from 2015 through 2030. In the CA scenario €11,5 billion is spread out over 5 years, which means
€2,3 billion is added to the government expenses in 2018,2019,2020,2021 and 2022. In the CH scenario €13,8 billion is spread out over 5 years, so €2,76 billion per year. In the CL
scenario €9,2 billion is spread out, which means €1,84 billion per year.
From 2018 until 2022 debt rises in all scenarios, which is indicated by a steeper slope of the C-lines. In 2022 the costs of stopping with the extraction of gas have been accounted for and the slope of the C-lines becomes flatter as a result. From 2022 up until 2030, the C-lines seem to converge. The difference between CH and CL in 2022 is €4375,68 million, in 2030
this difference is €3573,4 million. If all variables such as inflation, interest rate, growth rate, government expenditure and government income stay the same, debt is going to converge to the same value across scenarios.
CA CH CL 400000 420000 440000 460000 480000 500000 520000 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032
Debt affected by extraction costs
Now that we have calculated the path of government debt for this scenario we can again calculate the debt-to-GDP ratio path for 2015-2030. We use the same values for GDP as in the previous scenarios, which gives us the following calculations:
Table 10 Figure 10 CL CA CH 60% Baseline 55,00% 56,00% 57,00% 58,00% 59,00% 60,00% 61,00% 62,00% 63,00% 64,00% 65,00% 66,00% 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032
Debt-to-GDP ratio
The debt-to-GDP ratio shows a decreasing trend. When the costs of stopping natural gas extraction have to be accounted for the debt-to-GDP ratio decreases less than in the previous year, which was expected. The green Baseline-line shows a scenario in which the level of natural gas extraction is at the level set in the Regeerakkoord 2017. In this scenario the EMU line is crossed just after the CL-line. The CA-scenario follows in the same year and
in the CH-scenario the 60% line is crossed in 2025. In all scenarios the debt requirements set
by the SGP are met. Compared to the Baseline, the CL-line depicts a more favorable
scenario. The CA and CH-scenario are both worse than the Baseline. Based on these
findings, it can be concluded that if the cost of stopping gas extraction is the variable affecting government debt, the impact of the decision to stop extracting gas results in a more favorable debt situation in the CL-scenario than if the government were to keep extracting at
Scenario 5: Economic growth
The growth rate is the variable of interest in this scenario. The table below shows the debt levels from 2015-2030 for all scenarios.
Using the calculated government debt, we can derive the debt-to-GDP ratio by dividing the debt by the GDP. The calculations can be found in the appendix. The graph below depicts the development of the debt-to-GDP ratio in different scenarios.
Table 11 GA GL 60,00% Baseline 54,00% 56,00% 58,00% 60,00% 62,00% 64,00% 66,00%
Debt-to-GDP ratio
The graph shows that when economic growth is 1,28% per year or higher, keeping everything else equal, the debt-to-GDP ratio decreases every year in the time period 2015-2030. In the scenario with high economic growth the EMU requirements are met in the year 2020-2021, in the scenario with low economic growth this happens in 2025. From this, we can conclude that if economic growth varies between 1,28% and 1,92% the debt-to-GDP ratio will be equal to 60% between 2022 and 2025. It can be assumed that the debt-to-GDP ratio in reality would be a line in between the GH-line and the GL-line. This is because
economic growth is not constant over time. If the average expected economic growth between 2018 and 2030 is 1,6%, economic growth in reality will sometimes be higher and sometimes lower. At the moment the Dutch economy is in an above trend (CBS, 2018). Based on that, it can be assumed that at the moment the debt-to-GDP ratio is developing closer to the GH-line than the GL-line. As the Dutch economy might slow down in the future
and comes in a below trend, the debt-to-GDP ratio might move more towards the GL-line.
Compared to the Baseline, the GA-scenario and the GH-scenario have a more favorable
debt-to-GDP ratio development. Based on this we can conclude that, when economic growth is the only variable affecting government debt, the impact of the decision to stop extraction gas will result in a more favorable debt situation than when gas extraction was to continue. This will be the case in the GA-scenario and in the GH-scenario.
