Norway’s petroleum taxes

Oct 05, 2005 02:00 AM

by Oestein Noreng

Oil prices for Brent crude at $ 65/bbl and higher may not be sufficient to halt demand (at least not yet), but they do impact oil exporters. The immediate effect is to improve returns on oil and gas investment.
The Norwegian marginal petroleum tax bite of 78 % was much criticized by the industry as late as 2003. Companies demanded a reduction in the Special Petroleum Tax from 50 % to 25 %, which is added to the 28 % general corporate tax. At that time, the industry argued that an annual, 15 %-to-18 % after-tax return on investment was insufficient to generate much interest in the maturing Norwegian Continental Shelf (NCS).

Reducing marginal tax bite from 78 % to 53 %, and raising after-tax annual return to about 25 % on new investment, would be necessary to stimulate further activity. On the NCS, the volume threshold for developing a field is three to four times higher than in UK waters, due to higher labour costs and taxes -- that was the industry viewpoint.
The government responded in the revised budget (presented in the spring of 2004) by refuting, point-by-point, the key industry argument. However, officials did introduce generous tax provisions for newcomers, in reality taking most of their exploration risk, in addition to slightly accelerating the depreciation schedule. The response was encouraging, with many smaller companies showing interest in Norwegian acreage, including domestic start-ups in addition to foreign-based independents.

Subsequently, the market has done for the industry what the government failed to implement. With oil prices above $ 60/bbl, after-tax annual return on NCS investment ranges from 30 % to 35 %, or about double previous figures. Industry considers this satisfactory -- recently, Statoil CEO Helge Lund commended the Norwegian petroleum tax system for its fairness and stability.
The proof will be, however, in investment decisions. Larger Norwegian companies have a substantial number of smaller prospects, found decades ago as the NCS was less mature, that have not been commissioned for development. The government is concerned that these resources are idle, but it has been unable to incite companies to act.

The question is now whether high prices will spur investment in proven prospects. If so, Norwegian crude and condensate volumes might stabilize above 3 mm bpd for several years. Development of smaller prospects would sustain investment activity on the NCS, which in 2005 probably will amount to about $ 14 bn to $ 15 bn, comprising exploration and development, the highest annual figure ever.
Exploration is already hampered by a shortage of suitable rigs. The 19th Licensing Round, announced in June, opens 64 blocks in the Barents Sea and the Norwegian Sea, including frontier areas of the Barents Sea. Deadline for applications is Nov. 15, 2005, and awards will be announced before Easter 2006.

This seems set to enhance exploration activity in largely virgin territory. Also, exploration continues in mature parts of the NCS, suchas deeper layers of North Sea acreage. Significantly, several smaller oil companies, including domestic start-ups, are seeking pre-qualification from the government.
Norwegian crude oil and condensate output should average 3.2 mm bpd in 2005, about the same as in 2004. Natural gas sales are estimated to be 80 bn cm, marginally above 2004 levels. To keep liquid output even, efforts and luck will be needed in coming years, but gas sales seem set to rise by another 50 % over the next five to six years. This outlook confirms that Norway is a mature oil province with a gas potential.

Due to higher oil prices, net governmental petroleum revenues should range between $ 40 bn and $ 45 bn in 2005, or close to $ 10,000/capita. Only a fraction will be spent. The remainder will be deposited in the Petroleum Fund, likely to exceed $ 200 bn this fall, or $ 45,000/capita.
The governmental budget surplus should be $ 45 bn to $ 50 bn, or about 20 % of GDP. Thus, Norway, with a 4.5-mm population, is set to have one of the world's largest surpluses on the current account balance, in absolute terms.

The most exciting item is the opening of the Barents Sea for petroleum activities, bringing a potential for cooperation with Russia. Recently, relations between Norway and Russia have improved markedly, and a settlement of the maritime border and a division of the disputed area may be within sight.
This summer, Norway and Russia concluded a general agreement on economic cooperation, emphasizing petroleum work in the Barents Sea. It stresses political/ industrial cooperation, and reciprocity, with Norwegian firms participating on the Russian side, and Russian ones in Norway. An important objective is to develop common standards and principles for petroleum development in the Barents Sea, which may be an attempt at introducing strict Norwegian environmental regulations into Russia.

Norway and Russia also agree to jointly develop oil and gas projects on a commercial basis, and to strengthen and further develop cooperation on hydro power and other renewable energy sources. The agreement raised hopes in Norway of a quick deal, but sceptics have pointed out that Russia in recent years has concluded numerous cooperation agreements with the US, China, Germany and the European Union, so far without much practical result.
Nevertheless, the follow-up was The Arctic Energy Agenda, set by decision-makers from Norway, Russia, the US and the European Union. They met in July in Kirkenes, Norway, to address challenges and opportunities of Arctic energy resources.

Oestein Noreng, is Professor, Norwegian School of Management, and he holds the Total chair in petroleum economics and management.

Source: Enatres
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