A revamped tax package hammered out by the Norwegian government and opposition parties is set to revive potential investments in a raft of field projects stalled due to the collapse in oil prices, while boosting liquidity for a number of players, according to an analyst.

The improved proposal presented this week by parliament’s finance committee, will raise the uplift allowance against the special petroleum tax to 24% — compared with the present level of 20.8% and the government’s proposed reduction to 10% — and allow immediate deduction of investment costs against tax, as opposed to over six years at present.

Sparebank1 Markets analyst Teodor Sveen-Nilsen has estimated the revised uplift figure will increase net present value by around 70% for projects considered marginal at current low oil prices of $30 to $40 per barrel.

In particular, it will significantly boost the profitability of the Nkr50 billion ($5.4 billion) so-called Noaka (North of Alvheim-Krafla-Askja) field development project in the North Sea being matured by co-operators Equinor and Aker BP, he said.

Accelerating sanction

While an investment decision for Noaka was not expected this year or next, Sveen-Nilsen believes the tax package could accelerate sanction to within this timeframe.

He now expects proposed investments on this and a number of other schemes to be revised following the landmark tax decision after greenfield development sanctions were largely put on hold earlier this year when the oil market collapsed in the wake of global energy demand destruction due to the Covid-19 pandemic.

Other field projects set to be brought back on to the radar screen include Equinor’s Grand (Grane Area Northern Development), Snohvit Future phase two, Ormen Lange phase three, Halten South East, Peon, and possibly the stalled Nkr60 billion Wisting scheme in the Barents Sea, “if you believe in much higher oil prices”, Sveen-Nilsen said.

Most of these projects were due for a final investment decision by Equinor in the 2022-to-2026 timeframe but were thrown up in the air by drastic capital expenditure cutbacks by the state-controlled operator.

Cost deductions against the 56% special tax will apply for 2020 and 2021, while increased uplift will apply for development plans submitted by the end of 2022 and approved within 2023, covering field investment costs incurred until production start-up.

The temporary package has already resulted in Aker BP reviving a final investment decision on its Hod redevelopment scheme that was earlier postponed after a key platform contract was awarded to Kvaerner on Tuesday.

'Industry-friendly'

“Compared to the government’s original proposal, we think the revised proposal is better designed to do what the politicians actually want: slow down the expected drop in industry activity,” Sveen-Nilsen said.

He added that “both the uplift rate and the structure of cash payback of tax losses are more industry-friendly compared to the government’s original proposal”.

The increased uplift will boost capex deductible against tax to 91.4%, compared with 89.6% under the present rate and 83.6% under the government’s proposed reduction, according to the analyst.

Moreover, a new arrangement under the package will allow so-called carry-forward losses, which are typically deferred to offset future tax payments on profits, to be compensated in the form of immediate cash payments in the years in which the relief measures are in force.

These immediate tax payouts of the value of expected losses will in particular deliver a liquidity boost for companies with an extensive development portfolio and tax losses for 2020 generated by high capital or operating expenditure, according to the analyst.

The relative winners from this arrangement were highlighted as Aker BP, due to its wide portfolio of potential development projects, DNO, due to its tax losses, and Okea, which has tax losses as well as high financial and operational gearing.

Cash payback

He estimated DNO could gain a cash payback of between $150 million and $180 million, and Okea between $50 million and $70 million for their 2020 tax losses, based on an oil price of $40 per barrel.

“The companies that, on a relative basis, will benefit the least from the tax proposal are companies with high-margin production and a thin development portfolio for potential 2020-2021 sanctions,” Sveen-Nilsen said.

He said the package will meet oil companies’ requirement for a $10 per-barrel improvement in the breakeven price for field projects and is also likely to release more than the Nkr100 billion in liquidity for the industry estimated under the government’s original proposal.

It is estimated the package will result in a tax reduction of around Nkr8 billion for the industry, while uplift will not impinge on calculation of the separate corporate tax of 22%.

Okea chief executive Erik Haugane told Upstream the revised tax measures mean companies like itself “will be able to ease the foot off the brake” on project cutbacks as they will boost the profitability of investments for larger companies while increasing liquidity for smaller players.

Package panned

However, Haugane said Okea’s proposed Grevling field scheme in the North Sea remains postponed as it presently requires a breakeven oil price of $40 per barrel, with a pair of nearby exploration wells now delayed until next year.

“We may well have to wait for the outcome of these wells to determine the economics of the project as it is difficult to make a standalone project profitable at an oil price of around $30 per barrel,” he said.

The revised tax package, which is due to be discussed in parliament on 12 June, was approved following tortuous talks between the Conservative-led government and opposition Labour, Center and Progress parties.

Labour also secured a deal under the package for a proposal to be presented in parliament by October this year for an onshore oil terminal at Veidnes in Finnmark county that had earlier been shelved by Equinor and other operators due to lack of commerciality.

However, the package was panned as “short-sighted” by parliamentary member Kari Elisabeth Kaski of the Socialist Left (SV) party that earlier withdrew from the cross-party negotiations.

Kaski said the party had been unable to secure a majority for tax breaks in the package to promote areas such as offshore wind and hydrogen, raising concern over future Norwegian jobs and the economy.

Finance

Norway tax relief package set 'to make field projects fly'