Fossil Fuels – At What Cost?
Government support for upstream oil
and gas activities in Norway
JANUARY 2012
Prepared by:
Pöyry Management Consulting (Norway) AS (Econ Pöyry)
Frian Aarsnes
Petter Lindgren
For the Global Subsidies Initiative (GSI) of the International Institute for Sustainable Development (IISD)
Geneva, Switzerland
www.globalsubsidies.org
THE GLOBAL SUBSIDIES INITIATIVE
FOSSIL FUELS – AT WHAT COST?
GOVERNMENT SUPPORT FOR UPSTREAM OIL AND GAS ACTIVITIES IN NORWAY
Page III
Fossil Fuels – At What Cost?
Government support for upstream oil
and gas activities in Norway
JANUARY 2012
Prepared by:
Pöyry Management Consulting (Norway) AS (Econ Pöyry)
Frian Aarsnes
Petter Lindgren
For the Global Subsidies Initiative (GSI) of the International Institute for Sustainable Development (IISD)
Geneva, Switzerland
www.globalsubsidies.org
THE GLOBAL SUBSIDIES INITIATIVE
FOSSIL FUELS – AT WHAT COST?
GOVERNMENT SUPPORT FOR UPSTREAM OIL AND GAS ACTIVITIES IN NORWAY
Page IV
© 2012, International Institute for Sustainable Development
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Website: www.globalsubsidies.org
Fossil Fuels – At What Cost? Government support for upstream oil and gas activities in Norway
January 2012
Prepared by
Pöyry Management Consulting (Norway) AS (Econ Pöyry)
Frian Aarsnes
Petter Lindgren
www.globalsubsidies.org
THE GLOBAL SUBSIDIES INITIATIVE
FOSSIL FUELS – AT WHAT COST?
GOVERNMENT SUPPORT FOR UPSTREAM OIL AND GAS ACTIVITIES IN NORWAY
Page V
ACKNOWLEDGEMENTS
The Global Subsidies Initiative (GSI) wishes to thank the authors, in particular Frian Aarsnes and Petter
Lindgren, for preparing this in-depth and complex research report. Peter Wooders and Kerryn Lang at the GSI
provided guidance on the direction of the research project.
The report also greatly benefited from the expertise of its peer reviewers:
• Anders Bjartnes, Norwegian Climate Foundation
• Doug Koplow, EarthTrack
• Jorgen Randers, Norwegian Business School
• Svend Søyland, Bellona Foundation
The work of the GSI could not have been undertaken without the generous support of the governments of
Denmark, Norway and the United Kingdom.
The views expressed in this study do not necessarily reflect those of the GSI’s funders, nor should they be
attributed to them.
www.globalsubsidies.org
THE GLOBAL SUBSIDIES INITIATIVE
FOSSIL FUELS – AT WHAT COST?
GOVERNMENT SUPPORT FOR UPSTREAM OIL AND GAS ACTIVITIES IN NORWAY
Page VI
TABLE OF CONTENTS
1. Executive Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2. Approach and Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.1 Objective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.2 Scope . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.3 Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.4 Subsidy: A Definition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.5 Taxation in Norway . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
2.5.1 The General Taxation System for Enterprises in Norway. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
2.5.2 The Petroleum Taxation System in Norway . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
2.6 Discount Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
2.7 Resource Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
2.8 Option Value and Future Decisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
2.9 Currency and Petroleum Unit Definition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
3. Overview of the Petroleum Industry in Norway. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
3.1 Petroleum Production: Volume and Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
3.2 Petroleum Investments: Exploration Activity, Field Development and Petroleum Extraction . . . . . . . . . . . . . . . . . . . 22
3.3 Petroleum Industry Structure and Governance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
3.4 Taxation of Petroleum Assets: A Valuable Revenue for the Norwegian Government and Society. . . . . . . . . . . . . . . . . 26
4. Discussion of Potential Subsidy Policies in Norway . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
4.1 Government Transfers of Funds and Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
4.1.1 Government Spending on State Direct Financial Investment and Petoro. . . . . . . . . . . . . . . . . . . . . . . . 30
4.1.2 Public Infrastructure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
4.1.3 Research and Development Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
4.1.4 Emergency Preparedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
4.1.5 The Case of a Major Disaster: Insurance Subsidies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
4.2 Public Provision of Goods and Services at Below-Market Prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
4.2.1 Seismic Investigations by the Norwegian Petroluem Directorate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
4.2.2 Gassco Infrastructure and Facilities Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
4.2.3 The Guarantee Institute for Export Credit and Government Credit Guarantees. . . . . . . . . . . . . . . . . . . . 36
4.2.4 Eksportfinans and Favourable Long-Term Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
4.3 Government Revenue Foregone: Potential Preferential Treatment of the Oil and Gas Industry in the Fiscal System . . 36
4.3.1 Government Coverage of 78 Per Cent of Expenditures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
4.3.2 Loss Carried Forward with Interest Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
4.3.3 Guaranteed Reimbursement of Loss Carried Forward . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
4.3.4 Exploration Reimbursement to Exploration Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
4.3.5 Fast Deduction of Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
4.3.6 Liquefied Natural Gas in Northern Norway: The Case of Snøhvit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
4.3.7 Uplift: An Additional Investment Subsidy? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
4.3.8 Transfer of Production Licences. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
4.4 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
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THE GLOBAL SUBSIDIES INITIATIVE
FOSSIL FUELS – AT WHAT COST?
GOVERNMENT SUPPORT FOR UPSTREAM OIL AND GAS ACTIVITIES IN NORWAY
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5. Impact Assessment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
5.1 Seismic Investigations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
5.2 Research and Development Programs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
5.3 Gassco as a Non-Profit Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
5.4 Emergency Preparedness. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
5.5 Loss Carried Forward with a Risk-Free Interest Rate and Guaranteed Reimbursement . . . . . . . . . . . . . . . . . . . . . . . 48
5.6 Exploration Reimbursement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
5.7 Fast Deduction of Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
5.8 Liquefied Natural Gas in Northern Norway: The Case of Snøhvit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
5.9 Comparison with Statistics Norway’s KVARTS Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
6. Summary and Conclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
7. References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
8. Further Reading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Appendix A: Value of Subsidies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
A.1 Government Transfers and Public Provision of Goods and Services at Below-Market Prices. . . . . . . . . . . . . . . . . . . . 62
A.2 Non-Profit Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
A.3 Subsidies with a Critical Time Perspective: An NPV Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
A.4 Quantifying the Exploration Reimbursement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
Appendix B: Impact Assessment of a Removal of Potential Investment Subsidies . . . . . . . . . . . . . . . . . 66
B.1 Data. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
B.1.1 Production Data. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
B.1.2 Investment Data. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
B.1.3 Government Revenue Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
B.1.4 Petroleum-Related Employment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
B.1.5 Environment Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
B.2 Methodology for Calculating the Effects of Investment Subsidy Removal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
B.2.1 Investment Impacts on Production . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
B.2.2 Investment Impacts on Employment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
B.2.3 Production’s Impact on Government Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
B.2.4 Production’s Impact on Employment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
B.2.5 Impact of Production on the Environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
About the Authors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
www.globalsubsidies.org
THE GLOBAL SUBSIDIES INITIATIVE
FOSSIL FUELS – AT WHAT COST?
GOVERNMENT SUPPORT FOR UPSTREAM OIL AND GAS ACTIVITIES IN NORWAY
ACRONYMS AND ABBREVIATIONS
GDP
gross domestic product
GSI
Global Subsidies Initiative
IISD
International Institute for Sustainable Development
KVARTS
a statistical model employed by Statistics Norway (quarterly data)
LNG
liquefied natural gas
MODAG
a statistical model employed by Statistics Norway (annual data)
NCS
Norwegian continental shelf
NOK
Norwegian kroner (currency)
NPD
Norwegian Petroleum Directorate
NPV
net present value
R&D
research and development
Sm3
standard cubic metres
Sm3oe
standard cubic metres oil equivalent
WTO
World Trade Organization
www.globalsubsidies.org
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THE GLOBAL SUBSIDIES INITIATIVE
FOSSIL FUELS – AT WHAT COST?
GOVERNMENT SUPPORT FOR UPSTREAM OIL AND GAS ACTIVITIES IN NORWAY
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1. EXECUTIVE SUMMARY
In this report we investigate potential subsidies to the upstream oil and gas industry in Norway. Norway has
a 50 per cent special tax on petroleum activities that is intended to capture the so-called resource rent,
which is defined as the return over and above normal profits from oil and gas activities. Norway gives licences
to oil and gas companies under the express understanding that the state, through this special tax, captures
this resource rent. Thus, this report assumes that what profits the oil and gas companies retain are normal
profits. To the extent that mechanisms in the petroleum tax favourably affect normal profits, these mechanisms
can constitute fiscal subsidies to the oil and energy industry relative to other industries that draw on the
same resources.
We investigated 17 policy areas and identified nine subsidies that are offered to the oil and gas industry (four
non-fiscal and five fiscal). The value of these subsidies in 2009 was around 25.5 billion Norwegian kroner
(US$4 billion), but the total value is probably slightly higher, as not all the subsidies have a value calculation.
The value will also differ from year to year due to the nature of the subsidies and the underlying assets and
assumptions. This value is based on a calculation of the potential subsidies in isolation from one another and
for the most part restricted to one year. A multi-year calculation would show a reduction in subsidies over
the years.
The definition we use for subsidy is the one established by the World Trade Organization (WTO), with further
subcategorization by the Global Subsidies Initiative. This report does not take a position on whether possible
subsidies are negative or positive, only whether a subsidy exists, its most likely value and the potential effect
of removing it.
In table 1.1 (next page) we show the possible subsidies we have identified, as well as our attempt at calculating
their value for 2009.
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FOSSIL FUELS – AT WHAT COST?
GOVERNMENT SUPPORT FOR UPSTREAM OIL AND GAS ACTIVITIES IN NORWAY
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TABLE 1.1: SUBSIDIES IDENTIFIED AND ESTIMATED FOR UPSTREAM OIL AND GAS ACTIVITIES
IN NORWAY
Section
Expenditure/policy
Is it a
subsidy?
Size of subsidy
(million NOK)
Transfer of funds or liabilities
4.1.1
Government spending on SDFI and Petoro
No
4.1.2
Public infrastructure
No
4.1.3
Research and development programs
Yes
216
4.1.4
Emergency preparedness
Yes
N/A
4.1.5
Insurance subsidies
No
Provision of goods and services at below-market prices
4.2.1
Seismic investigations by the Norwegian Petroleum Directorate
Yes
257
4.2.2
Gassco infrastructure and facilities services
Yes
24
4.2.3
Guarantee Institute for Export Credit and government
credit guarantees
No
Eksportfinans and favourable long-term financing
No
4.2.4
Government revenue foregone
4.3.1
Government coverage of 78 per cent of expenditures
No
4.3.2
Loss carried forward with interest rate
Yes
N/A
4.3.3
Guaranteed reimbursement of loss carried forward
Yes
N/A
4.3.4
Exploration reimbursement to exploration companies
Yes
4,024
4.3.5
Fast deduction of investments
Yes
20,812
4.3.6
Liquefied natural gas in Northern Norway: The case of Snøhvit
Yes
181
4.3.7
Uplift: An additional investment subsidy
No
4.3.8
Transfer of production licences
No
We performed an impact assessment for the removal of three of the largest fiscal subsidies: the exploration
reimbursements, the investment deductions and the Snøhvit field. In table 1.2 we show what the gross
impact on government revenue, employment and carbon dioxide emissions would be if these fiscal subsidies
were removed. Removing the investment deductions, which are estimated to be NOK 20.812 billion in
2009, would likely reduce government revenue from petroleum taxes by about 5.3 per cent, employment in
the oil and gas sector by 0.3 per cent and national carbon dioxide emissions by 1 per cent. Removing the
exploration reimbursements, estimated at NOK 4.024 billion in 2009, would likely reduce government
revenue from petroleum taxes by 2.9 per cent, employment in the oil and gas sector by 0.2 per cent and
national carbon dioxide emissions by 0.5 per cent. In the case of the Snøhvit field, if it had not been
subsidized, we estimate the overall impact would have been to reduce government revenue from petroleum
taxes by 13.2 per cent, employment in the oil and gas industry by 0.7 per cent and national carbon dioxide
emissions by 2.4 per cent.
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THE GLOBAL SUBSIDIES INITIATIVE
FOSSIL FUELS – AT WHAT COST?
GOVERNMENT SUPPORT FOR UPSTREAM OIL AND GAS ACTIVITIES IN NORWAY
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TABLE 1.2: OVERVIEW OF SUBSIDY REMOVAL IMPACT ASSESSMENT, NPV AND NPV AS
PERCENTAGE OF 2010 VALUES
NPV of middle
(6%) estimate
in million NOK
NPV as
percentage of
2010 values*
–8,479
–5.3%
–21,012
–13.2%
Exploration reimbursement
–4,647
–2.9%
Investment deduction
–6,933
–0.3%
–19,204
–0.7%
Impact on:
Subsidy type
Government revenue
(petroleum taxes)
Investment deduction
Snøhvit
Employment
Snøhvit
Exploration reimbursement
CO2 emissions (million tonnes)
–4,004
–0.2%
Investment deduction
–0.6
–1.0%
Snøhvit
–1.4
–2.4%
Exploration reimbursement
–0.3
–0.5%
*We calculated government revenue lost if the investment deduction were removed as a percentage of the total petroleum tax revenue in 2010
(Ministry of Finance, 2011), employment effects as a percentage of total labour years from 2010 (data from Statistics Norway, 2011) and the
impact on carbon dioxide emissions as a percentage of the 2010 data from Klima-og forureiningsdirektoratet (Klif, 2011).
We estimate that removing the non-fiscal subsidies would have almost zero direct effect or very unpredictable
indirect effects. Removal of the research and development (R&D) subsidy would most likely have zero impact
on oil and gas activity itself, and thus no impact on government revenue, employment or carbon dioxide
emissions, but consequences could be unpredictable for research programs and research institutions.
The purpose of this report is not make recommendations as to whether the subsidies should be removed or
maintained, but to improve transparency regarding subsidies provided to the oil and gas industry in Norway.
Whether or not the benefits from such policies are large enough to justify the existence of the subsidies is a
question for public debate.
The report also identifies areas where the government can improve transparency of information about subsidy
expenditures.
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THE GLOBAL SUBSIDIES INITIATIVE
FOSSIL FUELS – AT WHAT COST?
GOVERNMENT SUPPORT FOR UPSTREAM OIL AND GAS ACTIVITIES IN NORWAY
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2. APPROACH AND METHODOLOGY
This study is the third in a series collectively termed Fossil Fuels – At What Cost? by the Global Subsidies
Initiative of the International Institute for Sustainable Development (IISD). This study is preceded by studies
on Indonesia (Braithwaite et. al., 2010) and Canada (Sawyer & Stiebert, 2010).
2.1 OBJECTIVE
This study attempts to identify, quantify and assess subsidies to upstream oil and gas activities in Norway.
In economic theory, subsidies contribute to waste and economic inefficiency. They can distort economic
decision-making, and in consequence, resources (such as labour, natural resources and real capital) may be
used in a non-optimal way. Thus, the potential costs of subsidies to society can be large. With petroleum
being a very versatile but non-renewable resource and a fossil fuel contributing to carbon dioxide emissions,
we should pay particular attention to possible distortions in economic decision-making affecting oil and gas
production and consumption. Also, the oil and gas industry constitutes an important part of the Norwegian
economy, and it is in the interest of policy-makers, organizations and the public in general to have a wider
and deeper knowledge of potential subsidies to the Norwegian oil and gas industry.
