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Capital expenditure cuts affirm Norwegian Government’s tax stability plans

11th February 2016

Plans to continue development on critical Norwegian Continental Shelf oil and gas projects over the past few months, enabled by the achievement of significant cost reductions, will give Norway’s government some reassurance over its decision to maintain the stability of its fiscal regime in the face of falling prices, says an analyst with research and consulting firm GlobalData.

Cuts in spending on Norwegian Continental Shelf oil and gas projects
Cuts in spending on Norwegian Continental Shelf oil and gas projects

According to Erik Lambert, GlobalData’s Upstream Fiscal Analyst, cost-cutting measures introduced by companies on Norway’s major planned projects have been made as the government has offered no support to firms through fiscal incentives during the price downturn.  The average full-cycle breakeven price for an offshore planned project in the country is now USD58 per barrel of oil equivalent.

Lambert explains: “Such measures have resulted, for example, in Statoil reducing the planned investment costs of its Johan Castberg oil development by almost 50 per cent.

“Indeed, reductions in project costs have been supported by a national initiative to standardize contracts between operators and suppliers, competitive pressure amongst suppliers to reduce costs, and the sharp decline throughout 2015 of the krone relative to the dollar.”

The progression of development plans for several flagship projects is despite Norway’s marginal tax rate of 78 per cent, which continues to position the country as the North Sea producer with the most onerous fiscal terms.

For example, Norway’s position of fiscal stability stands in direct contrast to that of the UK, where in mid-2014 the marginal tax rate stood at 62 per cent (or 81 per cent for older fields). This has now been slashed to 50 per cent (67.5 per cent for older fields).

Despite Norway’s higher marginal tax rate, GlobalData believes the Norwegian sector holds some advantages over its regional competitors.

Lambert continues: “Norway has a substantially larger resource base compared to other North Sea countries, increasing its attractiveness as an exploration target, while the existing tax rebate of up to 78 per cent of costs that can be recouped in drilling dry holes strongly incentivizes exploration.

"The 2015 reduction to the corporate tax rate from 27 per cent to 25 per cent balanced by an increase in the Special Petroleum Tax (SPT) from 51 per cent to 53 per cent, has resulted in tax reductions for firms investing in capital expenditure given the uplift applied to SPT, although these will not be material.”

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