Oil executives warn Norway tax change could hit future output
BY KJETIL MALKENES HOVLAND
OSLO -- The executives of 15 oil companies operating in Norway said Wednesday that a proposed tax change could hit future output, but they expected even more tightening.
"It takes decades to build credibility in a stable [tax] framework, but it takes only one decision to tear it down," warned the executives of 15 oil companies operating in Norway, including Statoil, ConocoPhilips, ExxonMobil, Royal Dutch Shell, Wintershall, Total and Centrica, in an opinion piece published by the Norwegian daily Dagens Naeringsliv.
Traditionally paying only 9% of project development costs, oil companies must start to pay 12% of their project costs as of 2014 after a May 5 government proposal that shifted more risk away from Norwegian taxpayers and onto companies.
The government linked the proposal to a series of cost overruns on offshore projects and rising oil-sector cost inflation, which have been partly fueled by generous tax deductions and also rapidly rising oil activity amid high oil prices.
The executives, including Statoil Chief Executive Helge Lund, said they expected even more tax changes in the coming years, and that increased uncertainty "must necessarily affect" project decisions.
The full effect of the tax change would be reached around 2020, when new activity was needed, the executives said.
"The fields we are developing today will maintain production until 2020-2025, but then it will fall towards 2030," they said. "Does the government want to reduce activity in the petroleum sector in 2017, 2030 or 2035?"
Norway' s total oil and gas output is on a declining trend, and 2012 output was 14% below the 2004 peak.
Prime Minister Jens Stoltenberg told the NTB news agency Wednesday that he knew the oil sector would oppose the proposal. Mr. Stoltenberg said the tax change was "important and correct" and would increase the sector' s cost awareness and reduce the danger of overruns.
In a separate statement Wednesday, state-owned Petoro AS warned its owner that huge revenues could be lost due to the tax change. Petoro manages the government' s direct ownership in 35 producing oil and gas fields, and a third of Norway' s oil and gas reserves.
"The further development on the Norwegian continental shelf could be hit by the government proposal to tighten taxes," said Petoro Chief Executive Kjell Pedersen.
Petoro pointed to the opinion piece, and warned that it would become harder to persuade license partners to invest in expensive projects to boost output at mature fields. "The proposed tax change could have negative effects on the further development of fields that are time-critical," Mr. Pedersen said.
Independent consultancy Rystad Energy estimated that the oil price required to make a project profitable rose on average by $5/bbl for new projects after the tax change. Projects such as Norvarg, Linnorm, Victoria, Peon and Zidane, and the project to boost output at the aging Snorre field, now had a break-even of between $78 and $90/bbl, it said. Oil companies were likely to be reluctant to approve projects with a break-even above $75/bbl, Rystad said.