By defining policies as subsidies, it is not our purpose to be normative. The latter word has, over decades,
acquired negative connotations. Instead, our characterization of policies as subsidies to the oil and gas industry
merely follows from the WTO’s definition of a subsidy (defined in section 2.4). This definition does not address
whether a subsidy contributes to a negative, undesired distortion in the economy or to a desired outcome
following clear policy decisions, where any negative distortions have been reviewed and accepted as a
necessary side effect. In this study, we do calculate the effects of removing the subsidies, but we do not
propose such removal. Subsidy removal or changes to the fiscal and regulatory regime in a democratic country
are subject to democratic processes. Instead, this study is to inform people about the fiscal and regulatory
regime within which the Norwegian oil and gas industry operates. The study sheds light specifically on
subsidies and the benefits and costs of their removal.
2.2 SCOPE
By oil and gas industry, we refer to the upstream petroleum industry: companies that deal with exploration
drilling, development of petroleum fields and extraction of petroleum resources. Hereafter, we call this industry
the oil and gas industry. We exclude the service and supply industry.
The scope of this study is to identify subsidies in accordance with our definition, measure the most likely
value of such subsidies and, if possible, assess the effect of removing them.
In the study, we examine subsidies to the production of oil and gas in Norway. We do not look at subsidies
relative to other countries. Furthermore, we do not take into consideration the fact that subsidies to industries
other than the oil and gas industry may alter the prices of goods and services that the oil and gas industry in
Norway uses.
Moreover, we do not consider the fiscal aspects of the tax system as a whole. In other words, we do not
calculate the need for the Norwegian government to find other sources of revenue and whether these new
measures to increase the revenue cause larger waste or distortion than the subsidies identified.
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We calculate non-fiscal subsidies directly, and fiscal subsidies in relation to the general tax system applied in
Norway to normal profits in other energy and extractive industries (renewable and mining, respectively). Thus,
we measure fiscal subsidies to the oil and gas industry assuming that a general fiscal system is in place that
citizens and enterprises have internalized in their decision-making processes. We assume that in a wellfunctioning modern state, this tax system has, over time, been optimized to balance services that can be
provided by the enterprises themselves and services that form public goods that all enterprises can use.
It is not within the scope of this study to try to establish an optimal tax system or tax rate for either the oil and
gas industry or for Norway in general.
2.3 METHODOLOGY
The general framework of the report is as follows:
1) In chapters 2 and 3, we formulate the framework for the study, describe the fiscal framework in
Norway, and describe the oil and gas industry in Norway.
2) In chapter 4, we identify possible subsidies, discuss and categorize them, and conclude whether the
identified possible subsidies actually are subsidies. Where we conclude that a subsidy exists, we
calculate the value of the subsidy for 2009. We chose the year 2009 because we do not have data
for later years.
3) In chapter 5, we analyze the impact of removing three fiscal subsidies. For each, we analyze three
impacts: on government revenue, employment and emissions.
The oil and gas regime in Norway includes a range of potential subsidies, which display different
characteristics. For some of the subsidies, calculating impacts of removal is difficult. We have therefore taken
a more thorough look at removing subsidies related to investments and to exploration activity. These investment
subsidies are also of the largest value.
The companies have, over time, adjusted to optimize their use of manpower, real capital and know-how on
the Norwegian continental shelf (NCS). The government has made laws and rules regarding emission control,
risk avoidance and other regulatory issues. In this study, it is also relevant to ask what will happen in
companies’ decision-making if some of the government policies are changed—that is, how companies will
respond to a removal of subsidies.
The impact of policy removal on decision-making is hard to forecast. There are several alternative ways for
estimating behaviour under different government regulations. Instead of creating structural models that can
predict business behaviour, we identify reasonable assumptions on how business behavior changes with new
economic conditions where a subsidy is removed. Then, to evaluate the impact of our assumptions, we include
two more scenarios: high and low.
The approach in this study is to use both general activity level data and more specific petroleum industry
data. Several advantages can be mentioned: first, data for the general petroleum activity (production,
investments, employment, revenues) in Norway contributes to an overall understanding of the activity in the
industry and the impact on the Norwegian economy in general. Second, data on exploration activity, volumes
discovered, field development costs and production, etc. are important inputs to understand the Norwegian
petroleum activity at a deeper level. Both are important in order to evaluate potential subsidies correctly within
the industry itself and in the wider perspective of the national economy of Norway.
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Statistics Norway has two general-equilibrium models: MODAG (based on annual data) and KVARTS (based
on quarterly data). These econometric models can predict the influence of increases or decreases in petroleum
investments on important macroeconomic indicators. Since we are also measuring the effects of a reduction
in investments, we include the most interesting results from Eika et al. (2010) at the end of section 5. The
Statistics Norway results can thus be a supplement to this study’s results.
Figures 2.1 and 2.2 illustrate two investment subsidies and one exploration subsidy, respectively, which we
identified and for which we conducted an impact assessment of subsidy removal. The sequential process that
starts with removal of investment subsidies reduces the level of investments. From economic theory, we know
that businesses maximize their profits. In any given time, a company adjusts to its external business
environment. Thus, if the environment (other competitors, customers, oil prices, government rules and
regulations, etc.) changes, we know that business behaviour changes. But exactly how is hard to forecast.
However, in the case of subsidy removal, we know that either the level of investments will decrease or the
investments will be conducted at a later date. When investment is on hold or reduced, it will affect the
production of hydrocarbons. And again, when the level of production goes down, the level of emissions,
government revenue and employment will decrease. It may also be that less investment leads to less efficient
use of existing infrastructure, which could lead to greater investments at a potential future time when resources
are developed.
FIGURE 2.1: EFFECTS FROM EXTRA INVESTMENT: EMPLOYMENT, GOVERNMENT REVENUE
AND EMISSIONS
FIGURE 2.2: EFFECTS FROM EXTRA EXPLORATION ACTIVITY: EMPLOYMENT, GOVERNMENT
REVENUE AND EMISSIONS
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People are employed in all the areas represented in the figures: exploration, investments and production. The
modelling is static and does not take into consideration how capital, labour and resources will be allocated to
other areas. However, the model produces a clear picture of what reduction we may see in the oil and gas
industry if a subsidy is removed. In addition, we will use the Statistics Norway results from KVARTS to show
a more dynamic picture of the Norwegian economy.
In the appendices, we describe in more detail the methodologies for valuation and subsidy removal assessment.
2.4 SUBSIDY: A DEFINITION
This study examines potential subsidies to the oil and gas industry in Norway. Opinions differ on what the
concept of a “subsidy” encompasses. We base this study on the WTO’s definition, including the GSI’s
subcategorization of this definition. The subsidy definition is based on the WTO’s Agreement on Subsidies
and Countervailing Measures, to which 153 countries have agreed. Under Article 1: Definition of a Subsidy,
the Agreement determines that four types of potential subsidies exist, where:
1. Government provides direct transfer of funds or potential direct transfer of funds or liabilities.
2. Revenue is foregone or not collected.
3. Government provides goods or services or purchases goods (at other than market prices).
4. Government provides income or price support.
The Agreement also requires that a subsidy be specific to an enterprise, industry, or group of enterprises or
industries under Article 2.
When applying the definition, it helps to consider whether preferential treatment is provided to the subsidized
party (in this case petroleum explorers and producers). The GSI (2010a) states that preferential treatment
can be provided in three forms:
1. To selected companies inside an industry (market level).
2. To one sector or product when compared with other sectors (national level).
3. To sectors or products in one country when compared internationally (global level).
The third form is not part of this study (as defined in section 2.2).
Based on the WTO’s definition above, the GSI has developed subcategories of subsidies that form the
framework for identifying subsidies in the oil sector in Norway (table 2.1). Not all of these subcategories are
necessarily relevant to the oil sector in Norway, as this study will reveal, but rather form a comprehensive
framework for identifying and analyzing subsidies in any country. This framework provides the basis for the
Initiative’s series of country case studies, Fossil Fuels – At What Cost?, which identify and quantify subsidies
to upstream oil and gas activities. In the table, we show which subcategory the possible subsidies we identified
belong to.
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TABLE 2.1: THE GSI TYPOLOGY OF ENERGY SUBSIDIES UNDER THE WTO SUBSIDY DEFINITION
Direct and
indirect
transfer of
funds and
liabilities
Direct spending
Earmarks: special disbursements targeted at the sector.
Agency appropriations and contracts: targeted spending on
the sector through government budgets.
Research and development support: funding for research
and development programs.
Government ownership of Security-related enterprises: strategic petroleum reserve;
energy-related enterprises securing foreign energy shipments or key assets.
Municipal utilities and public power: significant public
ownership of coal- and natural gas-fired electricity stations;
some transmission and distribution systems for both
natural gas and electric power.
Credit support
Government loans and loan guarantees: market or belowmarket lending to energy-related enterprises, or to energyintensive enterprises such as primary metals industries.
Subsidized credit to domestic infrastructure and power
plants.
Subsidized credit to oil- and gas-related exports.
Insurance and
indemnification
Government insurance/indemnification: market or belowmarket risk-management/risk-shifting services.
Statutory caps on commercial liability (can confer
substantial subsidies if set well below plausible damage
scenarios).
Occupational health
and accidents
Assumption of occupational health and accident liabilities.
Environmental costs
Responsibility for closure and post-closure risks: facility
decommissioning and cleanup; long-term monitoring;
remediation of contaminated sites; natural resource
restoration; litigation.
Waste management: avoidance of fees payable to deal
with waste.
Environmental damages: avoidance of liability and
remediation to make the environment whole.
Government
revenue
foregone
Tax breaks and
special taxes
Tax expenditures: tax expenditures are foregone tax
revenues, due to special exemptions, deductions, rate
reductions, rebates, credits and deferrals that reduce the
amount of tax that would otherwise be payable.
Overall tax burden by industry: marginal tax rates are lower
than other industries.
Exemptions from excise taxes/special taxes: excise taxes on
fuels; special targeted taxes on the energy industry (e.g.,
based on environmental concerns or “windfall” profits).
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TABLE 2.1: THE GSI TYPOLOGY OF ENERGY SUBSIDIES UNDER THE WTO SUBSIDY DEFINITION
(CONTINUED)
Provision of
goods or
services below
market value
Government-owned
energy minerals
Process for mineral leasing: auctions for larger sites; solesource for many smaller sites.
Royalty relief or reductions in other taxes due on
extraction: reduced, delayed or eliminated royalties are
common at both federal and provincial levels. Royalties
targeted based on type of energy, type of formation,
geography or location of reserve (e.g., deep water).
Process of paying royalties due: allowable methods to
estimate and pay public owners for energy minerals
extracted from public lands.
Income or price
support
Government-owned
natural resources or land
Access to government-owned natural resources or land: at
no charge or at rates below fair market value.
Government-owned
infrastructure
Use of government-provided infrastructure: at no charge or
below fair market prices.
Government procurement
Government purchase of goods or services for abovemarket rates.
Government-provided
goods or services
Government-provided goods or services at below-market
rates.
Market price support
and regulation
Consumption mandates: fixed consumption shares for
total energy use.
Border protection or restrictions: controls on imports or
exports leading to unfair advantages.
Regulatory loopholes: any legal loophole, either in the
wording of a statute or in its enforcement, that transfers
significant market advantage and financial return to
particular energy-market participants.
Regulated prices set at below-market rates: for consumers
(including where there is no financial contribution by
government).
Regulated prices set at above-market rates: including
government regulations or import barriers.
Sources: Braithwaite et. al. (2010); Sawyer and Stiebert (2010).
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2.5 TAXATION IN NORWAY
This section is broken into two parts: the first provides an overview of the general taxation system in Norway,
and the second examines the petroleum taxation system in more detail.
2.5.1 THE GENERAL TAXATION SYSTEM FOR ENTERPRISES IN NORWAY
In this section, we briefly look at the some of the main aspects of the general taxation system for enterprises
in Norway.
The general tax system in Norway was overhauled in 1992. Before that, the general tax rate was 50.2 per
cent, and the system contained a substantial number of deductions and loopholes. The overhaul in 1992
was meant to be revenue-neutral for the government, and it is thus possible to see the difference between the
general tax rates before and after the overhaul as a reflection of the value of these deductions and loopholes.
In connection with the overhaul, the general tax rate was reduced from 50.2 per cent to 28 per cent. After
1992 the Norwegian general tax system became mainly cash-based when dealing with deductions for costs,
with the exception of tax depreciation on fixed assets.
Taxation and accounting is based on general economic theory that matches costs with their associated revenues
at the correct time. This general matching principle leads to two outcomes: (1) it allows for economic
consequences with different timing to be presented as one economic value, using discounting (when
calculating net present values (NPVs), internal rates of return, break-even economics, and so on), and (2) it
allows for allocation of (parts of) an investment as a deduction against the future revenues the investment
may generate (used when establishing depreciation mechanisms).
For accounting purposes, one tries to directly match an investment against future revenues through the chosen
depreciation methods using an allotment type of thinking (an even distribution of cost against the revenue of
each period or each unit). However, in Norway the tax depreciation generally takes into greater account the
fall in value of an asset over time. Thus, the general tax system in Norway has a system of declining balance
ratios for various classes of assets to reflect the reduction in value over time. The percentage varies and is
decided on the basis of the expected decrease in value over the economic lifetime of the investment.
Depreciation starts when the investment (cash) has been made. Table 2.2 shows the deduction rates for
different types of investments.
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TABLE 2.2: DEDUCTION RATES FOR DIFFERENT TYPES OF INVESTMENTS
Investment type
Deduction rate (%)
Office machines, etc.
30
Goodwill (acquired business value)
20
Trailers, buses, trucks, etc.
20
Personal cars, machines and furniture
20
Ships, rigs, etc.
14
Airplanes, helicopters
12
Facilities for transfer and distribution of electrical power and
electro-technical equipment for power enterprises
5
Buildings and facilities, hotels, etc.
4
Business buildings
2
Fixed technical installations in buildings
10
Data source: Bedin Company Information (2011).
The general tax system allows deduction of all costs, including interest on debt, against revenue. Sale of
assets leads to a gain-and-loss calculation for tax purposes, with some assets that cross international borders
often (like rigs) having formalized rules for loss of value that occurs while in Norway. These rules do not
correspond with the declining-balance method of depreciation.
The general tax system does not include a carbon tax, but there are carbon dioxide emission quotas.
The general tax system allows losses to be carried forward without interest should an enterprise experience a
loss during the establishment phase, due to price fluctuations or due to market loss.
Taxes are paid in equal installments before and after December 31, resulting in December 31 being the date
of the “average” tax payment. There is no ringfencing of individual investments within a company, and there
are mechanisms that allow for pre-tax transfer of profits from one company within a group to cover losses in
another company within Norway.
A detailed tax code makes for small deviations, but the description above covers the main rules affecting
large investment decisions under the general tax system.
2.5.2 THE PETROLEUM TAXATION SYSTEM IN NORWAY
In this section, we look at petroleum taxation in Norway as it is differentiated from the general tax system in
the Petroleum Tax Act.
Establishing an oil and gas company in Norway is substantially different from establishing an enterprise
outside the petroleum industry. Oil and gas companies need to be pre-approved in order to carry out business
on the Norwegian continental shelf (NCS). Pre-approval gives these companies the right to apply for licences
under a discretionary concession system administered by Norwegian authorities. These companies are also
subject to a strict control system with regard to issues such as health, safety and the environment, monitored
by the Petroleum Safety Authority, and to taxation by the Oil Taxation Office.
