ECONOMICS OF A DUTCH-NORWEGIAN GAS SWAP

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00287R000600230001-2
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 6
• Document Creation Date: December 22, 2016
• Document Release Date: June 16, 2010
• Sequence Number: 1
• Publication Date: March 16, 1983
• Content Type: MEMO

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Central Intelligence Agency
MEMORANDUM FOR: Dr. Norman A. Bailey
Senior Director, National Security Planning
National Security Council
Acting Chief
Strategic Resources Division
SUBJECT Economics of a Dutch-Norwegian Gas Swap
1. Attached is our estimate of the potential benefits of
increased Dutch gas exports to western Europe in conjunction with
a swap arrangement for Norwegian gas in the 1990s. This
assessment is predicated on industry forecasts of future
conditions in the European gas market and the results are
strongly influenced by assumptions regarding price and the timing
If you have any questions, please contact me
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Attachment:
Economics of a Dutch-Norwegian Gas Swap
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SUBJECT: Economics of a Dutch-Norwegian Gas Swap
Distribution:
Orig - addressee
1 - SA/DDCI
1 - ExDir
1 - DDI
1 - NIO/Econ
1 - D/OGI
1 - Ch/SRD
1 - Ch/PES
A'- OGI/PS
2 - EIB
OGI/SRD/EIB~
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Central Intelligence Agency
DIRECTORATE OF INTELLIGENCE
16 March 1983
Economics of a Dutch-Norwegian Gas Swap
Summary
A Dutch-Norwegian gas swap arrangement could obviate the
need for a second installment of Soviet gas sales to Western
Europe in the 1990s and provide greater security of supply for
the Europeans. The economics of a gas swap deal for the
Netherlands, however, are unfavorable. Industry forecasts
indicate that market conditions are likely to preclude any
increase in Dutch exports until the late 1980s and if current
assumptions of future energy price trends prove correct, the
Dutch could lose about $200 million from such an arrangement.
Consequently, we believe the Hague would insist on significant
financial incentives before agreeing to any swap arrangement.
This memorandum was prepared by
Energy Issues Branch, Office of Global Issues.
The information contained herein is updated to 16 March 1983.
Comments may be directed to Chief, Energy Issues
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?r I I
Economics of a Dutch-Norwegian Gas Swa
Background
Economic difficulties and soft energy markets are forcing
West European gas producers to re-evaluate their gas policies.
In the Netherlands, budgetary problems and a sluggish economy
have forced the government to re-open discussions on a range of
export deals including the possibility of a swap arrangement with
the Norwegians. Under a plan being discussed, the Netherlands
and Norway would pool gas exports, increasing Dutch exports in
the near term and accelerating development of Norway's North Sea
reserves for delivery to Western Europe and the Netherlands in
the mid to late 1990s. The deal would be attractive because the 25X1
two countries might be able to supply enough gas to obviate the
need for large additional purchases of Soviet gas in the-1990s
and also enable the French and West Germans to minimize purchases 25X1
of Soviet gas in this decade under recently signed contracts. In
addition, developing an additional Norwegian pipeline system
would-provide greater security of supply for Western Europe. __1
Economics of a Gas Swap
Additional Dutch gas exports of up to 65 billion cubic
meters (bcm) to Western Europe over the next 10-15 years,
replaced by an equal volume of Dutch imports of Norwegian gas in
the late 1990s, appears uneconomic for the Netherlands. Given
projected market conditions, increased Dutch gas exports could
only begin in the late 1980s at the earliest. The present
discounted value of future. cash flows from increased exports is
unlikely to offset Dutch outlays for Norwegian gas in the
1990s. On the basis of industry estimates, Norwegian gas
probably will be over 20 percent more expensive than Dutch
domestic supplies. Consequently, we estimate such a gas swap
arrangement could result in a loss of about $200 million for the
Netherlands. For such an arrangement to be even marginally
attractive to the Dutch, they would require a 6 percent real rate
of return on their invested revenues from increased gas
exports. This enables the potential profit to approximate the
present discounted value of the gas if left in the ground and
real gas prices increased as most forecasts expect. 25X1
Assumptions
Assumptions concerning gas prices, the discount rate, and
the annual volumes of Dutch exports are crucial in assessing the
economics of a Dutch-Norwegian gas swap. Under most ely 25X1
scenarios, however, the Hague stands to lose.
