Projects progress on Norwegian tax postponements
Oslo’s stimulus package reaps immediate rewards
Norway’s decision to introduce time-limited changes to its tax regime—the stability of which it usually champions—has already resurrected one project mere weeks after postponement and brought resolution to one of the largest development sagas on the Norwegian continental shelf (NCS). And there could be more to come.
“To encourage activity and safeguard jobs in this difficult situation, we are proposing some temporary amendments. In practice, these will mean that tax bills are postponed and companies’ liquidity is improved. This will enable oil and gas companies to make more investments,” the country’s minister of finance, Jan Tore Sanner, said when the government unveiled proposals at the end of April. By June, the Norwegian parliament had approved them with a resounding majority.
There are two crucial elements in the changes. Firstly, oil and gas companies will immediately be allowed to deduct investments, including uplift, from their special tax base. Uplift will be at 10pc, but just for a year, compared with 5.2pc for each of the first four years previously.
“The measures for the oil and gas industry, now approved by the Storting, represent a victory for Okea… and for the entire industry” Norheim, Okea
The new rules will apply to investment costs incurred in 2020 and 2021 and to investments included in plans for new developments submitted by the end of 2021 and approved by the end of 2022. They will continue to apply until production starts, or until the end of 2024.
Secondly, firms will be able to have the tax value of losses in income years 2020 and 2021 refunded.
“Capex-intense and cash-restricted companies are the main beneficiaries [of the changes],” says Karl Fredrik Schjott-Pedersen, partner at Norwegian bank ABG Sundal Collier. “Aker BP has a large inventory of 2C resources combined with substantial capex in 2020. So, it has clearly benefitted, both from a liquidity and value creation perspective. Other winners are, for example, Okea and Mime Petroleum, where liquidity is strengthened from quick tax depreciation and negative tax instalments. Both have, in relative terms, large capex programmes in 2020 and 2021.”
Oslo-listed independent Okea is certainly satisfied with the changes. “The measures for the oil and gas industry, now approved by the Storting [Norwegian parliament], represent a victory for Okea, for equal treatment of companies operating on the Norwegian shelf, and for the entire industry,” says the firm’s CFO, Birte Norheim. “It constitutes an important contribution to increasing activity in the industry, which is the objective of the Storting’s temporary changes to the taxation system for oil and gas companies.
“We will have cash on hand earlier, enabling us to reassess profitable projects. Furthermore, it will provide us with support in the negotiation process with bondholders regarding changes to loan terms.”
Being able to claim back the tax value of losses immediately, rather than carrying the deficit forward until the firm is in a taxpaying position again, “alters the short-term picture considerably” in terms of liquidity this year. Based on current oil price curves and internal assumptions, Okea estimates it will receive c.NOK600mn for the 2020 income year, which otherwise would have been deductible only in later tax bills.
Norwegian independent Aker BP has gone a step further and progressed two projects—rowing back on having put non-sanctioned field developments on indefinite hold as recently as late March. “The proposed changes are appropriate and necessary and will strengthen our capacity to invest while at the same time contribute to improved profitability of new field developments,” the firm’s CEO, Karl Johnny Hersvik, said in June. “In Aker BP, we will not let this opportunity go to waste.”
40pc – Rystad estimate of average fall in breakeven
And Hersvik was as good as his word. Later that month Aker BP and Norwegian partner Pandion Energy submitted a plan for development and operation (PDO) for the $600mn Hod development project, to be tied into the Valhall complex and targeting first oil in early 2022. More unexpectedly, the tax changes contributed to finally reaching an agreement on a plan to develop the Noaka reserves.
“Aker BP argues that breakeven levels are down by 25pc on the changes,” says Schjott-Pedersen. “This fits well with our numbers. Oil companies now face a window of extraordinary good economics to sanction projects… The defined timeframe also makes a sense of urgency, which means that oil companies are likely running on all cylinders to mature projects.
“I think there is potential for smaller projects and tiebacks popping up like jack-in-the-boxes during the tax-break window,” he continues. “I am sure the oil companies are looking through their entire project inventory to see what now might be doable.”
Norwegian consultancy Rystad Energy thinks the 25pc number might even be conservative, with its analysis pointing to an even more material 40pc average breakeven reduction across the industry. It has identified at least 36 projects that may benefit from the changes—most of them subsea tie-backs and electrification projects.
But it also acknowledges risks in Norway tinkering with its fiscal system. “The tax relief… rocks the foundation of the Norwegian fiscal system’s stability, which over time has become one if its greatest qualities,” says Rystad principal Marius Kluge Foss.
One notable aspect when Norway’s right-leaning prime minister Erna Solberg announced the proposed changes was that even she tied both to ensuring the survival of Norway’s native oilfield services and equipment (OFSE) sector to avoid “los[ing] valuable expertise that we need for the transformation of Norway’s economy” and to a separate “green restructuring” package.
When even the traditional pro-oil Norwegian right is talking to about assistance to the oil industry in those terms, it is certainly “a stretch to say the oil industry has gained any stronger political support at the expense of” an environmental agenda, says Schjott-Pedersen. “A political argument is that the competence of the OFSE sector is a likely prerequisite for Norway to participate in developing renewable energy offshore.”
Despite this temporary win, it does not feel as if Norway’s waning political enthusiasm for hydrocarbons has dramatically reversed