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The fiscal system changed along with the general tax system in 1992. Before 1992 the oil and gas companies
had a general tax rate of 50.2 per cent, in line with other companies. There was also a special tax on oil and
gas companies of 30 per cent, for a total marginal tax rate of 80.2 per cent. The tax system overhaul in 1992
was meant to be tax neutral, but while most companies saw a reduction in their general tax rate from 50.2 per
cent to 28 per cent, when deductions were taken away, the oil and gas companies found their special tax rate
raised to 50 per cent. This meant that the total tax rate for the oil and gas companies went from 80.2 per
cent to 78 per cent, while many of the deductions allowed under the previous tax system were removed. Thus
for all practical purposes, the 1992 tax reform made the tax system harsher for oil and gas companies
in Norway.
The following are some features of the tax system for petroleum companies:
• The general tax rate is the same as for other enterprises, 28 per cent.
• A special tax rate of 50 per cent is laid on top of the 28 per cent to capture the resource rent.
• To protect normal profits from being taxed with the 50 per cent special tax, there is a 7.5 per cent
uplift on investments each year for four years (totalling 30 per cent), which can be deducted against
the tax base before the special tax of 50 per cent is applied.
• Declining-balance depreciation is only used for land-based activities. All investments on the Norwegian
continental shelf have a six-year straight-line depreciation from and including the year the investment
(cash) was made, except the Snøhvit liquefied natural gas (LNG) plant, which has a three-year straightline depreciation from the year of investment.
• The petroleum tax system allows deduction of all (cash) costs against revenue, including interest on
debt. However, the interest allowed is limited to that which is assumed to have relevance for the
petroleum investment. There is thus an allocation rule that splits any interest into two deductibles: one
deductible is allowed against the 78 per cent marginal tax rate for petroleum investments, and the
other is allowed against the 28 per cent marginal tax rate for enterprises in general. This latter is to be
deducted either against onshore revenue or against the 28 per cent offshore tax base, should the oil
and gas company not have onshore activities.
• Sale of assets leads to a gain-and-loss calculation for tax purposes onshore, but all sales of assets on
the NCS lead to a tax-free gain or a non-deductible loss. The tax value of the transferred asset(s) is
transferred to the buyer, and the buyer is not allowed tax deductions for a higher amount than the tax
value transferred.
• The petroleum system does not include a carbon tax, but there are carbon dioxide quotas.
• There is a loss carry-forward in the petroleum tax system, as in the general tax system. Unlike the
general tax system, however, oil and gas companies accrue interest on the loss each year.
• Taxes are paid in equal installments before and after December 31, resulting in December 31 being
the date of the “average” tax payment. There is no ringfencing of individual investments within a
company, but there is ringfencing against onshore investments. Half of onshore losses are allowed to
be transferred and deducted against the 28 per cent petroleum tax.
In addition to the petroleum tax system, Norway also has state participation in the petroleum industry: the socalled state direct financial investment, administered by the state-owned company, Petoro. The state direct
financial investment is a participant on equal footing with other oil and gas companies. It pays its own share
of operating costs and investments, and it receives 100 per cent of the revenues from its share of fields
in production.
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Summing up, the petroleum industry faces a different investment environment than other industries. While
enterprises in general can deduct an investment with a declining rate over a long period, petroleum enterprises
can deduct an investment linearly over a short period (six years). In addition, the oil and gas company receives
a tax shield against the full tax rate through the 30 per cent uplift mechanism on investments. In table 2.3
we show the basic structure of the Norwegian petroleum tax system.
TABLE 2.3 NORWEGIAN PETROLEUM TAX SYSTEM
Operating income (norm price)
Operating expenses
Linear depreciation for investments (6 years)
Exploration expenses, R&D and decommissioning
CO2 tax, NOx tax and area fee
Net financial costs
= Corporation tax base (tax rate: 28%)
Uplift (7.5% of investment for 4 years)
= Special tax base (tax rate: 50%)
Data source: Ministry of Petroleum and Energy (2010a).
We see that the industry can deduct an investment in two phases. First, the industry can take a linear
deduction over a six-year period (one-sixth each year), up to a total of 78 per cent of the costs. Second, there
is a linear deduction called “uplift”: 30 per cent of investments over a four-year period, deducted against the
special tax rate of 50 per cent. This represents 15 per cent of the investment in total. This system of deduction
is very different from how other industries deduct investments and allows for 93 per cent payback over six
years. This fast payback needs to be seen in the context of the high tax rate of 78 per cent, as these elements
were enacted and balanced against each other. The fast payback allows the oil and gas companies to free up
funds faster than an enterprise onshore, and thus allows the oil and gas company to reinvest the funds earlier
than other enterprises would be able to.
All other industries deduct investments using the declining-balance method, with a certain percentage each
year. Thus, the deduction is relatively large in the first years, but the absolute value of the deduction
opportunity decreases over time. If the petroleum industry were subject to the ordinary tax accounting laws,
their investment deduction profile would change significantly. The petroleum industry has many different
investment components, ranging from long-lived platforms to ships and rigs. In this study, we use a 10 per
cent average deduction rate as the alternative deduction system for the petroleum industry. This is a blend of
the 14 per cent floating rig rate, the fixed 10 per cent technical installation rate, and the lower rates of 5 per
cent and 4 per cent for power plants and industry facilities, respectively. An offshore installation would most
likely fall within this 4 to 14 per cent range, and we have chosen a rate of 10 per cent—an average close to
or equal to the fixed technical installation rate. With the alternative declining balance method, the deduction
period is longer and the yearly deduction is lower than in the petroleum tax system. The investment deduction
rules are favourable for the petroleum industry, and other industries do not receive the same favourable
treatment (although the hydropower sector has similar regulations).1
1
It is, however, not obvious that this is a subsidy, since these deduction rules are part of the rationale for higher tax rates on the petroleum industry
than on other industries. These rules are used to reduce the gap between the mathematically expected monetary value of an exploration decision
and the utility curve of the various oil and gas companies.
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2.6 DISCOUNT RATES
To take the time perspective into account, economists apply discount rates on costs and revenues in the
future. The discount rate then reflects the alternative cost of capital, labour, resources, etc. In the government
manual on cost-benefit analyses, the Ministry of Finance (2005) has set forth 2 per cent as the government’s
standard base real rate of return for risk-free projects. The Ministry states that the individual risk involved in
a particular project does not increase the total risk for society at large, because the sum of projects will nullify
the individual risks. However, the Ministry argues that if a project is exposed to systemic risk, the discount
rate should be higher than the risk-free rate. For instance, if an investment project is sensitive to the activity
in the global economy, the project is not free from systemic risk.
The Ministry advises applying a 4 per cent discount rate for normal projects with systemic risk, but states
that each project needs to consider applying different discount factors. The Ministry states that it is difficult
to decide the specific rate of return. In the case of petroleum-related upstream investments, a project is
exposed to systemic risk. Given the size of these investments and the size of the government’s revenue from
this industry, investments in the petroleum upstream industry are increasing the systemic risks to the
Norwegian government and society. The demand and supply of petroleum, the price of petroleum, political
circumstances and developments around the world are factors that will change the income stream from
petroleum upstream projects.
Considering the systemic risks involved in petroleum upstream industries, we have chosen to calculate the
government’s NPV of petroleum activity with a 6 per cent real rate of return. This is a choice based on the
fact that, for instance, infrastructure projects usually have a 4 per cent real discount rate. We believe petroleum
activity is more exposed to systemic risk than such projects, though we do not know exactly how much. Thus,
we have applied a rather conservative (low) discount rate.
Companies approach investment decisions differently than does the government. They are also concerned
about the individual risks of the project: problems such as drilling a dry well, the geological characteristics of
a reservoir being different from what the companies thought before production development, or needing to
close the processing facilities due to maintenance earlier than anticipated. Therefore, in the petroleum industry
it is usual to calculate drilling, development plans, projects, etc. with a discount rate between 7 (state) and
15 (oil major) per cent. The higher the discount rate is set, the more the company favours the present in
comparison with the future. If a company has other high-profit projects on their hands, the expected return
on the investment under scrutiny needs to be high to justify the capital expenditures. We apply a 9 per cent
real discount rate in a normal case. For more aggressive companies, we calculate projects based on a 12 per
cent discount rate.
Given that losses are allowed to be carried forward indefinitely, that they are carried forward with interest and
that they are reimbursed when a business closes (to the extent that they have not been taken against future
revenues), it is arguable that both the government and the companies should use a risk-free discount rate.
TABLE 2.4: REAL DISCOUNT FACTORS FOR GOVERNMENT AND PETROLEUM COMPANIES
Discount factor
Low
Middle
(expected)
Government
4%
6%
8%
Petroleum companies
6%
9%
12%
Data source: Ministry of Finance (2005)
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2.7 RESOURCE RENT
Extraction of petroleum resources is for the most part highly profitable—more profitable than normal economic
activity. The difference between normal return on endowments, real capital, labour and natural resources and
the special return on certain resources is termed resource rent.
In figure 2.3, we show the result of a Statistics Norway analysis. The result suggests that the resource rent
accounts for almost half of the value of the production in the petroleum sector.
The existence of the resource rent in the oil and gas industry has influenced the shape of the petroleum laws.
First, as described in section 2.5.2, the oil and gas industry falls under special taxation laws. Second, the
petroleum laws create a distance between oil and gas activity and other industrial activities to enable the
companies to capture and distinguish what belongs to each taxation sphere by itself.
FIGURE 2.3: RESOURCE RENT, PETROLEUM INDUSTRY AND SUPPLY INDUSTRY RELATIVE SHARES
OF GDP, 2010
Data source: Cappelen et al. (2011)
2.8 OPTION VALUE AND FUTURE DECISIONS
According to the Ministry of Finance, the government should calculate the alternative to production today,
which is either to wait for better timing of production or to never produce. Since consumption of non-renewable
resources is irreversible, investments conducted to produce petroleum have irreversible consequences; for
example, produced and consumed hydrocarbons cannot be produced and consumed again.2 Such investments
have an “option value” for waiting. The option value increases with the future’s ability to provide technological
improvements or higher demand/decreased supply of petroleum (i.e. a higher price). Thus, the Ministry states
that it is important to take option values into account. The guideline suggests looking critically at the time of
making an investment.
Petroleum production is an industry that deals with large uncertainty factors in many investment decisions.
Future prices of petroleum, competition from other petroleum-producing areas, or new technological
developments are examples of factors that contribute to a large uncertainty related to future market conditions
for Norwegian petroleum resources.
We do not attempt to calculate the value of waiting. But it is important to be aware of the fact that such
waiting has an intrinsic value.
2
Although changing technologies or higher prices can make “depleted” fields productive again.
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2.9 CURRENCY AND PETROLEUM UNIT DEFINITION
The study presents numbers in Norwegian kroner (NOK), but for readers not familiar with the Norwegian
domestic economy, figure 2.4 shows the value of British pounds sterling (GBP), U.S. dollars (USD) and euros
(EURO) over the last 10 years. In the petroleum industry, the most significant currency is the USD. A rule of
thumb can be to divide the NOK numbers by six to get USD.3
FIGURE 2.4: THE VALUE OF THE NORWEGIAN KRONE (NOK) IN COMPARISON WITH MAJOR
CURRENCIES
Data source: Norges Bank (n.d.)
The Norwegian Petroleum Directorate (NPD) uses the term standard cubic metres (Sm3) to quantify petroleum
resources. In international contexts, it is standard procedure to use barrels of oil instead of Sm3. However, it
is usual to refer to gas in Sm3, by using the gas resource unit of billion cubic metres.
Table 2.5 (next page) shows the conversion factors among units.
3
With a reservation: the value of currencies is exposed to constant change, and the future value is hard to forecast. For instance, the financial crisis
had profound impact on the volatility of the exchange rates (also due to the small size of the Norwegian economy and the dependence on raw
materials). The value of NOK per USD changed from approximately five to seven right after the fall of Lehman Brothers.
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TABLE 2.5: CALCULATION FACTORS FOR DIFFERENT TYPES OF RESOURCES INTO OIL EQUIVALENT,
AND GAS MEASUREMENTS
Resource type
Barrel
Oil equivalent
Sm3 Tonne
Barrel
3
Sm
Gas
Cubic feet
Oil
1 barrel
–
0.16
0.19
–
–
–
6.29
–
1.19
–
–
–
–
0.16
0.19
–
–
–
6.29
–
1.19
–
–
–
11.95
1.90
2.26
–
–
–
6.29
–
0.84
–
–
–
–
0.16
–
–
159
5,612
1,000 Sm
6.29
–
–
6,290
–
35,300
1,000 cubic feet
0.18
0.03
–
178
28
–
3
1 Sm
Condensate
1 barrel
3
1 Sm
LNG
1 tonne
3
1 Sm
Gas
1,000 barrels
3
Data source: Ministry of Petroleum and Energy (2011).
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3. OVERVIEW OF THE PETROLEUM INDUSTRY IN NORWAY
Petroleum resources are important to the Norwegian economy and government. The first hydrocarbons on the
NCS were discovered in 1969. From its beginning, the petroleum sector has grown to become the most
valuable industry in Norway in terms of share of GDP and government revenue. We examine here the industry’s
production and investments, as well as the government revenue it produces. We see from figure 3.1 that the
petroleum sector accounts for a large share of the most important macroeconomic indicators: GDP, government
revenue, investments and exports.
FIGURE 3.1: THE IMPORTANCE OF THE PETROLEUM SECTOR, 2010
Source: Adapted with permission from Norwegian Petroleum Directorate (NPD, 2010)
3.1 PETROLEUM PRODUCTION: VOLUME AND VALUE
Petroleum production has a 40-year history in Norway. As seen in figure 3.2, petroleum production has
increased every year from the 1970s to the early 2000s. The total production peaked in 2004.
FIGURE 3.2: PRODUCTION OF OIL, GAS, LNG AND CONDENSATE, 1971–2010
Data source: NPD (n.d.)
The production of petroleum in Norway has been in a transformation phase throughout the 2000s. While oil
production has experienced a large decrease in the last ten years, gas production has more than doubled,
resulting in the NCS becoming more of a gas-producing area. From a relatively low level of gas production on
the NCS in 2000, in 2010 gas production surpassed oil in volume (figure 3.3, next page).
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FIGURE 3.3: OIL AND GAS PRODUCTION, 2000–2010
Data source: NPD (n.d.).
As can be seen in figure 3.4, the value of petroleum production in Norway is large. It peaked in 2008, due
to high demand and high prices, when the total production value of the petroleum industry was nearly 700
billion NOK (2010 prices). In relative terms, as a share of total GDP, the petroleum industry constituted over
20 per cent for almost every year of the 2000s. Figure 3.4 shows that the value of petroleum production has
fluctuated more than has the production volume. The reasons for this are principally the change in oil and
gas prices as well as the currency differences between the NOK and the USD.
FIGURE 3.4: TOTAL PRODUCTION OF PETROLEUM AND SHARE OF GDP, 1970–2010
Data source: Statistics Norway (2011).
Domestic consumption of the oil and gas produced on the NCS is very low. Most of the hydrocarbon production
is exported. While the oil is loaded on oil tankers and sold on the world oil market, the gas is traded in the
regional European marketplace. The gas is transported through a gas pipeline grid that connects to the United
Kingdom, France, the Netherlands, Belgium and Germany. Figure 3.5 (next page) shows that as a share of
total exports, the value of petroleum exports has fluctuated between 30 and 50 per cent since the late 1980s.
Currently, petroleum exports make up 50 per cent of total exports. Again, the prices of oil and gas and the
USD relative to NOK are important factors in explaining the variation over the years compared with production
(figure 3.4).
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FIGURE 3.5: PETROLEUM EXPORT AND SHARE OF TOTAL EXPORTS
*Includes crude oil and natural gas exports and exports of refined oil products.
