Do the earthquakes in Groningen force The Netherlands to finally cure from the ‘Dutch Disease’? I have doubts, as the easy fix from the gas proceeds is too attractive for the financial drug addicts in the government.

"In economics, the Dutch disease is the apparent relationship between the increase in exploitation of natural resources and a decline in the manufacturing sector (or agriculture)".

Dutch disease – en.wikipedia.org

The people living in the Dutch province of Groningen totally had it, this January 2014.

Groningen, the Northern province of The Netherlands and host of formerly the largest gas field in the world (the Slochteren gasfield of 900 km2), is sick and tired of the Dutch government and the way that it treated the natural resources in this province. 

Overview of the gas fields in The Netherlands
and the Dutch territory
Picture courtesy of: nl.wikipedia.org
Click to enlarge

Groningen has been used as an ATM (i.e. cash machine) by the Dutch government for more than 65 years, while getting very little in return for it, from an economic point of view. 

In the meantime, the houses of the people in Groningen have been hit by more than 222 earthquakes with a magnitude of 1.5 or higher, during the last 20 years alone.

The annual number of earthquakes
in Groningen since 1995
Picture courtesy of: www.nlog.nl
Click to enlarge

What also outraged the people from Groningen, is that their companies lose the competition with German companies, due to the high energy prices in The Netherlands. And that in spite of the fact, that Groningen still has massive gas fields with an annual production of 49 billion cubic meters.

Latest victim of this energy inequality between The Netherlands and Germany was Aldel (i.e. Aluminium Delfzijl), an aluminium producing plant, which perished one week ago. Het Financieele Dagblad wrote:

[…] It is different for metal plant Aldel: the energy costs account for 40% of the production price. When these costs increase, they can’t simply be processed into the sales price of their product. In such case, the higher energy bill leads to a competitive disadvantage.

This was indeed what happened and it led to the end for Aldel, substantial loss of jobs and also a loss of millions of euro’s for Groningen Seaports, the company behind the Port of Groningen.

Last week, in a conversation with Minister Henk Kamp of Economic Affairs, the inhabitants of Groningen demanded that their complaints about the drawbacks of gas drilling would be taken seriously and that the gas production of Groningen would be strongly diminished, in order to stop these earthquakes.

And they wanted serious compensation for the damage done to their homes. The Cabinet Rutte II, represented by Henk Kamp, gave in… a little.

The following snips came from BNR news radio:

Cabinet strongly reduces drilling of gas in Groningen

The cabinet decided to reduce the drilling for gas in the Loppersum gas field in Groningen with 80% during the next three years.

And during the next five years, €1.2 billion euro will be added to the budget for Groningen, in order to reinforce the houses in the province and increase the quality of live in Groningen. At least during the next three years, the cabinet will drill up less gas in Groningen.

On Friday 17 January, Minister Henk Kamp (Economic Affairs) addressed these decisions to the officials of Groningen. In 2014 and 2015, not more than 42.5 billion cubic meters of gas may be drilled up in the province and not more than 40 billion m3’s in 2016. After that, the drilling of gas will be under scrutiny again. This will lead to a loss of income for the treasury of respectively €0.7 bln and €1.3 per year. These amounts are exclusive the state payments for damage redemption and preventive measures and the economic and life quality programs.

Although a 80% drilling reduction of the Loppersum field sounds spectacular, the total reduction in Groningen will be no more than about 15% in 2014 and 2015  and 18% in 2016, based on an average annual production of 49 billion cubic meters during the last few years.

The annual gas production
in Groningen since 1965
Picture courtesy of: www.nlog.nl
Click to enlarge

As a consequence, the inhabitants of Groningen were not really pleased with the aforementioned measures of Minister Kamp, as there were still too many loose ends in it – especially when it came to:

• Structural ways and measures to reduce the future number of earthquakes in Groningen;
• Arbitration in order to set the real damage done to their homes, caused by the gas drilling-induced earthquakes;
• The size of the whole area in which the people can claim damages, caused by the gas drilling in Groningen;
• The economic situation in Groningen, which has deteriorated above average since the start of the crisis in 2008; also as a consequence of the mounting energy inequality between The Netherlands and Germany
• Heavy taxed, expensive energy coming from fuel (The Netherlands), versus heavy subsidized, cheap energy coming from wind (Germany) is not an equal battle.

So although the acute situation in Groningen has now come somewhat at ease, due to Minister Kamp and his measures, the next outburst of public outrage is only one earthquake or large default of a Groningen-based company away. 

I hope that such a future earthquake will not be ‘the big one’ with a magnitude of 4 and higher.

From an economic point of view this is a very interesting development, however: it forces the Dutch government to think about a situation, in which the yields from gas drilling are not certain anymore.

Gas drilling in Groningen made a slow start in 1946, which lasted well into the first half of the sixties. Only a few million cubic meters of gas were drilled up per year.

The Finance Minister at-the-time, Jelle Zijlstra (1958-1963), didn’t even bother to put the money – which came from this Dutch gas – in a special reserve, as he reckoned ‘that the gas would not yield very much money in the future’.

Zijlstra was dead wrong: from the second half of the sixties on, the NAM (Dutch Oil Company; the official exploiter of the Dutch gas) drilled themselves dizzy and the Dutch gas production soared to no less than 95 billion cubic meters in 1976 (see the following chart).

The total gas production in The
Netherlands since 1946
Chart by ernstseconomyforyou.blogspot.com
Data courtesy of: www.cbs.nl
Click to enlarge

The proceeds from the gas drilling in the seventies and eighties were so high that they led to a rockhard Dutch guilder, but at the same time also to enormous inflation rates and massive interest rates of 12% and higher.

These circumstances killed productivity and industrial production: people called this phenomena ‘stagflation’ and the Dutch Disease (see the aforementioned Wikipedia description) became a known concept in the whole economic world.

You could state that the same what happens now in Russia with the proceeds of Rosneft and Gazprom, happened in The Netherlands during those days.

Since the drilling started in 1946, the estimated proceeds from the gas drilling have been between €400 and €500 billion until now. And although the massive drilling of the seventies and eighties has been reduced to lower levels, the high energy prices still turn the Dutch gas into a massive cash cow for the Dutch government.

The worst thing is that, due to Minister Jelle Zijlstra’s refusal to create a special off-balance reserve, the gas money simply disappeared into a financial black hole through the actions of subsequent cabinets, unlike what happened in Norway.

The gas money has been used for royal unemployment benefits, high state retirement benefits, extravagant disability payments and high welfare payments. And also for a project or two or three all over the country (“bridges to nowhere”). And now it is gone without a trace…

For me, the reduction in the annual Dutch gas production is therefore a blessing in disguise: it puts the focus again on productivity improvement and innovation in the agricultural, manufacturing, service, storage&distribution and trade industries.

These are the industries that deliver the real jobs and that should deliver true, sustainable prosperity for the inhabitants of The Netherlands in many years to come.

Still, I doubt whether Cabinet Rutte II and its successors are really willing to structurally reduce the future gas production. The gas yields are an easy fix for the financial drug addicts in The Netherlands: ‘if you get rich for free, why bother to work for it?!’ 

So I expect that – after the current damage is redeemed and the situation in Groningen has come really at ease again – the Dutch gas production through Groningen and other gas fields will be back at record levels within 5 or 6 years. And that is something to be really ashamed about.