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June 19, 2020

Norwegian tax relief proposal could double near-term industry post tax cash flow

The announced government-supported temporary tax relief proposal designed to ensure continued investment in the oil and gas industry is likely to benefit recently sanctioned and smaller projects; larger projects are likely to see limited benefit.

By GlobalData Energy

The announced government-supported temporary tax relief proposal designed to ensure continued investment in the oil and gas industry is likely to benefit recently sanctioned and smaller projects; larger projects are likely to see limited benefit.

Following the recent commodity price collapse that has forced companies to reduce near-term capital expenditure, Norway has responded to calls from industry to help sustain investment in the sector. The proposal has been designed to allow only companies that invest to realise the tax relief benefits, with those that sanction new projects set to gain the most. Under the proposal, the 78% effective tax rate will remain and instead the Special Petroleum Tax (SPT) allowance depreciation schedule will be accelerated for all investments in 2020 and 2021, and for investment in eligible projects between 2022 and 2024.

The accelerated depreciation of investment could double the post tax cash flow available to the industry in 2020 and 2021, and will therefore increase company liquidity in the short term. Of the pre-FID fields that are under consideration for development in Norway (and targeting FID prior to 2023), Equinor is the operator or a participant in 16 of these fields and therefore could gain significantly. Additionally, although Aker BP has interests in fewer fields (nine), the company will also benefit from the new terms, with the NPV10 of its announced (pre-FID portion) Norwegian portfolio estimated to increase by almost 50%.

 

There have been early indications that the proposal could be effective. Following the announcement that the government supported the proposal, Aker BP sanctioned the Hod Redevelopment and entered into an agreement in principle on the commercial terms with Equinor for a coordinated development of the Krafla, Fulla, and North of Alvheim licenses (the NOAKA project).

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However, the proposal has not been fully passed by parliament (it is due for review in mid-June) and civil society groups are attempting to halt the temporary amendment. Additionally, given the relatively constrained timeframe of the proposal, the incentive is only likely to benefit recently sanctioned and smaller projects.

Wisting is an example of a larger project that could potentially receive limited benefit from this proposal. The field has recoverable reserves of over 400 million barrels of oil and is estimated to cost over US$4 billion to develop. Given the size of the project it is likely that a significant portion of investment could fall after 2024 and therefore will not be eligible for tax relief under the current proposal. Furthermore, the uncertainty of the duration of the COVID-19 response by both governments and companies could mean that the proposed length of the tax relief duration for all investment falls short of what is required to continue and sustain investment in the industry into the longer term.

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