Data source: Statistics Norway (2011).
Comparatively, Norway is a large exporter of oil and gas. In 2009, Norway was the eleventh-largest oil producer
and the fifth-largest gas producer in the world (NPD, 2011). But due to its small consumption of its own
petroleum products, Norway was the sixth-largest exporter of oil and second-largest exporter of gas in 2008.
This is shown in figure 3.6.
FIGURE 3.6: EXPORTS OF OIL AND GAS (MILLION SM3 OF OIL EQUIVALENT), 2009
Oil (million Sm3oe)
Gas (million Sm3oe)
Data source: Ministry of Petroleum and Energy (2011).
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3.2 PETROLEUM INVESTMENTS: EXPLORATION ACTIVITY, FIELD DEVELOPMENT AND
PETROLEUM EXTRACTION
Petroleum production requires large investments along all points of the value chain: exploration, development,
production and transportation. As seen in figure 3.7, the investments have grown over time, to a peak at the
end of the 2000s of around 120 to 130 billion NOK (2010 prices). Petroleum investments constitute between
20 and 30 per cent of total Norwegian investments. Taking into account the petroleum industry’s share of
GDP and the fact that it is a capital-intensive industry, it is not surprising that petroleum investments account
for such a large share of total investments.
FIGURE 3.7: PETROLEUM SECTOR INVESTMENTS AND SHARE OF TOTAL INVESTMENTS, 1970–2010
Data source: Statistics Norway (2011).
If we look closer into petroleum investments, we find that a shift has occurred on the NCS in the last 15
years. In figure 3.8, we see two important changes. First, investments into fields in production have increased
their share relative to investments related to field development. Second, exploration investments have
increased their share of petroleum investments, from approximately 10 per cent to 20 per cent.
FIGURE 3.8: PETROLEUM INVESTMENTS BY CATEGORY, 1995–2010
Data source: Statistics Norway (2011).
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The reasons for these developments in the investment structure are as follows: as the NCS matures, the
reservoirs are both smaller and harder to discover. Since the smaller discoveries are only economically viable
as long as established infrastructure exists, companies are eager to find, develop and produce smaller fields
before the existing infrastructure is abandoned. For instance, a small deposit of oil may only reach an
economical threshold if it can be connected to a larger facility as a subsea tie-in. If the deposit is discovered
after abandonment of the larger surrounding facilities, the value of the resources in the deposit will not justify
large investments in a new platform. Thus, the relative share devoted to exploration will increase.
Because of this, the Norwegian government changed the petroleum tax laws in 2005 to increase exploration
activity and the number of companies participating. The older, giant fields on the NCS are maturing and need
heavy investments to keep up the production as the reservoir depletes, and to increase the recovery rate. Also,
the newer fields are smaller and cheaper in absolute terms. Thus, a shift from new field development to
investments in already-developed fields is occurring.
The number of exploration wells has varied greatly over the years. Exploration surged in the 1980s, with
slightly above 50 wells during the most active years. Since then, exploration activity has reduced over time
(except for a few peaks), until a new surge started in 2006. From a historical low of 12 wells in 2005, the
period from 2008 to 2010 has been one of the most active three years on the NCS, and 2011 also seems to
be a year with many exploration wells.
Figure 3.9 divides exploration wells into two categories: wildcats and appraisals. By drilling a wildcat, the
company seeks to discover new petroleum reservoirs. With an appraisal well, the company tries to acquire
more knowledge about an already-discovered reservoir. The increase in drilling activity is highly correlated
with a major increase in the oil price.
FIGURE 3.9: EXPLORATION WELLS, 1966–2010
Data source: NPD (n.d.).
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3.3 PETROLEUM INDUSTRY STRUCTURE AND GOVERNANCE
The petroleum industry in Norway is upstream dominated. Midstream activities such as refining and chemical
production or energy generation are less prevalent. The country refines almost none of its own petroleum. The
major midstream activity is the pipeline transport network of gas to continental Europe and the United
Kingdom. Norway’s handful of onshore midstream facilities includes the Mongstad oil refinery and the
Tjeldbergodden methanol plant. There are limited plans for gas-to-power plants in Norway, but no large-scale
downstream use of gas. There are, however, some small-scale LNG plants and a large LNG plant in Melkøya,
as well as limited LNG facilities and local gas distribution in the county of Rogaland.
The Norwegian government is of the opinion that revenue should be taken out at the upstream level. A normprice system has been put in place for pricing of oil, while the pricing of gas is based on large-scale contracts
with downstream buyers or hub prices in the United Kingdom or continental Europe. This means that
companies are taxed on a norm price instead of what is realized in the market. The system is in place to keep
the profits achieved in the oil and gas industry inside the fiscal system of this particular industry. With no
major downstream activities in Norway it is essentially only in the mid-stream pipeline network where the
effect of this policy becomes apparent. Revenue from the pipeline system, owned by Gassled and operated
by Gassco (refer section 4.2.2), has been fixed by the Norwegian authorities, allowing Gassled to earn a 7 per
cent return on invested capital. Gassco recovers operating costs, but does not collect any revenue, from
companies transporting gas via the pipelines.
Access to petroleum resources has been strictly governed by Norwegian authorities since the start of petroleum
activities before 1970.
Norway established a petroleum administration early, with the Ministry of Petroleum and Energy and the NPD
as main bodies, but also with Statoil as a national oil company. An old industry consortium, Norsk Hydro,
established its own oil company, and another private company, Saga Petroleum, was also established. Until
2000 these three companies and the large international majors were the primary actors on the NCS. Statoil,
Norsk Hydro and Saga received preferential treatment for concession awards for a long time, and the large
international companies had to share technology, methodology and concepts with Statoil in the early part of
the company’s history.
As integration with Europe increased, the preferential treatment receded, but it was not until around 2000
and the privatization of Statoil (33 per cent is now publicly owned) that the preferential treatment ended.
However, by this time Statoil had merged with the petroleum part of Norsk Hydro, which in turn had merged
with the private Norwegian oil company Saga and had become all-dominant on the NCS, with 80 per cent of
the operatorships there.
During the 1980s Statoil’s increasing power was recognized, and a significant portion of its petroleum
resources were organized into a direct state ownership: the state direct financial investment, which since
Statoil’s privatization in 2001 has been managed by a state-owned company, Petoro (established in 2001).
Petoro does not have any operator duties and functions only as a partner in the licences it owns.
Between 2000 and 2005, the NCS was opened up generally for all types of oil and gas companies, as a
consequence of the Statoil privatization and the merger of the three dominant Norwegian companies (Statoil,
Norsk Hydro and Saga). The NCS now hosts a multitude of companies, including traditional European utility
companies, but most of their activities are minor relative to the large international companies that entered
the NCS during the 1960s and 1970s.
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To participate in petroleum activity in Norway, a company needs to acquire production licenses. These regulate
the ownership structure of all aspects of petroleum upstream activity. The licence owners share the costs for
exploration wells and for developing a discovery or a field, and also share the petroleum revenues. Figure
3.10 shows that many companies compete on the NCS. The figure shows not the total number of licences on
the NCS, but rather the number of shares. Statoil and Petoro constitute the two largest participants in Norway.
Also, large international companies such as Total, ExxonMobil, ENI and ConocoPhillips have large interests
in production licences. Note also that Petoro participates only as a licensee in the petroleum activity, not as
an operator.
FIGURE 3.10: OPERATORS AND LICENSEE SHARE IN PRODUCTION LICENCES, MAY 2011
Data source: NPD (n.d.).
When it comes to producing fields, the company structure shows stability. Figure 3.11 (next page) shows the
companies that own shares in producing fields. Again, Statoil and Petoro own the most fields. Then, the
international majors own a substantial part of the fields. A majority of the companies, however, have ownership
in fewer than five fields.
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FIGURE 3.11: SHARE IN PRODUCING FIELDS, OPERATOR AND LICENSEE, MAY 2011
Data source: NPD (n.d.).
3.4 TAXATION OF PETROLEUM ASSETS: A VALUABLE REVENUE FOR THE
NORWEGIAN GOVERNMENT AND SOCIETY
The Norwegian government has, from the time petroleum production began on the NCS, enforced a strict
taxation system for the petroleum industry. With a 28 per cent profit tax and a special 50 per cent petroleum
profit tax, as well as other taxes such as environmental taxes (e.g. on carbon dioxide or nitrous oxides) the
Norwegian government receives large tax revenues from the petroleum industry.
In addition, the government owns 67 per cent of the largest company on the NCS, Statoil (formerly 100 per
cent government owned), and receives dividends from the company. Finally, the Norwegian government has
established a wholly owned company, Petoro, which manages the government’s direct ownership of licences
on the shelf—the state direct financial investment. Petoro is a special company that pays no taxes but transfers
100 per cent of its profits directly to the government. Figure 3.12 (next page) shows the Norwegian
government’s income from different sources.
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FIGURE 3.12: GOVERNMENT INCOME FROM PETROLEUM ACTIVITY, BY CATEGORY, 1998–2010
*SDFI = The state’s direct financial investment.
Data source: Ministry of Finance (2002; 2009).
As a share of the government’s income, total petroleum revenues constitute around a fourth (see figure 3.13).
Thus, the petroleum industry is a very important contributor to the Norwegian government’s large surpluses
on the national budgets.
FIGURE 3.13: GOVERNMENT’S TOTAL INCOME AND PETROLEUM INCOME, 2010
25%
Petroleum income
Income excluding petroleum income
75%
Data source: Ministry of Finance (2011).
The Norwegian government is relatively well-positioned among other European countries. In figure 3.14 (next
page), we show the surpluses and deficits on the budgets of European governments in 2010.
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FIGURE 3.14: DEFICITS AND SURPLUSES ON GOVERNMENT BUDGETS, IN PER CENT OF GDP,
AMONG EUROPEAN COUNTRIES, 2010
Data source: European Commission (2011).
However, if we look beyond the petroleum industry’s contribution to the Norwegian government, the financial
position of the government changes. Adjusted for the large petroleum incomes, the Norwegian government
runs a yearly deficit of almost 4 per cent of GDP. Figure 3.15 shows this.
FIGURE 3.15: PETROLEUM-ADJUSTED DEFICIT ON THE NORWEGIAN GOVERNMENT’S BUDGET,
2002–2010
Data source: Ministry of Finance (2011).
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Although the petroleum revenues contribute to a larger ability to spend money for welfare purposes, the
surpluses on the national budgets in the 2000s have been invested in the Government Pension Fund Global
to secure a strong and healthy financial position in the future. Figure 3.16 shows the historical development
in value, but also the forecasted total value of the fund through the 2010s. Currently the fund consists of
obligations, stocks and property valued at around three trillion NOK, which is around 20 per cent more than
the Norwegian GDP. It is estimated to double in the next 10 years.
FIGURE 3.16: VALUE OF GOVERNMENT PENSION FUND GLOBAL, HISTORICAL AND PROGNOSIS,
2001–2020
*Prognosis
Data source: Norwegian Bank Investment Management (n.d.).
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4. DISCUSSION OF POTENTIAL SUBSIDY POLICIES IN NORWAY
In this chapter, we analyze fiscal and regulatory policies to identify subsidies that exist in Norway. As pointed
out in section 2.4, we examine the Norwegian economy for subsides with four different characteristics:
1. Government provides direct transfer of funds or potential direct transfer of funds or liabilities.
2. Government provides goods or services or purchases goods (at other than market prices).
3. Government revenue is foregone or not collected.
4. Government provides income or price support.
We have investigated possible subsidies in the first three categories. We do not find any candidates for possible
subsidies in the fourth category (government provides income and price support).
The categories below are possible subsidies. This means that we are highlighting the government policies and
then investigating whether or not the policy is a subsidy to the oil and gas industry. We have bolded our
conclusions to make chapter 4 easy to read.
4.1 GOVERNMENT TRANSFERS OF FUNDS AND LIABILITIES
Government transfers of funds and assumptions of liabilities distort the use of resources in the economy
compared with a situation without such government subsidies.
4.1.1 GOVERNMENT SPENDING ON STATE DIRECT FINANCIAL INVESTMENT
AND PETORO
The government in Norway owns many shares of production licences on the NCS. This ownership is termed
the state direct financial investment. Since its establishment in 2001, the wholly owned enterprise Petoro
has been responsible for managing the government’s assets on the shelf, except for marketing and transporting
petroleum, which Statoil does on Petoro’s behalf. The budgets for administration of the state’s direct financial
investment are transferred from the Ministry of Petroleum and Energy, but the cash flow is not spent on the
petroleum industry per se. It is the cost of managing the government’s own assets.
The choice to participate in licences (exploration, field development and petroleum production) is a way of
taxing resource extraction. Government expenditures on such a joint venture with other companies resemble
a cash-flow type of taxation. Thus, spending through Petoro is a consequence of direct participation in
petroleum activity.
We conclude that this is a government investment and not a subsidy of the petroleum upstream sector.
4.1.2 PUBLIC INFRASTRUCTURE
Public authorities provide the petroleum industry with infrastructure, ranging from roads to railways, harbours
and airports. But the infrastructure is publicly available and not built for the petroleum industry per se. Many
infrastructure projects require user payments as well, at market rates. The petroleum bases serving the NCS
are built by the oil and gas companies or service companies charging market rates for their use.
We conclude that publicly financed infrastructure is not a subsidy to the petroleum upstream industry.
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4.1.3 RESEARCH AND DEVELOPMENT PROGRAMS
Research and development (R&D) is an important policy area for the Norwegian government. Norway
participates in a global trend to invest in human capital, increase the application of science in society and
develop research areas with international excellence. Actually, one of the central traits of the modern state is
that it invests heavily in education and the sciences.
The petroleum industry invests in R&D to enable more efficient business operations and increase profits. R&D
is conducted in research institutes, universities and government institutions (such as the NPD and the
Petroleum Safety Authority), but also in enterprises.
The Ministry of Petroleum and Energy supports the Norwegian Research Council with the means to offer seven
petroleum-oriented research programs. Three of these programs are pointed toward petroleum production.
Figure 4.1 presents government expenditures. The figure shows the contribution from the Ministry of Petroleum
and Energy to petroleum-specific research programs.
FIGURE 4.1: CONTRIBUTIONS TO PETROLEUM-ORIENTED RESEARCH PROGRAMS
PetroSaM
PETROMAKS & Demo 2000
*Still subject to change, 2.5 per cent inflation.
Data sources: Ministry of Petroleum and Energy (2002–2009; 2010b).
4.1.3.1 DEMO 2000
DEMO2000 was established in 1999. Its objective is threefold: first, the program supports new field
development through new and cost-efficient technology and new models for field development. Second, DEMO
2000 encourages projects to stay on-budget. Third, the research program attempts to contribute to new
Norwegian industrial products being exported to the global market.
The Ministry of Petroleum and Energy transfers the DEMO2000 budgets to the Norwegian Research Council,
which then provides support to demonstration projects. The demonstration projects are conducted with the
cooperation of petroleum companies, the supply industry and research institutions. Together with PETROMAKS
(below), DEMO2000 was worth 182 million NOK in 2009 (2011 currency).
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4.1.3.2 PETROMAKS
The objective of PETROMAKS is to strengthen knowledge development, business development and
international competitiveness. This ensures that PETROMAKS contributes to an increase in the value of
petroleum resources to Norwegian society.
As with the DEMO 2000 program, the Ministry of Petroleum and Energy transfers the PETROMAKS budgets
to the Norwegian Research Council. The Research Council then grants and allocates the budgets to the
recipients: universities, university colleges, research institutions and businesses. The PETROMAKS research
program aims at financing basic research (pure research/fundamental research) and applied research as well
as technological development.
