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Troubles for Norwegian Oil Production

Brian Hicks

Written By Brian Hicks

Posted June 7, 2013

Norway’s Statoil (NYSE: STO) has disclosed the likelihood of delays regarding the Johan Castberg oilfield located in the Barents Sea. Reasons cited include lack of clarity over expected costs and available resources, and it is noteworthy that this comes hard on the heels of the Norwegian government deciding to raise taxes on oil and gas developers.

offshore oil rigLate in May, Statoil – which is the nation’s largest energy concern – had warned of possible adverse reactions to the government’s decision. Moreover, the Castberg project is particularly demanding in terms of infrastructure.

Presently, Norway’s facing a developing crisis in the North Sea, as production volumes continue to decrease due to depleting fields. Hence, the nation is looking to expand offshore northward.

Recently, for example, Statoil discovered some oil near the Vigdis field in the North Sea. However, Reuters reports that the discovery was far smaller than anticipated. Further research is presently ongoing to determine more details. Licenses for the area in question are distributed among Statoil (41.5 percent), Petoro AS (30 percent), Exxon Mobil (16.1 percent), Idemitsu (9.6 percent), and RWE (2.8 percent).

Oil Tax Hike

The recent government decision drew quick responses from Statoil and other oil and gas majors like ConocoPhilips (NYSE: COP) and Exxon Mobil (NYSE: XOM). Under the new terms, petroleum income’s tax-deductible will be reduced, effectively going from 30 to 22 percent.

Further, the special petroleum tax will be hiked to 51 percent from 50 percent, with the top rate steady at 78 percent. Altogether, the moves should see oil industry taxes go up by roughly $517 million annually.

The criticism from various oil companies emphasized that Norway’s tax-friendly structure had helped the energy sector flourish. Indeed, Norway remains the largest oil and gas producer in all of Western Europe. The criticism further alleged that destabilizing that tax-friendly environment could produce a chilling effect in the near future.

Investment Europe quotes Statoil’s development and production head (Norway), Øeystein Michelsen:

“The Norwegian government has recently proposed reduced uplift in the petroleum tax system, which reduces the attractiveness of future projects, particularly marginal fields and fields which require new infrastructure. This has made it necessary to review the Johan Castberg project.”

FuelFix reports that the Castberg project could hold up to 600 million barrels of recoverable crude. These findings have brought renewed focus upon the Barents Sea, which previously was eclipsed by production from the North Sea.

The Castberg project is situated around 240 kilometers northwest of Hammerfest, and comprises the Skrugard (discovered in 2011) and the Havis (discovered in 2012). Statoil operates a 50 percent stake in Castberg, with the remainder split between Italy’s Eni SPA (NYSE: E) (30 percent) and Norway’s Petoro AS (20 percent).

Originally, Statoil had intended to present development and operation plans to the government in 2014, with production expected in 2018. However, the new tax structure means Statoil will need to significantly revise its plans. The same goes for other companies operating in the area.

Given the Castberg situation, it is reasonable to expect other projects and other companies will also experience similar delays as the new rules are digested and accounted for.

Expanding Oil and Gas Sector

Despite the ruckus going on at present, though, Bloomberg reports that Norway appears committed to continuing to expand its oil and gas sector. Offshore explorations in particular are likely to be a major focus of national development.

A new round – the 22nd – of licensing is expected within the next few months for exploration in the Barents Sea. Given the renewed attention the Barents is receiving lately, we should anticipate high interest levels.

Norway’s Oil and Energy Minister, Ola Borten Moe, has further suggested that the upcoming Barents exploration options will include regional support for prospecting and developing oil and gas, much as was done for the Snohvit gas fields off Hammerfest.

Clearly, the Norwegian government intends to continue developing and expanding the oil and gas sector. However, companies may remain recalcitrant for some time longer as they resist the hikes in taxes.

At this time, it does not appear likely that this will cause any serious crisis as far as Norwegian oil and gas production is concerned, but the situation remains somewhat unstable. As more companies overhaul their operational plans to account for the new tax structure, though, the situation should ease out. 


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