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Prices. Industry forecasts in early 1983 now anticipate
declining real oil prices to 1985, with prices remaining flat
through 1990 and rising about 1.5-3.0 percent per year between
1990 and the year 2000. Gas prices are likely to follow given
the increasing linkage between oil and gas prices in European
contracts. As a result, we assume real gas prices will decline 1
percent per year to 1985, remain flat through 1990, increase 1
percent per year between 1990-95, and rise 12 percent per annum
from 1995 through the year 2000.
As for the cost of Norwegian gas delivered to the
Netherlands, we believe it will approximate $.18 per cubic meter
($5.25 per million BTU in 1982 dollars) in the mid-1990s.
production costs alone for the 25X1
Troll gas iel project would be $.12-.15 per cubic meter. We
have further assumed a 10 percent real return on the resource and
transportation costs of $.02-.03 per cubic meter. Because
Norwegian gas contains a higher BTU content than does Dutch gas,
adjustments in the Dutch gas grid or gas blending will be
required; we have thus increased the delivered price of Norwegian
gas by 4 percent to cover these additional costs as estimated by
industry sources. 25X1
Discount Rate. The real return on investments has
historically been around 3 to 4 percent. Consequently, we assume
a 4 percent real discount rate in our base case. A higher
(lower) discount rate would decrease (increase) the present value
of future cash flows, primarily affecting Dutch outlays for
Norwegian gas in the latter 1990s. Assuming a 5 percent discount
rate, the Dutch could gain $240 million from the gas swap. Under
a 3 percent real discount rate, however, the Dutch would lose
$760 million.
Timing and Rate of Exports. Industry forecasts indicate
that market conditions are.likely to preclude any increase in
Dutch exports until the late 1980s. The earlier the Dutch can
begin exports, the greater the potential gain to be realized.
Lower exports in the early 1990s--which is probably more likely
given current gas market projections--boost the potential losses
for the Netherlands. Conversely, higher exports in the early
1990s compensated for by lower exports later cut the Dutch loss
Other Factors. The effect of higher Dutch gas prices
domestically--resulting from imports of more costly Norwegian
gas--has not been assessed. For example, in industry, gas is
expected to provide about half of total energy requirements in
the latter half of 1990s and higher gas prices could erode the
competitiveness of Dutch industrial products. On the other hand,
added gas sales could improve the country's trade balance and
perhaps reduce government borrowing requirements in the late
1980s and early 1990s.
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Netherlands: Economics of a Gas Swap with Norway
(US $ Million)
Present Value of Future Cash Flows
(Real Discount Rate of 4
Percent)
1988
$693
$693
$693
$693
1989
666
666
666
666
1990
641
641
641
641
1991
1,244
1,257
1,866
1,885
1992
1,208
1,232
1,812
1,848
1993
1,174
1,208
1,174
1,208
1994
1,140
1,185
570
593
1995
1,107
1,163
553
581
1996
-1,300
-1,300
-1,300
-1,300
1997
-1,275
-1,275
-1,275
-1,275
1998
-1,876
-1,876
-1,876
-1,876
1999
-1,839
-1,839
-1,839
-1,839
2000
-1,804
-1,804
-1,804
-1,804
Net
$-221
$-49
$-119
$21
Case A: Base case. Real gas prices decline 1 percent per year
to 1985, remain flat through 1990, increase 1 percent
per year between 1990-95 and rise 2 percent per annum
from 1995 through 2000. Dutch gas exports are 5 bcm per
year between 1988 and 1990 and are 10 bcm per year from
1991 through 1995.
Case B: Strong gas market in the 1990s: real gas prices
increase 2 percent per year between 1990 and the year
2000.
Case C: Higher Dutch gas exports during the early 1990s: 1991,
15 bcm; 1992, 15 bcm; 1993, 10 bcm;'1994, 5 bcm; 1995, 5
bcm.
Case D: Assumptions of both Case B and Case C.
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