The PETROMAKS research program was established in 2004. It is the largest petroleum-oriented research
program that the Research Council administers, worth 182 million NOK in 2009 (2011 currency) when
combined with DEMO2000.
4.1.3.3 PETROSAM
This research program’s objective is to contribute insights and knowledge about society, politics and the
economy. This insight and knowledge are fundamental for strategies and policy-making for Norwegian
authorities and petroleum businesses. The program is focused on petroleum research in the social sciences.
PETROSAM has two goals. First, the program attempts to stimulate the development of a more stable,
permanent and competent research environment in Norway in the field of social scientific petroleum research.
The ambition is to develop strong professional groups of researchers that can compete internationally in the
program’s themes. Second, PETROSAM is targeted to increase knowledge within these themes:
• Management of Norwegian oil and gas resources.
• International development trends and the value of Norwegian petroleum resources.
• Development in the main petroleum areas.
The Ministry of Petroleum and Energy finances the public share of the program. The Ministry transfers the
PETROSAM budget to the Research Council, which then decides the recipients of the research resources.
Universities and research institutions are the receiving institutions. Scholars and researchers apply to
participate in relatively large research programs that the Research Council sets up.
PETROSAM was started in 2007 and continues until 2012. The program is a continuation of earlier programs:
Oil and Society, Petro, Petropol I and Petropol II. Its value in 2009 was 10 million 2011 NOK.
Government financing of R&D to specific industries is a subsidy to the particular industry under the WTO’s
definition. We conclude that the Norwegian government subsidizes the petroleum upstream industry with the
three R&D programs discussed above.
4.1.4 EMERGENCY PREPAREDNESS
In Norway, there is a high level of awareness of the risks stemming from the petroleum production industry.
Disasters, petroleum spills, etc. can occur due to petroleum extraction, but there are other risks, as well,
stemming from transportation of petroleum along Norway’s long coast. It is hard to separate the efforts for
decreasing exposure to potential disasters in the petroleum production industry and the exposure that stems
from other sources.
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The responsibility for being prepared for petroleum disasters is split mainly between the industry and
municipalities, with support from the state. If the scale of the disaster requires it, the government intervenes
more heavily to ensure the best treatment of the problem. The Coastal Administration is responsible on behalf
of the government.
Data on the expenses of Norwegian municipalities are provided by Statistics Norway. However, the data are
too aggregated to be valuable for our purposes. The municipalities’ total expenditures are divided into function,
and data for all functions and municipalities are accessible from the Statistics Norway website. The functions
that include expenditures for emergency preparedness for disasters, spills and so on from the petroleum
production industry are termed “prevention of fires and other disasters” and “preparedness for fires and other
disasters.”
As the Norwegian state and municipalities have expenditures tied to being prepared for and preventing
potential disasters and spills from the petroleum production industry, we conclude this is a subsidy. However,
due to lack of data, we are unable to calculate its value.
4.1.5 THE CASE OF A MAJOR DISASTER: INSURANCE SUBSIDIES
In the case of a major disaster on the petroleum production facilities on the NCS, companies are required to
finance the clean-up operations. The question is then, what happens to the companies’ responsibility if one of
the partners is not able to pay its share of the rescue and cleaning operations? The shareholders of a licence
are all responsible for the full costs in the case of disasters. Their responsibility is based on solidarity, which
means that if a company is not able to pay its share of the costs, the other shareholders must cover the expenses.
We conclude that the case of a major disaster is not a subsidy to the oil and gas industry, because the
companies are responsible for the full cost of a major disaster.
4.2 PUBLIC PROVISION OF GOODS AND SERVICES AT BELOW-MARKET PRICES
Government provision of goods and services at below-market prices is a form of preferential treatment to the
recipient and is considered a subsidy within the WTO definition under the Agreement on Subsidies and
Countervailing Measures.
4.2.1 SEISMIC INVESTIGATIONS BY THE NORWEGIAN PETROLEUM DIRECTORATE
The NPD conducts seismic investigations on the NCS on behalf of the Ministry of Petroleum and Energy. The
NPD has responsibility for investigating areas that are proposed to be opened for the petroleum industry. For
instance, the continental shelf around Jan Mayen is currently being investigated. Also, an investigation of the
areas previously disputed with Russia is planned for after the summer of 2011.
The objective of the seismic investigations is to get a better understanding of the geological and geophysical
condition of the area under scrutiny. The information is for sale from the NPD, but the price only corresponds
to the administration costs. Thus, the cost of the seismic investigations is covered by the Norwegian
government and is thus characterized as a subsidy to the oil and gas production industry. Information can be
a public good as long as the data becomes freely available. Also, the information contributes to more efficient
licence-application rounds.
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The Ministry of Petroleum and Energy transfers the necessary resources to the NPD, which is responsible for
conducting the seismic investigations. The information from the investigations is publicly available, but is
rarely interesting for those not in the petroleum industry. For the petroleum companies, however, the
information is of major interest. In particular, it improves the companies’ knowledge of which production
licence to apply for and what to expect in the licence. Thus, it is reasonable to argue that the petroleum
companies are the recipients of the seismic information that the NPD produces.
We conclude that the seismic investigations done by the NPD are a subsidy.
The NPD has conducted seismic investigations on the NCS since 1969, but the size of the budget varies
between years. Since investigation of virgin areas constitutes the majority of the NPD seismic investigation
budgets, this subsidy is largest in the years when Parliament has decided to examine whether new areas
should be opened to petroleum activity.
Figure 4.2 shows the seismic investigation transfer from the Ministry of Oil and Energy to the NPD. We see
that the scope of the seismic investigations the NPD conducts on behalf of the Ministry of Petroleum and
Energy varies. In 2009 the subsidy constituted approximately 250 million NOK, while in 2010 and 2011,
the Ministry of Petroleum and Energy transferred 20 million NOK.
FIGURE 4.2: SEISMIC INVESTIGATION SUBSIDIES, 2005–2011
*2010 and 2011 numbers may still be subject to change. 2.5 per cent inflation (2011).
Data sources: Ministry of Petroleum and Energy (2004–2009; 2010b).
Although the seismic investigations are a subsidy to the petroleum production industry, we do not assess the
impacts of a removal of this subsidy, as the cost of the seismic investigation is very small compared with the
overall activity of the oil and gas industry.
4.2.2 GASSCO INFRASTRUCTURE AND FACILITIES SERVICES
Gassco is an enterprise that administers and operates the gas pipeline grid and the onshore processing facilities
in the North Sea and the Norwegian Sea. Gassco is wholly owned by the Norwegian government, and the
Ministry of Petroleum and Energy is responsible for overseeing Gassco’s operations. When established in
2001, the objective of Gassco was to secure an independent and neutral utilization and development of the
natural gas resources on the NCS.
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Gassco owns neither the pipelines nor the processing facilities. Most of the gas pipelines and the two
processing facilities are owned by Gassled, a joint venture between 12 oil and gas companies operating on
the NCS. The Haltenpipe in the Norwegian Sea is, however, not part of the Gassled ownership structure.
Traditionally, petroleum companies with gas fields built and owned gas pipelines. Lately, international
investment funds have started to acquire shares in the gas pipeline grid.
Gassco is a non-profit enterprise. Thus, as the owner of the enterprise, the Norwegian government receives
no return on their business operations. The price for administration and maintenance of the midstream gas
facilities as well as the management of capacity and orders are lower than the market price. The recipients
of this non-profit organization are the upstream gas shippers or the upstream companies owning the gas
pipeline grid and processing facilities. These companies pay less for transportation of gas to the European
markets—the tasks Gassco conducts—than they would if Gassco was a profit-seeking enterprise.
In other words, the government subsidizes the maintenance cost of the pipeline grid and processing facilities.
The government has been involved in this subsidy since the establishment of Gassco in 2001. Although we
have defined only subsidies to the oil and gas industry as our scope, the non-profit management of the pipeline
system directly affects the business of the shippers of gas from Norway.
Thus, we conclude that the Norwegian government provides a subsidy, because Gassco does not apply market
rates in its business activity.
Figure 4.3 shows the value of the Gassco non-profit-orientation subsidy. The value was calculated by assuming
what profit Gassco could receive from its business. The profits are derived from the government’s discount
factors, discussed in section 2.6. In the middle scenario, the oil and gas industry is subsidized by 24 million
NOK in 2009.
FIGURE 4.3: GASSCO OPERATION COSTS AND PROFIT SUBSIDY
Data source: Gassco (2009; 2010; 2011).
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4.2.3 THE GUARANTEE INSTITUTE FOR EXPORT CREDIT AND GOVERNMENT CREDIT
GUARANTEES
The Guarantee Institute for Export Credit provides guarantees for Norwegian companies’ exports and
investments. The Institute issues guarantees on behalf of the Norwegian government. A daughter enterprise
has the responsibility of short-run credit insurance.
The Institute has a few industries as its main customers: the oil and gas supply industry, the maritime industry
and the energy industry. However, the Institute has no customers from the oil and gas industry. Thus, there is
no need to analyze either whether the Institute provides a subsidy or the size of the possible subsidy. In section
2.2, we explained that we are only looking at subsidies that directly affect the oil and gas industry. The change
in prices on inputs to the oil and gas industry from the subsidies offered to the suppliers of the oil and gas
industry is thus outside our scope.
We conclude that the Guarantee Institute for Export Credit’s provision of guarantees and credits are not a
subsidy to the oil and gas production industry.
4.2.4 EKSPORTFINANS AND FAVOURABLE LONG-TERM FINANCING
Eksportfinans is an export credit institution in Norway. The institution is owned by banks and the Ministry of
Trade and Industry on behalf of the Norwegian government. Eksportfinans provides long-term financing for
Norwegian exporting firms.
The oil and gas sector constitutes 30 per cent of Eksportfinans’ total financing. However, these loans are
provided to support financing of rigs and other equipment. Eksportfinans thus only satisfies financing needs
of the industry that supplies the oil and gas industry. Since we have defined our scope to constitute only
subsidies to the oil and gas industry, we do not examine subsidies to other industries that in the end may
change the prices of the inputs to the oil and gas industry.
As Eksportfinans does not provide financing for the oil and gas industry, we do not consider Eksportfinans
within this study.
4.3 GOVERNMENT REVENUE FOREGONE: POTENTIAL PREFERENTIAL TREATMENT OF
THE OIL AND GAS INDUSTRY IN THE FISCAL SYSTEM
As explained in section 2.5, the fiscal system differs between the oil and gas industry and the general fiscal
system. In this section, we identify and measure the value of possible subsidies to the oil and gas industry
stemming from the differences in the fiscal systems applied.
Below, we use the thorough description of the fiscal systems from section 2.5. We identify possible subsidies
through discussing the differences in the fiscal systems.
4.3.1 GOVERNMENT COVERAGE OF 78 PER CENT OF EXPENDITURES
The oil and gas industry faces a 78 per cent tax on profits, whereas other industries have a 28 per cent tax.
However, the high marginal tax implies also that the government lets companies write off 78 per cent of
expenditures and investments. This is clearly better than the 28 per cent rate allowed in other industries.
The reason behind the preferential coverage of expenditures and investments in the oil and gas industry is
that the industry faces a higher tax on profits. The government wants to achieve neutrality in the investment
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and operation decisions of the oil and gas companies. It does this by allowing a tax deduction on expenditures
at the same marginal rate as they tax the companies’ profits.
We conclude that the 78 per cent coverage of expenditures is not a subsidy to the oil and gas industry. The
reason is that the principle of symmetry is the same in the other fiscal systems.
4.3.2 LOSS CARRIED FORWARD WITH INTEREST RATE
In Norway’s general fiscal system, losses may be set against income from all sources, including capital gains.
Excess losses may be carried forward indefinitely. In the fiscal system for the petroleum industry, however,
losses may be carried forward with a risk-free interest rate. This rule was made to achieve a more neutral
fiscal system for the petroleum industry, but is not part of the general fiscal system.
The value of this subsidy in 2009 is the NPV of the losses taken in 2009 increased with an interest rate until
the company achieves a taxable position or the company is sold to a company that is in a taxable position.
There are, however, almost no losses, as most of the losses go into the exploration refund.
We conclude that the ability to carry forward losses with a risk-free interest rate is a subsidy to the oil and gas
industry, but that the value is small.
4.3.3 GUARANTEED REIMBURSEMENT OF LOSS CARRIED FORWARD
In Norway, the Petroleum Tax Law guarantees that an oil and gas company will receive the government’s
share of the loss in the future when and if the company is closed down (not sold or merged). Since the
government has guaranteed reimbursement of losses, the Ministry of Finance can apply this risk-free interest
rate to the loss carried forward (as discussed in section 4.2.2). It has not happened yet that a company has
received the government reimbursement, but the policy in itself is a favourable treatment of petroleum
companies compared with companies in other extractive or energy industries.
The Ministry of Finance argues that the petroleum companies have been evaluated thoroughly by the Ministry
of Petroleum and Energy to be pre-qualified as licence holders or operators, and that the critical assessment
conducted by the Oil Taxation Office is much more comprehensive than what other companies experience.4
The Ministry of Finance therefore states that in a perfect world, all expenses could have been reimbursed to
any company the following year (or the same year). But we do not live in a perfect world. As long as the
government treats the petroleum companies favourably, a couple of subsidies are offered the companies in
the petroleum industry that have not yet reached a position of substantial income.
We consider the guarantee of government reimbursement to be a subsidy to the oil and gas industry, but the
value of this subsidy is close to zero, as it has never been used.
4.3.4 EXPLORATION REIMBURSEMENT TO EXPLORATION COMPANIES
The petroleum tax law was changed in 2004 to include a paragraph on exploration payback for companies in
a non-taxable income position. Such companies were then able to reclaim 78 per cent of their exploration
expenditures the following year. This is what established companies with a taxable income manage to reclaim.
4
This was presented in a meeting with the Ministry of Finance on September 2, 2011.
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The reasoning behind the exploration reimbursement is twofold. First, the Ministry of Finance seeks to level
the playing field between new entrants and more traditional players on the NCS. Second, the exploration
reimbursement follows the logics of the guarantee of reimbursement and the ability to carry loss forward with
a risk-free interest rate. Since the government has guaranteed the payback of its share of exploration costs (78
per cent) and has made an offer to the companies to increase the value each year with a risk-free interest rate,
the government is indifferent to the choice of whether to reimburse its share immediately or wait. In the case
of the exploration costs, the government has chosen to reimburse its share of the costs the following year.
The exploration payback is a financial treatment of exploration expenditures that is different from the treatment
of other companies operating in Norway. Usually, companies are required to reach a taxable position before
they can write off their expenses.
The government rationale for granting the exploration subsidy is to increase the number of companies on the
NCS in order to increase competition for exploration activities. From figure 4.4, we see that beginning in
2005, the number of petroleum companies in Norway has increased. But even with a large growth in the
number of entrants, the numbers are still lower than during the 1980s. There have been many mergers and
acquisitions of companies in the industry, but part of the reason for fewer companies lies in the fact that the
NCS is maturing, and thus less commercially interesting. Notwithstanding the exploration reimbursement
rule from 2004, other variables, such as oil prices, may also explain the increase in the number of companies
on the NCS.
FIGURE 4.4: NUMBER OF PETROLEUM COMPANIES ON THE NCS AND COMPANIES IN A TAXABLE
POSITION
Date source: Oil Taxation Office (personal communication, 2011).
