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Kon-Kraft report: Tax reductions will promote greater activity

September 27, 2007, 21:05 CEST

A reduction in the special tax on new petroleum operations in Norway will represent an important step in stimulating exploration and prolonging production on current fields. This is the main conclusion of Kon-Kraft's tax project, that was handed over to Oil and Energy Minister Einar Steensnæs on Thursday morning.

According to the Kon-Kraft report, amending the tax system will mean that the companies would be willing to take greater risks in their exploration for oil and gas fields in the Norwegian Sea and the Barents Sea. Moreover, it will be possible for the infrastructure already in place to be better utilized, and companies will be further motivated to adopt more cost-efficient methods of operation.

Executive vice president Tore Torvund of Hydro Oil and Energy handed over the report on behalf of the Topplederforum, the steering group for Kon-Kraft's tax project. Topplederforum, a management forum, was set up by Oil and Energy Minister Einar Steensnæs and includes representatives from the authorities, organizations and industry.

New oil policy

"Now that the arguments are being presented in the political arena, they should provide the basis for a new oil policy in Norway through a constructive dialogue with the authorities," states head of department Tom-Einar Rysst-Jensen of Oil and Energy, who headed Kon-Kraft's project team.

"The industry is ready to discuss real solutions enabling us to continue developing the Norwegian petroleum industry and retain the tremendous expertise accumulated in this sector over the last 30 years."

The tax project points out that the proposed tax changes will only apply to projects for which the PDO, or plan for development and operation, is submitted after 1 January 2004. This means that the Ormen Lange project, which is expected to apply for its PDO before the end of the year, will not be encompassed by a new tax  system.

For increased production on current fields the tax project proposes a volume deduction, in Norwegian krone per barrel, as an alternative to the special tax.

Critical phase

The petroleum industry has entered a critical phase with many of the fields on the Norwegian Continental Shelf experiencing reduced oil production. Kon-Kraft argues that creating greater incentives, to increase production and further reduce costs, will prolong the lifetime of fields and promote a better utilization of resources. It is particularly important to increase exploration activity in mature areas of the North Sea and on Haltenbanken, so that further good use can be made of existing installations before they are closed down and removed.

The tax project points out that cutting the special tax rate by half will lead to a 100 percent increase in the number of interesting prospects on the Norwegian Continental Shelf.

"We are spending more and more money and finding less and less: exploration activity is therefore being curtailed. If we do not obtain good incentives, we will see a further steady decline of investment interest on the shelf," emphasizes Rysst-Jensen.

Declining tendency

Peak production on the Norwegian Continental Shelf was achieved in June 2000, but by June 2003 it had declined by 15 percent. Exploration results have been disappointing, accounting for some 10 percent of total oil and gas production in 2002. Employment is also falling.

The arguments put forward for a tax policy change emphasize the importance of the petroleum industry for the whole country, especially in the form of the state's revenues through its direct and indirect ownership, as well as through taxes and duties. But it also means a lot for the financial situation of local authorities and for regional employment. Very many local areas benefit from spin-off effects such as tax revenues from petroleum industry employees and business for local suppliers.

"The proposed changes, involving lower tax rates, will not affect the state's overall revenue potential. Calculations made by Hydro show that a reduction in special tax impacts positively on activity levels and the state's earnings. It's a "win-win" situation," explains Rysst-Jensen.

Great value

Executive vice president Tore Torvund believes that it is now imperative to implement the tax system improvements as quickly as possible. If this is not done, resources representing great value will not be utilized.

"If we do not obtain incentives to extract the remaining resources in current fields and the proven substantial value they represent, they will be lost for ever," he points out.

"Time is running out, as production on many fields is declining. The politicians must now acknowledge the gravity of the situation and make improvements that best serve the interests of society and industry, enhancing employment opportunities and drawing upon the deep well of expertise in Norway."

Facts:

  • The Kon-Kraft process commenced in 1999 to boost the competitiveness of the Norwegian oil and gas industry. Kon-Kraft is a joint project with the participation of the authorities, oil companies, the supplier industry, the shipping industry, the trade unions, research institutions and the financial industry.
  • The objective of the project is to improve and boost competitiveness on the Norwegian Continental Shelf, ensuring stability and constancy for development activity on the shelf.
  • For the two Kon-Kraft reports handed over on Thursday, managing director Johan Nic. Vold of A/S Norske Shell was responsible for the Activity Project, while Tore Torvund, executive vice president of Norsk Hydro ASA, was responsible for the Tax Project.

More info: 

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