7. Recommendations for future research
For future research based on this paper or subject, I would recommend a study that also looks at the impact of the interest rate on the debt situation. In this thesis, an interest rate of 0,9% has been used and kept constant for the entire time period. In reality, the interest rate will not be 0,9% for the entire time period. The same can be said for the inflation rate and economic growth.
Another recommendation would be a study that focusses on the costs that arise due to small earthquakes. During this study, I found that very little data was available because no research has been done on this subject.
Finally, I would recommend that a study is done on the influence of earthquakes on economic growth. Some research has been done on this subject, but it has not been studied for small earthquakes such as in Groningen. Especially for Dutch researchers this topic should be interesting.
8. Conclusion
This thesis analyzes the impact of the decision by the Dutch government to stop extracting natural gas in Groningen on the Dutch economy and in particular its debt situation.
Since 1959 the Dutch government has been extracting natural gas from the gas fields in Groningen and the Dutch economy has become dependent on those fields as an energy resource. The Dutch minister Wiebes of economic affairs announced that by 2030 the amount of natural gas extracted in Groningen has to be reduced to zero. As a result of this decision, the Dutch debt situation is going the be influenced in the future. This study focuses on three variables that might affect the government debt between 2015 and 2030.
These three variables are:
- The international price of natural gas - The total cost of stopping gas extraction - The economic growth of the Dutch economy
To observe these variables and what their influence on the government debt is going to be, three scenarios have been created. In every scenario, three sub-scenarios are created in order to provide a useful estimation for the influence of the variable in the future.
develops to a higher value than projected by the World Bank, the debt-to-GDP ratio does not meet EMU requirements before 2030. Compared to the Baseline-scenario, government debt is higher in all sub scenarios. Thus, the impact of the decision to stop extracting gas is that the debt-to-GDP ratio is higher and reaches the EMU requirements later.
The second variable, the total cost of stopping gas extraction, influences the debt-to-GDP ratio only slightly compared to a scenario in which gas extraction continues. The results clearly show that the debt-to-GDP ratio decreases less when the cost of stopping natural gas extraction have to be accounted for. In all three sub-scenarios the EMU requirement is met between 2024 and 2025 and the debt-to-GDP ratios develop closely together. Compared to the Baseline-scenario, government debt does not develop to significantly different value. In the CL-scenario, the Dutch government would actually be better off than in the
Baseline-scenario. Concluding, the impact of the decision to stop extracting gas is very small when the cost of stopping extraction is the only variable affecting government debt.
Finally, this thesis found that the third variable, economic growth, has a direct influence on the debt situation. Depending on the growth rate of the economy, debt develops quite differently. In all sub-scenarios the debt-to-GDP ratio shows a decreasing trend, but debt develops quite different across sub-scenarios. When economic growth is above average, debt-to-GDP ratio reaches the EMU requirements in 2021, when growth is on average in 2022 and when growth is below expectations in 2025. Compared to the Baseline-scenario the government debt situation is better off when economic growth is as forecasted or higher than forecasted. Therefore, the impact of the decision to stop extracting gas is big and has a positive effect on the government debt situation when economic growth is the only variable affecting government debt.
To conclude, it can be said that, based on the three scenarios that predict the Dutch government debt situation, the debt-to-GDP ratio is going to develop to satisfactory values by 2030. Results from scenario studies show that the government debt situation is indeed affected by the decision to stop extracting gas from the gas fields in Groningen, but that the government debt situation will not be in danger in the future because of it. Considering all scenarios this thesis concludes that, the impact of the decision to stop gas extraction on government debt situation is dependent on the variable that affects government debt. When the international price of gas is the variable, the debt situation is worse as compared to the Baseline. The debt situation is almost the same compared to the Baseline when the cost of stopping extraction is the variable. Thus, here the impact on the government debt situation is small. Finally, when economic growth is the variable affecting debt, the government debt situation is better than when compared to the Baseline. In this case, the impact on government debt is highly positive.