The exploration reimbursement is a very hot issue to the Norwegian public. The Ministry of Finance states
that such reimbursement is not to be viewed as a subsidy (Lund & Henriksen, 2011). It is true that established
companies can write off the expenditures on revenues from producing fields, and that the reimbursement
rule levels the playing field for less established companies. However, in other industries, companies running
deficits have to postpone a deduction until a future with high enough revenues.
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We consider the ability to have exploration expenses reimbursed in such a fast and secure manner to constitute
a subsidy. This is a preferential treatment of deficit-running companies in the petroleum industry compared
with such companies in other industries.
The Oil Taxation Office is responsible for the taxation of the oil and gas production companies. Whereas the
new law was implemented by the Ministry of Finance, the Oil Taxation Office is the immediate grantor
institution of the exploration payback subsidy.
The companies that received exploration payback in 2010 for the 2009 exploration year are shown in figure
4.5. The tax list shows that 44 companies receive a fast payback of their exploration expenditures. The five
largest recipients received almost 50 per cent of their expenditures, and 25 per cent of the companies (11
companies) received approximately 70 per cent.
FIGURE 4.5: EXPLORATION PAYBACK 2009, MILLION NOK
Data source: Oil Taxation Office (personal communication, 2011).
Figure 4.6 (next page) shows that the value of the payback has increased rapidly over the last five years. From
a negligible sum in 2005, the exploration reimbursement constituted over 9 billion NOK in 2009.
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FIGURE 4.6: EXPLORATION REIMBURSEMENT 2005–2009
Data source: Oil Taxation Office (personal communication, 2011).
The value of the exploration reimbursement is largely dependent on two factors:
1. How long the exploration companies operate in a non-taxable position. This is because the value of
the subsidy is equal to the difference between receiving the payback in cash and waiting to write off
the expenses in a future taxable position.
2. The discount rate used to calculate the value. If all the receiving companies have high expected returns
on alternative investments (operating with a high discount factor), the value of the exploration subsidy
can be larger than the payback itself.
It is difficult to calculate the duration that a company receiving the exploration subsidy will operate before
the company reaches the status of having taxable income. The results are sensitive to the assumptions made
(see Appendix A).
Figure 4.7 (next page) shows the value of the exploration payback to pure exploration companies. We have
used the three discount factors discussed in section 2.6. The companies should discount the rate of return
on their exploration costs with a lower discount rate, because these costs are guaranteed by the Norwegian
government. However, the fast reimbursement reduces the political risk, since taxation laws can be changed
in the future. Also, the Lund-Osmundsen debate showed us that the companies on the NCS are applying one
discount rate on a petroleum project, instead of splitting the investments into categories according to the
risks associated with each part.5
We can conclude that for this calculation, it is likely that the true value would be closer to the outcome of a
calculation with a 6 per cent discount rate than to the high case of 12 per cent. The importance of the
discount rate shows that the magnitude of the exploration subsidy varies from company to company and also
with the perspective of the government vs. the company.
As well, it is hard to estimate the number of years it takes a company to achieve a taxable position. The ability
to achieve a taxable position relies on many factors, such as discovering petroleum, developing fields and
making acquisitions. Instead of estimating a precise value of the exploration reimbursement, we have
calculated a range based on three durations: 5, 10 and 15 years. In our middle estimate (10 years with a 9
per cent discount rate), the value of the 2009 exploration subsidy is 4 billion NOK.
5
While Lund (2009) argues that, according to investment theory, companies should split a project into parts that take into consideration the
different risks involved, Osmundsen (2000) argues that the companies should apply one risk-weighted discount factor for a project.
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Billion NOK (2011)
FIGURE 4.7: VALUE OF EXPLORATION PAYBACK, 2009
Data source: Oil Taxation Office (personal communication, 2011).
4.3.5 FAST DEDUCTION OF INVESTMENTS
The petroleum industry works within a different investment deduction system than other industries. While
enterprises in general can deduct an investment using a declining rate over a long period, petroleum
enterprises can deduct an investment linearly over a short period (six years).
The objective of the investment deduction rules is to provide incentives to invest on the NCS. Upstream
petroleum activity is characterized by major capital investments to enable the production of petroleum. The
investment rules are supposed to contribute to easing the large investments necessary on the shelf.
The Ministry of Finance is responsible for the tax system. The Ministry has delegated responsibility for this
deduction to the Oil Taxation Office, a branch of the Norwegian Tax Administration. The recipients of the
subsidy are all the companies that invest and earn a petroleum income. For companies with only investment
expenditures, the deduction is built up with an interest rate, ready to be reaped when income from petroleum
production begins.
The value of the potential subsidy is shown in figure 4.8 (next page). The results show that the investment
deduction rules are highly favourable to the oil and gas industry. The discount rates applied are discussed in
section 2.6. In 2009 the value of the deduction with a 9 per cent discount rate was 19 billion 2011 NOK. We
calculated this by summing up the total investments in 2009 and subtracting the exploration expenditure,
then comparing the difference between the existing investment deduction rules and a 10 per cent yearly
deduction.
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FIGURE 4.8: VALUE OF FAST INVESTMENT DEDUCTION RULES, 2009, THREE DISCOUNT RATES
Source: Statistics Norway (n.d.).
It is important to note that the favourable investment deduction rules are made in relation to the high tax on
profits. Removal of the favourable deduction rules without lowering the profits tax would shift the balance of
the system. In our calculation, we have made no attempt to identify what the “right” profit tax should be in
order to treat investments in the same manner as in the general fiscal system. We have just focused on the
fact that investments are treated favourably in the oil and gas fiscal system compared with the general
fiscal system.
The investment deduction rules fall under the definition of a subsidy to the oil and gas industry, as long as
we also acknowledge the relationship between the high profits tax and the fast investment deduction. The
investment deduction rules provide for a faster payback of investments on normal profits than other comparable
industries get under the general tax system. This faster payback may result in the oil and gas industry
reinvesting in new opportunities faster than other industries may, and thus the investment deduction rules
are a subsidy, since they may skew investment decisions and channel resources toward the petroleum industry
at the expense of other investment opportunities onshore.
4.3.6 LIQUEFIED NATURAL GAS IN NORTHERN NORWAY: THE CASE OF SNØHVIT
The Snøhvit field in the Norwegian Barents Sea comprises three main discoveries, Snøhvit, Albatross and
Askeladd, in addition to a few minor reservoirs. The discoveries were found during the first surge of interest
in the Arctic Barents Sea in the 1980s. Snøhvit was developed as a subsea solution, with multi-phase gas
pipelines to Melkøya, outside Hammerfest, where the gas is processed and liquefied before it is loaded on to
the LNG ships.
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MAP 4.1: THE SNØHVIT FIELD AND THE FIVE REGIONS WITH SPECIAL LNG INVESTMENT SUBSIDIES
Data source: NPD (personal communication, 2011).
Because the field was developed from 2002 onward, the lead time from discovery to development can be
considered long. The lack of established infrastructure offshore and onshore, as well as harsh climate and
geological difficulties, contributed to a long discovery-to-development process. However, one of the main
issues for natural gas in general is the distance to potential markets. This is particularly the case for natural
gas in the Arctic region, since the distance to populated areas and the markets is long. In the case of Snøhvit,
even with a relatively large amount of hydrocarbons, the industry claimed that the Norwegian petroleum tax
regime hindered development. The Norwegian government declined the recommendation of reducing the tax
rate, but instead proposed reducing the time for deducting the LNG investments.
The treatment of LNG projects in the proposed law was found to contravene the European Union’s competition
laws by the European Free Trade Association Surveillance Authority. Thus, the Norwegian government had to
write a geographical dimension into the law, since efforts to improve the economic conditions of rural areas
are seen as legitimate under European Union law. The LNG subsidy then became viable for projects only in
the most rural northern part of Norway: Finnmark county and the four most northern municipalities in Troms
county (see map 4.1).
We conclude that the change in the law to differentiate this petroleum investment from others and to facilitate
development of the Snøhvit LNG plant qualifies as a subsidy.
This change to the petroleum law ensured that the owners of Snøhvit would conduct the necessary investments
into the LNG facility. To provide a value for the subsidy depends on the alternative investment opportunities.
We have calculated the Snøhvit subsidy using several discount factors.
The Oil Taxation Office, a branch of the Norwegian Tax Administration, is the institution that directly grants
the subsidy. The Norwegian Tax Administration reports to the Ministry of Finance.
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The Snøhvit field is owned by Statoil (currently at 33.53 per cent; 12 per cent went to GDF Suez in 2001,
but Statoil received a 10 per cent share from Norsk Hydro and 1.24 per cent from Svenska Petroleum in
2004), Petoro (30 per cent), Total (18.4 per cent), GDF Suez (12 per cent), Hess (3.26 per cent) and RWEDEA (2.81 per cent).
The law is not specific to the Snøhvit field development, but the law applies to any LNG project in the
geographical area shown in map 4.1. The law was in effect beginning in 2002.
Figure 4.9 shows the value of the LNG subsidy in 2009. We calculated these figures using industry data on
investments in 2009 and deducting 78 per cent of the investments over three and six years linearly. In 2009,
the difference resulting from the subsidy was worth 180 million 2011 NOK.
FIGURE 4.9: VALUE OF THE LNG DEDUCTION LAWS IN 2009
Data source: WoodMackenzie (2011)
4.3.7 UPLIFT: AN ADDITIONAL INVESTMENT SUBSIDY?
The petroleum enterprises are able to deduct a special uplift in addition to the investment deduction described
above. The uplift is an extra 30 per cent deduction on the special tax (50 per cent), constituting 15 per cent
of the total investment value. The uplift is deducted linearly over an even shorter period (four years).
The objective of the uplift is to provide a tax shield to avoid what the Ministry of Finance refers to as “normal
profits” being taxed with the 50 per cent special tax.
As discussed in section 4.2.5, it is not obvious that this is a subsidy, since these uplift rules are part of the
rationale for higher tax rates on the petroleum industry. These rules are used to reduce the gap between the
mathematically expected monetary value of an exploration decision and the utility curve of the various oil and
gas companies.
The uplift mechanism, however, was introduced to shield “normal” profits against taxation under the 50 per
cent special tax, and thus it cannot be isolated from the level of the special tax. Had the special tax rate been
set at zero, there would be no uplift deduction. Therefore, the uplift is directly connected to the level of
resource rent taxation.
We conclude that the uplift is not a subsidy to the oil and gas industry as long as its value is directly connected
to the special tax rate and thus provides a tax shield against special taxation of “normal” profits.
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4.3.8 TRANSFER OF PRODUCTION LICENCES
The Ministry of Petroleum and Energy administers application rounds, both for new and mature areas. In
these announced rounds, the petroleum companies apply for production licenses, which, if awarded, give
the companies the opportunity to explore, develop and produce oil and gas. The licences are normally given
for a period of 10 years and come with a work obligation, in the form of seismic investigation and/or
exploration drilling. If the obligation is fulfilled, the owners can apply for an extension of the licence period,
usually 30 years.
The companies have to pay an application fee equal to the expenditures associated with administering the
application rounds. Thus, the companies have access to government-owned land and perhaps resources, with
only administrative costs. As stated in section 2, the Norwegian government has chosen to tax the companies
as well as to participate as a partner in the licences. The government could also have sold the licences or let
the licence rounds be organized as lotteries. But since the government has chosen other means of taxing the
companies for petroleum extraction, it makes little sense to state that the companies should pay for the
licences as well. Shareholding and licence auction are ways of acquiring the profits of the petroleum resources
ex ante, that is, before we know about the actual existence of petroleum, while taxation is a way of acquiring
resource rent after the discovery of resources. We are not questioning the means of acquiring the share of the
petroleum production, nor are we questioning the level of rent acquisition.
In many countries, the petroleum companies pay for the access to licences. In Norway, the taxation of access
to petroleum resources does not occur during the handover of petroleum activity rights. Rather, the taxation
is placed on production. This is done to secure a neutral taxation system, that is, a system that ensures that
an investment that is profitable pre-tax is still profitable post-tax.
We conclude that the transfer of petroleum activity rights through the application rounds for production
licences is not a subsidy to the oil and gas production sector.
4.4 SUMMARY
The potential subsidies have been presented and discussed above. Here, we sum up their value. The subsidies
vary from year to year. We chose the year 2009 as the baseline year, since this is the year of the latest data
on the exploration subsidy. The category of government transfers and public provision of goods and services
at below-market prices is volatile given the fact that the government bases their decisions on the perceived
need for such subsidies. In the category for subsidies in the fiscal system, the level of subsidies is based
more on the level of activity; for example, large investments in a year release more value of the subsidies.
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TABLE 4.1: SUMMARY OF SUBSIDIES TO THE PETROLEUM PRODUCTION INDUSTRY IN 2009,
MILLION 2011 NOK
Category
Subsidy
Low
Middle
Million NOK (2011)
High
Transfers and provisions of goods and services
Seismic investigations
257
257
257
R&D programs
216
216
216
16
24
32
2,692
4,024
4,955
135
181
217
Investment
17,791
20,812
22,289
Total
21,106
25,514
27,966
Gassco
Fiscal system subsidies
Exploration reimbursement
Snøhvit
Data sources: Investment: Statistics Norway (2011); seismic investigations and R&D programs: Ministry of Petroleum and Energy (2010b);
exploration reimbursement: Oil Taxation Office (personal communication, 2011); Gassco: Gassco (2010); Snøhvit: Wood Mackenzie (2011).
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5. IMPACT ASSESSMENT
In this section, we look into the effects of removing the subsidies. We provided the methodology we applied
for the effect assessment in section 2, but have given a more detailed framework in Appendix B.
The effects are separated into three categories:
1. Financial impact on government revenue.
2. Social impact on the number of jobs.
3. Environmental impact on emissions.
The numbers are used as indications of what happens if any subsidies are removed.
In this chapter, we develop two extra sensitivity cases by changing the underlying assumptions. Thus, we
operate with a low, middle and high estimate. This is important in order to show how the estimates are sensitive
to the assumptions applied in the calculations. Instead of treating the results as exact figures, we should
interpret them as indications of how important the subsidies are (or are not) for the industry and for the
Norwegian society and economy.
5.1 SEISMIC INVESTIGATIONS
Seismic investigations were valued at 20 million NOK in 2010. In 2009, the value was approximately 257
million NOK. It is difficult to assess what the situation would have been if the government had not taken
responsibility for conducting the initial seismic investigations. Information is a public good, as defined in
economic theory, but it also provides a competitive advantage for those acquiring that information privately.
To be a public good, the information needs both to be non-rival and non-excludable. Non-rivalry means that
consumption of the good does not reduce the ability of others to consume the good. Non-excludability means
that economic agents shall not be effectively excluded from the good. Pure public goods are rare in the real
world, but the information gathered from seismic investigations scores high on these two features.
If the government had not taken on the responsibility of providing the information, the competition on the
shelf to apply for production licences would have been reduced. Few companies on the shelf have the ability
and capacity to conduct their own large-scale seismic investigations. This could have led to less competition.
It is likely that fewer companies would have shot and interpreted seismic data if this data were not available
from the NPD, but we cannot rule out that the same acreage would have had seismic data shot. This ambiguity,
combined with the fact that the subsidy is not directly related to production or investments and the huge
variability of the subsidy, makes it difficult to analyze and assess the impact of removing the subsidy.
5.2 RESEARCH AND DEVELOPMENT PROGRAMS
In section 4 we stated that the Norwegian government invests 216 million NOK in R&D directly in the oil and
gas industry. Given the scope and budget of this study as well as the complicated nature of R&D activity, we
have chosen not to assess the impacts of removing R&D subsidies. We also note that the R&D subsidies to
the petroleum industry are lower in relative terms than similar R&D subsidies to other sectors of the economy.
