Volume 3, issue #12 - 17-04-1998

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New Norwegian oil tax code looked at with reserve

Mar. 6, 1998 The Norwegian new oil tax code is expected to open up the FPSO market for shipowners, reduce costs and improve profitability at oil companies.
However, the oil industry remains sceptical about the code and this could hinder the one way it can help shipowners, by getting oil companies to lease rather than buy floating equipment.
In addition, the oil industry is unhappy about capital gains aspects of the code, which it feels will result in tax increases for individual members, especially on small fields.
Shipowners have welcomed the legislation. The Norwegian Shipowners' Association had been lobbying since early 1993 for a change in the system which gave oil companies substantial concessions on the ownership side and thus made leasing floating assets impractical.
Initially the oil industry was opposed to the move because it feared that tinkering with the old code could open a Pandora's box and lead to adverse new provisions which went much beyond the buy-versus-lease aspect.
For example, under the old tax provisions if an oil company invested NKr 250 mm ($ 33.11 mm) in a production vessel it could effectively turn in a negative operating result of NKr 257 mm on activities connected with the vessel and yet achieve a net after-tax annual yield of 7 %.
Were the operator to lease the vessel instead, the same 7 % end result was possible only after a positive operating result of NKr 65 mm
The oil industry was quite happy with the first scenario and the shipowners' interest in the second was unrelated to its own priorities. It feared that if politicians were allowed to "equalise" the two scenarios they would make the first like the second.
Shipowners promised to lobby for the other way round and through a series of developments, the bridge-building Norsok process among them, gradually got the oil industry on their side. But it was always a somewhat reluctant enthusiasm for the cause.
With the new regime having already become law in its existing format some oil interests believe their initial fears about ending up "neither here nor there" have come to pass.
The new regime effectively enables oil companies leasing floating equipment to treat the transaction as a "fictive buy", allowing them to apply the same tax rules as if they had actually invested in the vessel.
The parties to the transaction are supposed to formalise the value of the lease as a rule of thumb pegged at book value adjusted for 4 % annual depreciation.
However, the new code stipulates that the oil tax authorities must accept this valuation for it to stand and gives them the power to apply a lower figure at a later date if they have reason to believe the initial value was inaccurate.
Frode Bohm, head of section for industrial and policy affairs at the Oil Industry Association in Stavanger, told: "This practical aspect of the new system is causing insecurity. Ideally oil companies would like to know for certain, and beforehand, what the value and its tax implications are going to be. Ifthey cannot they may see no reason to give up the established policy of owning floating equipment."
He also expressed reservations about capital gains rules, which effectively advance tax liability on the sale of moveable production assets. The association has projected an erosion of profitability between 8 % and 33 % in small fields as a result.
"FPSO units will tend to be moved from one field to another, especially as the number of small fields grows," said Mr Bohm. "The new system, which also treats the basis for the uplift calculation as an income in the investment period, means that the tax burden will come much sooner now. The government's argument of equalising the way investments are treated is not tenable because the uplift and depreciation systems were predicated on general neutrality between cost and income."
Gudmund Restad, of the Centre Party, was in the parliamentary opposition and a member of the Storting's decision-making finance committee until last year while the shipowners' proposals on the buy-versus-lease matter were under consideration.
He was reported to be in agreement with the oil industry's insistence that the buy-versus-lease change should be treated as a stand-alone and one-off issue and not linked with more general matters such as the capital gains modifications now in force.
Since assuming office the incumbent administration switched to the viewpoint of the Labour Party. The net result was that supporters of the shipowners and the oil industry were reduced to a minority on the finance committee and could not prevent the capital gains changes.
"We regret that politicians have changed their positions without explaining to us why," said Mr Bohm. "We are all for the new system, but it remains to be seen how it actually works. If oil companies continue to own rather than lease, all we will have is shipowners with idle and unleased assets and oil companies burdened with more taxes."