Norway’s Budget Indicates Lower Reliance on Oil&Gas Sector, Proves Arctic’s Centrality
Norway’s Conservative-led minority government said that its minor tax reform will help oil and gas operations in the country, at a moment when production is expected to decrease despite the attempts of Oslo to keep a leading role in the Arctic.
Oslo proposed to cut corporate tax from 27% to 25%, while raising its special petroleum tax from 51% to 53%.
The adjustment is minor, and will not have a major effect on oil and gas companies, suggesting that Norway is working to diversify its economy. Indeed, unlike other years, the Petroleum Ministry was not the protagonist of the 2016 fiscal budget.
Norwegian Minister of Defence Ine Eriksen Søreide was in the spotlight for her proposal to increase the defence budget for 2016 by 9.8% in real terms.
‘A considerable strengthening of the Norwegian Armed Forces is required in order to ensure that we develop capabilities for the future that are both relevant and modern, and which improve our ability to deter the use of force against both Norway and the wider NATO-alliance’ reads a note released on Thursday.
The Ministry of Defence indicated its priorities: F-35 and a F-35-base at Ørland Main Air Station, investments in the Norwegian Intelligence Service, and the Norwegian Navy.
As a result, the 2016 defence budget should increase by NOK 4.29 bn to 49.066 bn (€5.34 bn).
ARCTIC IS NORWAY’S PRIORITY
“The Arctic is Norway's most important foreign policy priority. The Government will continue to give high priority to Norway's efforts in the Arctic in 2016,” Minister of Foreign Affairs Børge Brende said in a note released on Wednesday.
Oil and gas operations seem to be functional to maintain a firm footing in the region.
Coherently, on Thursday, Lundin Norway received consent to drill exploration well 7130/4-1 in the Barents Sea, and Eni Norge AS (Eni) received an authorisation from the Petroleum Safety Authority to extend the use of a service rig on its Arctic Goliat oil field offshore until 30 November 2015.
PRODUCTION AND TAXES
Noreco published on Thursday its statistics for September 2015, saying that it produced 3,186 boepd compared to 3,561 boepd in August. A few hours later, Det Norske published data on production in the third quarter. According to the note, it produced 62.8 mboepd, compared to 58.6 mboepd in the third quarter of 2014.
Speaking about the budget on Wednesday, the Norwegian Oil and Gas Association did ask additional efforts from the Government to help in a moment of low oil prices.
‘The governments proposal for the national budget does not contain the new policies that are needed to increase oil recovery from mature fields. This policy has been drafted by the current government itself as a part of their political platform. And the Norwegian oil and gas association feels strongly that the government must deliver on this quickly’ the Norwegian Oil and Gas Association wrote in a note.
On the other hand, commenting on the tax changes, Petroleum and Energy Minister Tord Lien told Bloomberg that “especially for investments that aren’t that profitable, the measure in the budget will have an impact”, explaining that the “improvement” had to do with the fact that the base for the corporate tax is wider than for the special tax.
All in all, the change seems planned to maintain the marginal tax rate on the same levels. As explained by Statoil, a special petroleum tax is levied on profits from offshore petroleum production and pipeline transportation on the Norwegian Continental Shelf, but it is computed in the a similar way of the corporate tax.
‘The basis for computing the special petroleum tax is the same as for income subject to ordinary corporate income tax, except that onshore losses are not deductible from the special petroleum tax, and a tax-free allowance, or uplift, is granted at a rate of 7.5% per year’ Statoil wrote on its website.
SO WHAT? WHAT DOES IT MEAN?
From the 2016 Budget, it clearly emerges that the Arctic continues to be Norway’s most important foreign policy area. The position is coherent with what said by Prime Minister Erna Solberg in several occasions. The increase in budget spending is a proof of this commitment.
At the same time, the corporate tax cut indicates that her government wants to work on diversifying its economy, maintaining the fiscal pressure on oil companies stable while decreasing taxes for other sectors.
Sergio Matalucci is an Associate Partner at Natural Gas Europe. He holds a BSc and MSc in Economics and Econometrics from Bocconi University, and a MA in Journalism from Aarhus University and City University London. He worked as a journalist in Italy, Denmark, the United Kingdom, and Belgium. Follow him on Twitter: @SergioMatalucci