Norway Oil Tax Investing

Brian Hicks

Written By Brian Hicks

Posted May 7, 2013

Norway’s caught between a rock and a hard place, but of a different sort.

On the one hand, offshore domestic oil and gas production is booming. On the other hand, the nation isn’t immune to the debt crisis that has pervaded all of Europe.

oil 11%2F11%2F11Thus, the government has decided to impose taxes on the oil sector—to a total of $520 million a year—in an effort to stem the overheating production.

Bloomberg reports that four-year exemptions on “free cash flow” will be reduced from their current level of 30 percent to 22 percent, while petroleum taxes will go up from 50 to 51 percent. Overall, the top rate will be 78 percent. At the same time, corporate tax rates drop from 28 to 27 percent.

Bloomberg reports:

“The changes will lead to an increased focus on costs in the petroleum industry,” Finance Minister Sigbjoern Johnsen said. “This can damp the pressure and cost increases created by the high activity level in the petroleum sector.”

The problem with Norway’s explosive oil and gas sector is that it has resulted in a skewed market. Elsewhere, jobs keep getting cut, while investment in offshore oil and gas development continues to increase, which translates to cost and wage increases nationwide. Naturally, the government announcement was not met with cheers.

Oil Sector Impact

The impact of the raised taxes could hurt the nation’s production. It remains the world’s seventh largest oil producer, and oil projects may be temporarily shelved or even canceled.

Right now, supplies are facing severe strain. Just last week, for example, Aker Solutions—an engineering firm—declared that Q1 numbers would be depressed due to cost overruns and assorted product delays. It led to Aker’s shares dropping more than 20 percent in just one day.

Predictably enough, oil firms saw slight drops in the market after the tax news broke, while non-oil-and-gas companies generally saw a slight uptick.

While Statoil has declared that the news makes it more difficult to keep investing in “marginal” oilfields, the general criticism seemed to be that the government’s action has reduced the industry-friendly atmosphere Norway enjoyed. Some 10 small oilfields Statoil was considering are likely to be shelved for the time being, Reuters reports.

Norway has worked hard to make the nation as transparent and economically-friendly as possible, and dividends have been plentiful as companies flock to the country to do business. However, this is the second major adjustment Norway has made to the oil and gas sector within six months.

The earlier move was to reduce natural gas transport tariffs for new gas contracts beginning January. That decision caused a bit of a panic amongst pipeline investors, who abruptly faced steep potential losses.

Short-Term Answer to a Long-Term Problem

Norway isn’t without its economic problems. The sheer success of the oil and gas market—and the arguable coddling it has received from the government—has meant that overall unemployment numbers are impressive.

While that is good—and Norway certainly has had a nice reprieve from the worst of the Eurozone debt crisis—it also means that non-energy sector companies have often suffered greatly, becoming all but non-competitive in some cases. Thus, through this year Norway expects overall wage growth to slow down to 3.5 percent.

Meanwhile, North Sea oil fields continue to deplete, and overall output is projected to drop for the 13th straight year. Export growth is likely to slow down to 0.5 percent over 2013; last year it was 2.9 percent.

That also means unemployment, while still low, is expected to reach its highest level since 2011. Inflation, at any rate, has stayed below 2.5 percent due to the krone’s sustained strength, yet the central bank has stated it may cut rates further this year to curb the krone’s growth.

Overall, then, the tax adjustments may well have a chilling effect on the energy sector in the short term, but it’s more than likely to benefit Norway in the long run. 


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