The Dutch curse: how billions from natural gas went up in smoke

Fifty years ago, huge natural gas reserves were discovered under the Netherlands. The resulting 211 billion euros in extra revenue allowed the Netherlands to live beyond its means for half a century.

It was 6.33 on the morning of July 22, 1959, an unusually cold and grey day for the season, when drilling first started in the Slochteren natural gas field - one of the biggest in the world. Had this been the US, beet farmer Kees Boon, who owned the land, would be a very rich man today. American journalists who interviewed Boon in the seventies expected to meet the Dutch Rockefeller.

But because of the 1810 mining law, a relic from Napoleonic days, land owners in the Netherlands have no claim on natural resources discovered under their property. Boon received the equivalent of less than 1,000 euros for the lease of 4 hectares of land to the Dutch petroleum corporation NAM.

An unexpected windfall

By contrast, the Dutch state did extremely well: the total revenue from the Groningen gas field is more than 211 billion euros, most of which went straight to the treasury. Back in 1959, there was some discussion about putting the money into a special fund for future investments. Former finance minister Piet Lieftinck was in favour. "The revenue from natural gas should not be used to raise consumption but to take investments to a higher level," the Labour politician argued.

But finance minister Jelle Zijlstra was opposed to the idea. The revenue was too little to warrant a special fund, he said, and he feared that the fund would be used to cover government spending either way.

The gas revenue proved not to be little, quite to the contrary. The oil crisis in the seventies meant that oil and natural gas prices, went through the roof. The Slochteren natural gas field also turned out to be much bigger than expected. Back in 1963, the NAM estimated reserves at 1,100 billion cubic metres in 1963. That number has been revised upwards to 2,700 billion cubic metres, more than 60 percent of which has been extracted.

The unexpected revenue from natural gas had a perverse effect on the Dutch economy. For the past few decades, says Flip de Kam, a retired professor of public finance at Groningen university, the Netherlands has been living beyond its means thanks to the natural gas billions.

Up in smoke

De Kam and NRC Handelsblad have calculated that more than 52 billion euros, or almost a quarter of all natural gas revenues, went into financing social security. Only 15 percent was used to improve the national infrastructure of the Netherlands, while 85 percent went to welfare benefits, interest payments on the national debt, and spending on health care, education and public administration. In other words, says De Kam: "It went up in smoke."

In fact, it was the natural gas revenue that allowed Dutch politicians to build the generous welfare state the Netherlands is famous for. "Without it, Dutch taxpayers would have had to pay 211 billion euros in higher taxes and social security contributions to finance the collective spending", says De Kam. He seriously doubts that the Dutch would have stood for this.

De Kam is not alone in his criticism. The numbers paint "a shocking picture", says Sweder van Wijnbergen, an economics professor at the university of Amsterdam. The Netherlands could have had a much better infrastructure today. Van Wijnbergen: "To put it bluntly, you could say that we wouldn't be stuck in freeway traffic jams today if the money had been spent more wisely."

The natural gas revenue also shielded the Netherlands from the effect of the oil crisis. Money kept pouring in: from 0.8 billion euros in 1973 to 8.7 billion euros in 1980. It was used for a Keynesian stimulus policy, which came down to an expansion of the welfare state.

'Poldermodel'

"The money was used to soothe both employers and employees," says economist Aad Correljé, who has studied the effect of natural gas revenue on political decision-making. In fact, it was natural gas that paid for the so-called "poldermodel", the famous Dutch consensus-based system of cooperation between government, unions and employers organisations, Correljé says.

These days, the politicians who were in charge at the time tend to agree with the economists. "The natural gas revenue was not a blessing but a curse," says Ruud Lubbers, who as economic affairs minister in the seventies and prime minister from 1982-1994. The money led to a "lack of discipline". "We lost our critical touch in terms of government spending."

It wasn't until the late eighties that Lubbers saw an opportunity to create a fund for structural improvements to the economy. The "gas fund" (Fonds Economische Structuurversterking, FES) finally saw the light in 1995. Until the end of this year, it contains 26.5 billion euros. It has been used to finance infrastructure like the high-speed train link to Belgium and the Betuwelijn, a freight train line linking the port of Rotterdam to Germany.

But in 2005 the rules for projects that could be financed through the FES were relaxed to include "the knowledge-based economy". Since then it has become "a joke", says Sweder van Wijnbergen, who was secretary-general at the economic affairs ministry at the time. Under finance minister Gerrit Zalm, money from the "gas fund" was once more used to finance health care and education, capped at 1.5 billion euros per year.

Better late than never

In 2006, the Dutch economic policy bureau CPB examined 49 FES-funded projects on their added value to prosperity. The majority (35) had no added value at all. "It is a very worrying conclusion," says professor Kees Koedijk.

Koedijk was a member of an advisory board of the Dutch parliament that proposed abolishing the "gas fund" in favour of an equity fund, like the one Norway created in 1990 for its revenue from oil and gas.

Such a fund could be financed with the remaining 1,800 cubic metres of natural gas in the Scholteren natural gas field, whose estimated worth is 150 to 200 billion euros. The fund should be an important part of government formation talks after the next legislative elections in 2011, says Koedijk. "Better late than never."