If R&D subsidies were to be removed for all sectors, the petroleum industry would be least affected, but the
involved academic institutions would be significantly affected.
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5.3 GASSCO AS A NON-PROFIT ORGANIZATION
Gassco, a government non-profit organization, is a subsidy to the gas-exporting companies on the NCS.
Changing Gassco into a profit-seeking organization would cost the shippers of gas or the owners of the gas
pipelines and processing facilities between 16 and 32 million NOK per year. With 6 per cent profits, Gassco
operations would have produced profits that constitute a large amount for a Norwegian municipality. But for
the shippers and owners of the gas pipeline grid, such an amount would at best have a very minor impact on
decisions related to exploration, development of fields and petroleum extraction.
We have not assessed the impact of introducing profits to the operation of Gassco.
5.4 EMERGENCY PREPAREDNESS
The Norwegian Coastal Administration and municipalities in Norway are, together with the oil and gas
companies, responsible for being prepared for environmental emergencies related to the oil and gas industry.
We have not been able to calculate the value of this subsidy, so it is not part of the removal calculation.
5.5 LOSS CARRIED FORWARD WITH A RISK-FREE INTEREST RATE AND
GUARANTEED REIMBURSEMENT
Although the loss carry-forward is a subsidy, its value is highly questionable. Almost all the oil and gas
companies are running with a significant surplus in the current price picture, and those companies that are
mainly doing exploration activities are already being reimbursed for the tax share of their exploration costs
(see 5.6 below). Thus, very few companies have losses to carry forward in the bigger picture, and these losses
are low in comparison with exploration costs and with the current price picture. As no company has exited the
Norwegian continental shelf without having been acquired by another company, there are no examples of
situations where the guarantee has ever been exercised, and this is also the expectation in the future.
The subsidy would thus, in our opinion, be the risk-free interest rate itself. This subsidy is very small and has
not been included in the effect calculations, as the effect of removing it would be negligible. The likely effect
is that removal would improve the negotiation position of a company that wants to exit with a company that
wants to acquire it. With reimbursement, the value of any loss carry-forward could potentially increase.
However, when such a situation occurs, the timing between a potential sale and a potential reimbursement
would be very short, and thus the improvement in the negotiation position should also be minor.
5.6 EXPLORATION REIMBURSEMENT
What happens if the exploration reimbursement subsidy is removed? Will the exploration companies continue
their investments? Will the other companies increase their exploration activity?
If the exploration reimbursement is removed, we need to make assumptions about whether the exploration
companies’ wells will be drilled in the future by other companies. We have built three cases, based on an
assumption that the drilling conducted in 2009 was drilled by existing companies and newcomers that would
have come anyway. We need to remember that the oil price has experienced a large increase in the period we
are looking at. In the low estimate, only 25 per cent of the exploration companies’ wells are drilled. In the
middle estimate, 50 per cent of the wells are drilled. Then in the high estimate, 75 per cent of the wells are
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drilled. Thus, we assume that 25 per cent of the wells that the exploration companies financed will never be
drilled. The methodology is based on an ex ante perspective, that is, what we can expect exploration activity
to result in (see Appendix B).
Table 5.1 presents the results of removing this subsidy. Government income would be reduced. Also, the
number of employees in the four petroleum-related sectors would be reduced. However, the amount of carbon
dioxide emissions would also go down.
TABLE 5.1: GROSS EFFECT ASSESSMENT OF EXPLORATION PAYBACK REMOVAL, 2009
Indicator
Low estimate
Middle estimate
High estimate
Investments (Million NOK)
–2,317
–4,734
–7,152
Government revenue (Million NOK)
–2,323
–4,647
–6,970
–1,033
–2,090
–3,147
–949
–1,914
–2,879
CO2 (million tonnes)
–0.153
–0.306
–0.459
NOx (1,000 tonnes)
–0.615
–1.229
–1.844
nmVOC (1,000 tonnes)
–0.562
–1.123
–1.685
–2.160
–4.320
–6.480
Labour market
Oil and gas industry employment (persons)
Supply industry employment (persons)
Emissions
To air
To sea
Chemicals (1,000 tonnes)
Data sources: Investment: Statistics Norway (2011.); labour market: Eika et al. (2010) and Vatne (2007); emissions: Klif (2011) and Ministry of
Petroleum and Energy (2011).
5.7 FAST DEDUCTION OF INVESTMENTS
The investment subsidy is related to how the petroleum companies deduct their investment costs. If the
subsidy were removed and the deduction rules became based on general tax rules (declining balance
depreciation with a specific percentage of the remaining expenditure deducted each year), the petroleum
companies would have faced a less favourable deduction regime. The new regime would have made the
petroleum companies more hesitant to invest in projects on the NCS.
In this impact analysis, we assume that the companies change their investment behaviour by delaying a
percentage of the investment and instead smoothing this investment over the next five years. We believe that
the companies will become more reluctant with their investment strategy if the economics behind it worsen.
In addition, the companies reduce their total investment, and the amount represented by this particular
reduction will never be invested. We anticipate that some resources would be stranded due to a removal of
the investment subsidy. The justification for this assumption is that with a reduction in the value of a field
project, some of the discoveries that have very low profitability would fall under the threshold for economic
viability (this assumption may not be valid with high oil prices). The delayed share and the investment
reduction percentage are shown in table 5.2 (next page). We assume that by their very nature, the marginal
fields are expensive to develop.
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TABLE 5.2: ASSUMPTIONS ABOUT BUSINESS BEHAVIOUR OF INVESTMENT SUBSIDY REMOVAL
Scenarios
Smoothed
Next 5 years
Reduction
Low
10%
2%
Middle
20%
4%
High
30%
6%
As we showed in section 3, petroleum investments constitute a large share of the total investments in Norway.
Also, the investments enable petroleum production that contributes large revenues to the Norwegian
government. In table 5.3, we see that the investment delays and reductions have a significant impact on
government revenue, employment and emissions. In the middle estimate, the discounted government revenue
stream is reduced by approximately 8.5 billion NOK (US$1.4 billion). Also, the decreased investments reduce
the employment in the oil and gas industry by approximately 3,400 people, and by nearly another 3,600 in
the petroleum supply industry. At the same time, the removal of these subsidies reduces emissions. The effect
calculations may underestimate the reduced government revenue stream or overestimate the size of
personnel reductions.
TABLE 5.3: REMOVAL EFFECTS OF INVESTMENT SUBSIDY, 2009
Indicator
Low estimate
Middle estimate
High estimate
Investments (Million NOK)
–3,859
–7,718
–11,577
Government revenue (Million NOK)
–4,239
–8,479
–12,718
Oil and gas industry employment (persons)
–1,683
–3,365
–5,048
Supply industry employment (persons)
–1,784
–3,568
–5,352
CO2 (million tonnes)
–0.279
–0.559
–0.838
NOx (1,000 tonnes)
–0.001
–0.002
–0.003
nmVOC (1,000 tonnes)
–0.001
–0.002
–0.003
–0.004
–0.008
–0.012
Labour market
Emissions
To air
To sea
chemicals (1,000 tonnes)
Data sources: Investment: Statistics Norway (2011.); labour market: Eika et al. (2010) and Vatne (2007); emissions: Klif (2011) and Ministry of
Petroleum and Energy (2011).
5.8 LIQUEFIED NATURAL GAS IN NORTHERN NORWAY: THE CASE OF SNØHVIT
For all the other impact assessments, we have examined the 2009 subsidies. In the case of Snøhvit, however,
it makes little sense to just look at the impact of what was given in fiscal year 2009. Instead, we calculate
the impact of the whole Snøhvit project.
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It would be an exercise in alternative history to decide whether Snøhvit would have been developed without
the investment subsidy. Instead, we suggest making three cases. In the low estimate, Snøhvit is developed
with a three-year delay. In the middle estimate, the field is delayed by 10 years. In the high estimate, the
field is never developed.
Table 5.4 shows the results of the effect assessment on removal of the Snøhvit subsidy. In the low case,
Snøhvit is developed with a three-year delay. Thus, the government loses revenue in the perspective of NPV.
Also, emissions and employment are reduced due to the delay. In the middle case, the delay of 10 years
further decreases the NPV of employment. Also, the government receives the tax payment later, and its value
is reduced. On the other hand, the carbon dioxide emissions occur further in the future. In the high effect
estimate, the Snøhvit field is not developed at all. Thus, the losses to government revenue and employment
are the largest in this estimate.
TABLE 5.4: GROSS IMPACT ASSESSMENT OF THE SNØHVIT LNG SUBSIDY, DISCOUNTED TO THE
BEGINNING OF THE PROJECT
Indicator
Low estimate
Middle estimate
High estimate
Investments (Million NOK)
–9,480
–24,123
–59,110
Government revenue (Million NOK)
–8,258
–21,012
–51,488
Oil and gas industry employment (persons)
–3,606
–9,175
–22,483
Supply industry employment (persons)
–3,941
–10,028
–24,573
CO2 (million tonnes)
–0.544
–1.384
–3.392
NOx (1,000 tonnes)
–2.185
–5.559
–13.622
nmVOC (1,000 tonnes)
–1.996
–5.079
–12.445
–7.677
–19.534
–47.866
Labour market
Emissions
To air
To sea
Chemicals (1,000 tonnes)
Data sources: Investment: Statistics Norway (2011.); labour market: Eika et al. (2010) and Vatne (2007); emissions: Klif (2011) and Ministry of
Petroleum and Energy (2011).
5.9 COMPARISON WITH STATISTICS NORWAY’S KVARTS MODEL
In the impact assessment, we have only taken into consideration the dynamics of the oil and gas industry and
the supply industry. We have not examined how the general Norwegian economy would react to the removal
of any subsidies. In a real scenario excess labour, real capital and natural resources formerly used in the oil
and gas industry plus the supply industry would be turned over to other economic activities. However, there
are economic costs related to this transformation. First of all, not all the resources will find other uses. Second,
the time gap between employment of a resource in the oil and gas and supply industries and finding other
uses is costly in itself. Third, the economic rents will change. By definition, the rent on labour, real capital
and natural resources will be lower in other industries, or at least not higher. Otherwise, the resources would
have already been transferred from the oil and gas industry before subsidy removal.
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Since the impact assessment has been done on a gross level, we find it necessary to use results from Statistics
Norway’s KVARTS model. Statistics Norway models the Norwegian economy with two models, MODAG (annual
data) and KVARTS (quarterly). These are simulations of the Norwegian economy, where Statistics Norway
identifies, through econometrics, reaction patterns in each industry and among industries. While MODAG is
basically used for long-term macroeconomic forecasts, the KVARTS model is used for short- to medium-term
predictions. The models are built up by demand-side and supply-side functions and based on historical
relationships among consumers, industries and the government. The models are used to predict the outcome
of policy changes.
The results from these models contribute to a better understanding of the interplay between economic actions
in the petroleum industry, the general economy and the government. The models are symmetric, in the sense
that a positive exogenous shock has the same sized impact as a negative shock, with only the sign changing.
Also, the models are log-log linear. This means that a percentage change in the exogenous shock increases
the predicted change by the same percentage. Thus, a 300 per cent shock will have three times the forecasted
impact. However, the relationship between unemployment and wage change is not modelled to be linear.
Thus, to predict wage changes, we need to run the model with the exact value of the exogenous shock.
In table 5.5, we present data from Eika et al (2010), which is a study of delivered products and services from
other industries to the petroleum industry. A permanent increase in petroleum investments of 11.2 billion
NOK has impacts on every part of the Norwegian economy, through the interplays of markets for goods and
services or labour, government’s response with regard to financial and monetary policy, and so on. As described
above, these results can be used to calculate the net change in macroeconomic indicators from a permanent
increase or decrease in the petroleum investments, except the wage level.
Eika et al. (2010) finds that a permanent increase in petroleum investments increases the GDP, but with a
decreasing impact on production. Imports increase, and exports decrease slightly over time. The labour market
seems to profit substantially from an investment increase, with both wage and employment increasing. On
the other hand, petroleum investments drain the domestic economy of capital, and this is seen in the decrease
in both real estate investments and prices. The reductions in real estate investment and prices are progressive
over time.
Table 5.5 (next page) is based upon a permanent increase in investments. If we want to use these results, we
need to assume that impacts on investments are the same from 2010 forward, as the impacts were calculated
for 2009. This is a reasonable assumption for the investment and exploration subsidies, but not for the Snøhvit
subsidy, since this is a field project. For 2009, our middle estimate predicts a decrease in investments of
approximately 26 billion NOK, 3 billion NOK and 2 billion NOK due to the removal of the investment, Snøhvit
and exploration subsidies, respectively. In the modelling, we remove only one subsidy at a time. For instance,
the Snøhvit investments are an integrated part of the investments that are affected by the modelling of the
investment subsidy.
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TABLE 5.5: NET IMPACT ON MACROECONOMIC INDICATORS OF A PERMANENT 11.2 BILLION NOK
INCREASE IN PETROLEUM INVESTMENTS, STARTING IN 2004
Indicator
2004
2005
2006
2007
2008
2009
2010
Gross domestic product
0.3
0.3
0.3
0.2
0.2
0.2
0.2
Consumer price index
0.0
0.0
0.0
0.0
0.0
0.0
0.1
Import
0.9
0.9
0.9
0.9
0.8
0.9
0.9
Export
0.0
0.0
–0.1
–0.1
–0.1
–0.1
–0.1
Employment
0.2
0.2
0.2
0.2
0.2
0.2
0.2
Wages
0.2
0.2
0.2
0.2
0.2
0.3
0.4
Real estate investments
0.0
0.0
–0.2
–0.4
–0.6
–0.7
–0.7
Real estate prices
0.0
–0.1
–0.3
–0.4
–0.5
–0.4
–0.5
0.1
0.1
0.1
0.1
0.2
0.2
0.2
–0.3
–0.4
–0.5
–0.5
–0.5
–0.4
–0.4
Trade
Labour market
Real estate markets
Financial market
Money market interest rate
Weighted exchange rate
Source: Eika et al. (2010, p. 32), Statistics Norway (n.d.)
For the investment subsidy, the reduction in investments is nearly 2.5 times what is calculated with the
KVARTS model. As we stated above, since the KVARTS model is linear for the impact of an exogenous
investment shock, the effects from table 5.5 can be grossed up to match the decrease in the investments
found in our own analysis. We can thus see that for the first year in the modelling—here 2004 but in general
year 1—GDP would be reduced by approximately 0.7 per cent (0.3% * (26/11.2) = 0.7%). Moreover, imports
would be reduced by over 2 per cent. This is mainly due to the import leakage of oil and gas industry
investments. The labour market would have experienced a reduction in employment of around 0.5 per cent.
Wages would have fallen as well, but an exact prediction is hard to make because of the modelling of the
wage function. With subsidy removal, the real estate markets would see increased investments over time, with
an additional real estate price increase.
Both the investment subsidy removal and the removal of the Snøhvit LNG subsidy are assumed to cause
delays in investments. While subsidy removal will be permanent, parts of the investments in 2009 will be
made in the future. For instance, in 2014 around 13 billion NOK of the 2009 investments will be invested:
9 billion NOK at Snøhvit and 4 billion from the investment subsidy removal. These delayed investments will
counter the negative impact on the Norwegian economy.
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6. SUMMARY AND CONCLUSION
In this study, we have identified possible subsidies, calculated their most likely value and assessed the impact
of their removal. We identified subsidies within the first three of the four categories of our subsidy definition:
1. Government provides direct transfer of funds or potential direct transfer of funds or liabilities.
2. Government revenue is foregone or not collected.
3. Government provides goods or services or purchases goods (at other than market prices).
4. Government provides income or price support.
TABLE 6.1: SUBSIDIES IDENTIFIED AND ESTIMATED FOR UPSTREAM OIL AND GAS ACTIVITIES
IN NORWAY
Section
Expenditure/policy
Is it a
subsidy?
