How Does Norway Help Oil Companies?

Norway may be considered one of the most expensive countries on the planet, but it knows a thing or two about how to protect its economy. Not only does it have a sovereign wealth fund worth an estimated US$1 trillion, but it also champions a far-sighted oil and gas tax regime designed to ensure future wealth.

Currently, Norway offers oil and gas companies 78% reductions on exploration costs from taxable income. Furthermore, it offers cash reimbursements for companies that don't report any taxable income. To date, the government has issued more than 100 billion Norwegian crowns in reimbursements, the equivalent of US$12.54 billion. While this is good news for oil and gas companies, the policy has received its fair share of criticism from environmental groups.

Norway slammed over Arctic exploration

The system has garnered fierce criticism from Norwegian environmental group Bellona, as well as global organisations like Greenpeace. As well as accusing the government of supporting oil and gas exploration in the Arctic, they maintain that the up-front cash flow reimbursements breach state aid rules as outlined by the EEA. Bellona went as far as to get the European Free Trade Association (EFTA) involved, though ultimately the Norwegian finance ministry emerged unscathed.

“The Ministry maintains that the Norwegian rules on reimbursement of exploration costs and interest on carry forward of losses ... do not constitute state aid under Article 61 of the EEA Agreement, and are therefore in compliance with the EEA (European Economic Area) law,” asserts the ministry.

A "pay out now, reap the benefits later" approach

While US$12 billion is an enormous sum, the ministry maintains that it eventually recoups the benefits in the form of future tax payments.

“This means that if income is derived from petroleum activity taxed at a rate of 78%, the state, through the tax system, should cover a corresponding share of the cost incurred to earn this income,” explains a ministry representative.

Concerns over "botch" investments

Bellona isn't convinced, stressing that as the country's tax collector, the ministry of finance should not gamble such vast sums based on future gain. While the government is encouraging more exploration in the Arctic Barents Sea, Bellona maintains that in the face of climate change these reserves should remain untouched. As a result, there will be no future income and Norway will never recoup the exploration benefits it handed out in the past.

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