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Anyone who thought that Norway and Statoil were basically the same thing has just had a rude awakening. The government in Oslo last month proposed reducing the tax incentives for investing in new oil and gas developments – apparently without giving the national oil champion any advance warning. So Statoil said on Wednesday it will delay development of its Johan Castberg oilfield in the Barents Sea because the fiscal move – not yet law – adds $7 (U.S.) a barrel to the break-even cost of development and makes it less attractive.
Well done, Statoil. The company is already taxed to within an inch of its life at 78 per cent (a 28 per cent income tax and a 50 per cent special tax on oil and gas profits). The government proposal would reduce "uplift" relief – the proportion of new investments that a company can offset against the special tax – from 7.5 per cent to 5.5 per cent. That will raise the cost of new investments for exploration and production.
In the age of oil above $100 a barrel it is hard to complain about the industry paying a bit more. But investment incentives help to create opportunities for tax revenue, too. The U.K. government did something similar in 2011 to what Oslo is now proposing, but was forced to tweak again to make sure that investment remained attractive. Johan Castberg contains 400 million / 600 million barrels of oil equivalent and could cost $16-billion to develop. Its breakeven rate is already above Statoil's group breakeven rate of around $50 a barrel.
As Statoil points out, Norway's oil reserves are moving northwards into the Barents and Arctic sea region as the North Sea matures. That could require a greater level of investment in basic infrastructure. Investing in Arctic waters is already tough – just ask Shell or Gazprom. It is a pity that Norway proposes to tweak its oil investment tax regime and trip up Statoil just as a new chapter in its admirable energy story opens.
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