Size of subsidy
(million NOK)
Transfer of funds or liabilities
4.1.1
Government spending on SDFI and Petoro
No
4.1.2
Public infrastructure
No
4.1.3
Research and development programs
Yes
216
4.1.4
Emergency preparedness
Yes
N/A
4.1.5
Insurance subsidies
No
Provision of goods and services at below-market prices
4.2.1
Seismic investigations by the NPD
Yes
257
4.2.2
Gassco infrastructure and facilities services
Yes
24
4.2.3
Guarantee Institute for Export Credit and government
credit guarantees
No
Eksportfinans and favourable long-term financing
No
4.2.4
Government revenue foregone
4.3.1
Government covers 78 per cent of expenditures
No
4.3.2
Loss carried forward with interest rate
Yes
N/A
4.3.3
Guaranteed reimbursement of loss carried forward
Yes
N/A
4.3.4
Exploration reimbursement to exploration companies
Yes
4,024
4.3.5
Fast deduction of investments
Yes
20,812
4.3.6
LNG in Northern Norway: the case of Snøhvit
Yes
181
4.3.7
Uplift: an additional investment subsidy
No
4.3.8
Transfer of production licences
No
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We have identified nine subsidies and potential subsidies that are offered to the oil and gas industry (four
non-fiscal and five fiscal) from a total of 17 investigated policies and expenditures. The value of these subsidies
in 2009 was around 25.5 billion NOK (US$4 billion), but the total value is probably slightly higher, as not
all the subsidies have a value calculation. The value will also differ from year to year due to the nature of the
subsidies and the links to the underlying assets and assumptions. We calculated the value by isolating each
subsidy and estimating the value for 2009. As the fiscal subsidies are long-term and closely linked to the
activity level, a one-year calculation of the subsidy represents an approximation of the subsidy level in Norway.
An average calculation over several years may have showed a lower subsidy level, since, for instance, the
petroleum activity in 2009 was relatively high.
We have calculated a middle estimate, with two sensitivities (high and low). The difference between the estimates
is due to the use of different discount rates and different assumptions about time frames—for example, the
time until an exploration company enters a taxable position. As a percentage of total revenue from the oil and
gas industry, subsidies constitute around 13 per cent. This number needs to be interpreted with care, though.
For example, the investment subsidy need not have as high an impact if seen in the longer picture, where on a
time horizon longer than 15 years it would establish a rolling average for tax depreciation that would essentially
negate some of the effects (for example, if the subsidies had been removed in 1995 or earlier).
Care should also be taken when interpreting the Snøhvit numbers. We did our calculations based on ex ante
(plan for development and operation estimates) numbers for investments. Using ex post (actual cost) numbers,
the whole project has a negative NPV and is thus a waste of both company and societal resources. This may
not be the final verdict on the project though, as re-use of the LNG plant and changes in product prices may
influence the ex post end result.
For the subsidies that were preferential treatments in the fiscal system, we have assessed the effect of removal.
The subsidies in this category concern how the fiscal system is more preferential to the oil and gas industry
than is the general tax system. The calculations were based on certain assumptions; for instance, how the
companies in the oil and gas industry will invest given an alternative future with no subsidies. We found that
subsidy removal will have gross impact on government revenue, employment and environmental emissions.
In table 6.2 (next page), we show the values from the middle estimate of the gross impact assessment. The
three subsidies we remove provide different impacts on government revenue, employment and carbon dioxide
emissions. Also, we provide a relative estimate of the importance of the impacts to the Norwegian economy,
society and environment. The reduction is not taken in one year, however, as we are dealing with long-term
effects. Moreover, the impact assessment is based on a gross calculation, where we have only taken into
consideration what will happen inside the oil and gas industry and the supplying industries.
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TABLE 6.2: OVERVIEW OF SUBSIDY REMOVAL IMPACT ASSESSMENT, NPV AND NPV AS
PERCENTAGE OF 2010 VALUES
NPV (6%) of
middle estimate
in million NOK
NPV as
percentage of
2010 values* (%)
–8,479
–5.3
–21,012
–13.2
Exploration reimbursement
–4,647
–2.9
Investment deduction
–6,933
–0.3
–19,204
–0.7
Impact on:
Subsidy type
Government revenue
(petroleum taxes)
Investment deduction
Snøhvit
Employment
Snøhvit
Exploration reimbursement
CO2 emissions (million tonnes)
–4,004
–0.2
Investment deduction
–0.6
–1.0
Snøhvit
–1.4
–2.4
Exploration reimbursement
–0.3
–0.5
*Government revenue lost if the investment deduction were removed has been calculated as a percentage of the total petroleum tax revenue in
2010 (Ministry of Finance (2011)), employment effects have been calculated as a percentage of total labour years in 2010 from Statistics Norway
(2011), and the impact on carbon dioxide emissions has been calculated as a percentage of the 2010 data from Klif (2011).
Because of the need to identify the net impact on the Norwegian economy, society and environment as well
as the gross impacts calculated in section 5, we included a section on Statistics Norway’s KVARTS modelling.
With the modelling of the whole Norwegian economy, including all industries, we found that the impact on
Norway’s GDP was 0.7 per cent. Also, we found that the employment level would go down by 0.5 per cent,
together with a 0.5 per cent reduction in wages the first year. Even though we modelled the subsidy removal
as permanent, the future picture derived from the KVARTS model becomes somewhat complicated. The reason
for this is that we have assumed that some of the 2009 investment reduction will be smoothed over the
coming years. Thus on the one hand, we see a yearly decrease in investment, but on the other hand, parts of
the investment reduction will only be delayed, and will thus have a positive impact on the Norwegian economy
in the medium term.
Although referring to the policies analyzed in this study as subsidies or potential subsidies, we do not refer to
the concept with any normative connotations. In our report, a subsidy is a neutral concept, thoroughly defined
in section 2.4, except for the connotation that it affects economic decision-making in the oil and gas industry.
It is up to the government of Norway to decide whether the subsidies to the oil and gas industry are meeting
their public policy objectives. The purpose of this report was to improve transparency regarding subsidies
provided to the oil and gas industry in Norway. Whether or not the benefits from such policies are large enough
to justify the existence of such subsidies is a question we leave to the policy-makers to answer.
In this study we have also been asked to identify issues of transparency and data access. Transparency and
data are very important to ensuring a corruption-free society, knowledge-based debates and a critical civil
society. First of all, we need to state that the Norwegian government seems to strive for transparency, although
there are examples where information has been requested by media and others and such information has
been withheld. The government strikes a balance between serving civil society with data and analyses and
keeping the faith of the companies that the government will not provide sensitive information. The Ministry
of Finance, Ministry of Petroleum and Energy, NPD, Statistics Norway, Petroleum Safety Authority, Climate
and Pollution Agency, and Norwegian Coastal Administration are all contributing to openness and transparency,
but there are areas where the government needs to further strengthen accessibility.
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The Oil Taxation Office should develop data concerning taxation at aggregate levels, to enable more systematic
insight into the oil and gas industry. Also, the data on environmental costs are not specifically made for the
purpose of showing what the oil and gas industry actually costs the Norwegian society. Given the size and
importance of the oil and gas industry, the government should ensure a neutral provision of data concerning
what the government spends on prevention of damage caused by the oil and gas industry. We have also seen
very recently that, for example, the NPD has restructured its data so that it is less accessible than before.
Data on R&D in Norway has also been shown to be lacking, not so much in transparency, but in overall
compilation of financing sources and post-implementation cost-benefit analyses.
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7. REFERENCES
Bedin Company Information. (2011). Depreciation. Online resource last updated April 7, 2011.
Retrieved on December 8, 2011, from
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Braithwaite, D., Soelaiman, S., Wiroyudo, G. K., Trimurdadi, H., Soeleman, S., Utomo, S. P., and
Rakhmanto, P. A. (2010). Fossil fuels – At what cost? Government support for upstream oil and
gas activities in Indonesia. Geneva: The Global Subsidies Initiative of the International Institute
for Sustainable Development. Retrieved on December 8, 2011, from
http://www.globalsubsidies.org/ffs_atwhatcost_indonesia
Cappelen, Å., Eika, T., and Prestmo, J. (2011). Redusert petroleumsaktivitet: En utfordring for
norsk økonomi?” [Reduced petroleum activity: A challenge for the Norwegian economy?]
Økonomiske analyser [Economic analyses], 30(2), 8–15.
Eika, T., Prestmo, J., and Tveter, E. (2010, August). Ringvirkninger av petroleumsvirksomheten.
Hvilke næringer leverer? [Effects of petroleum activity: Which industries supply?]. Rapporter
2010(8). Statistics Norway.
European Commission. (2011). Statistics. Retrieved October 30, 2011, from
http://epp.eurostat.ec.europa.eu/portal/page/portal/statistics/themes
Gassco. (2011). Home page. Retrieved from http://www.gassco.no/wps/wcm/connect/GasscoEN/gassco/Home
Gassco (2011): Annual Report 2010. Retrieved December 8, 2011, from
http://www.gassco.no/wps/wcm/connect/d10f0f00468a308ba168f7fd04ea5a9e/Gassco_aarsrap
port_2010_engelsk_Orginal.pdf?MOD=AJPERES
Gassco. (2010). Annual Report 2009. Retrieved December 8, 2011, from
http://www.gassco.no/wps/wcm/connect/9ff42f0042174bbea03ee963a6debd44/Gassco_aarsrap
port_2009_eng_WEB.pdf?MOD=AJPERES
Gassco. (2009). Annual Report 2008. Retrieved December 8, 2011, from
http://www.gassco.no/wps/wcm/connect/815b3f004dc09720bc4fbd80e3f35ee4/GasscoAnnualR
eport08_en.pdf?MOD=AJPERES
Global Subsidies Initiative (GSI). (2010a, March). Defining fossil-fuel subsidies for the G-20:
Which approach is best? Policy brief. Geneva: The Global Subsidies Initiative of the International
Institute for Sustainable Development. Retrieved December 8, 2011, from
http://www.globalsubsidies.org/resources/march-2010-defining-fossil-fuel-subsidies-g-20-whichapproach-best
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Global Subsidies Initiative (GSI). (2010b). Subsidy estimation: A survey of current practice.
Geneva: The Global Subsidies Initiative of the International Institute for Sustainable
Development. Retrieved December 8, 2011, from
http://www.globalsubsidies.org/resources/subsidy-estimation-survey-current-practice
Klima-og forureiningsdirektoratet (Klif). (2011). Oil and gas industry emissions and discharges
2010. Retrieved December 8, 2011, from
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Konkraft. (2009). Konkraft-rapport 7: Ringvirkninger av petroleumsvirksomheten [Effects of
petroleum activity]. Oslo: Konkraft. Retrieved December 8, 2011, from
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Lund, D. (2009). Rent taxation for nonrenewable resources. Annual Review of Resource
Economics, 1, 287–308.
Lund, K., and Henriksen, P. R. (2011, March 1). Ingen Subsidiering av Letevirksomheten [No
subsidy to exploration activity]. Dagens Næringsliv [Business Today]. Retrieved December 8,
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/taler-og-artikler-av-statssekretar-kjeti/2011/ingen-subsidiering-avletevirksomheten.html?id=634874
Menon. (2009). Confidential report to the Minstry of Petroleum. Contact http://menon.no/kontakt
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Ministry of Finance. (2005). Veileder i Samfunnsøkonomiske Analyser [Guide to Economic
Analyses]. Oslo.
Ministry of Finance. (2002, October). National budget 2003. Retrieved from
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Ministry of Petroleum and Energy. (2011). Facts 2011. Oslo.
Ministry of Petroleum and Energy. (2010a) Facts 2010. Oslo.
Ministry of Petroleum and Energy. (2010b). Prop. 1 S (2010–2011). Oslo.
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Ministry of Petroleum and Energy. (2008). Prop. 1 S (2008–2009). Oslo.
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Ministry of Petroleum and Energy. (2007). Prop. 1 S (2007–2008). Oslo.
Ministry of Petroleum and Energy. (2006). Prop. 1 S (2006–2007). Oslo.
Ministry of Petroleum and Energy. (2005). Prop. 1 S (2005–2006). Oslo.
Ministry of Petroleum and Energy. (2004). Prop. 1 S (2004–2005). Oslo.
Ministry of Petroleum and Energy. (2003). Prop. 1 S (2003–2004). Oslo.
Ministry of Petroleum and Energy. (2002). Prop. 1 S (2002–2003). Oslo.
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industry. Retrieved on December 8, 2011 from http://www.npd.no/en/Publications/Facts/Facts2010/Chapter-1
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Osmundsen, P. (2000). Nøytralitet under ulike bibetingelser [Neutrality under different
conditions]. Appendix 3 in Norwegian Oil Industry Association, Taxation of petroleum operations.
Oslo: University of Stavanger/Norwegian School of Economics.
Sawyer, D., and Stiebert, S. (2010). Fossil fuels – At what cost? Government support for
upstream oil activities in three Canadian provinces: Alberta, Saskatchewan, and Newfoundland
and Labrador. Geneva: The Global Subsidies Initiative of the International Institute for
Sustainable Development. Retrieved December 8, 2011, from
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Statistics Norway. (2011). Statistics ordered by subject. Retrieved from
http://www.ssb.no/english/subjects
Statistics Norway. (n.d.). 10.06 Mining and extraction, incl. oil and gas. Online database.
Retrieved December 8, 2011, from http://www.ssb.no/english/subjects
Vatne, E. (2007). Regional fordeling av sysselsetting i norsk petroleumsrelatert leverandørindustri
[Regional distribution of employment in Norwegian petroleum-related supply industry]. SNFproject no. 2455. Bergen: Samfunns- og næringslivsforskning AS.
Wood Mackenzie. (2011, August). Global economic model. Edinburgh: Wood Mackenzie.
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8. FURTHER READING
Boadway, R., and Bruce, N. (1984). A general proposition on the design of a neutral business
tax. Journal of Public Economics, 24, 231–239.
Brown, E. C. (1948). Business income, taxation, and investment incentives. In L. A. Metzler
(ed.), Income, employment and public policy: Essays in honor of Alvin H. Hansen (300–316).
New York: Norton.
Fane, G. (1987). Neutral taxation under uncertainty. Journal of Public Economics, 33, 95–105.
Garnaut, R., and Clunies Ross, A. (1975). Uncertainty, risk aversion and the taxing of natural
resource projects. The Economic Journal, 85(338), 272–287.
Hagen, K. P., and Åvitsland, G. (2000). Grunnrenteskatt, kapitalbeskatning og usikkerhet
[Resource rent, capital tax and uncertainty]. In Skattlegging av petroleumsaktivitet” [Taxation of
petroleum activity], NOU 2000:18, 2000, appendix 2.
Lund, D. (2002). Petroleum tax reform proposals in Norway and Denmark. Energy Journal,
23(4), 37–56.
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APPENDIX A: VALUE OF SUBSIDIES
Subsidies have different economic characteristics. Based on the economic character of the subsidy, we split
the subsidies in three subgroups: transfers, government organizations with a non-profit orientation and
investment subsidies. This third group of subsidies is peculiar for its time-critical perspective. By this, we
mean that the value of the subsidy depends on the value the economic decision-makers believe they can
create with their real capital.
A.1 GOVERNMENT TRANSFERS AND PUBLIC PROVISION OF GOODS AND SERVICES
AT BELOW-MARKET PRICES
When the Norwegian government provides transfers in cash or offers in-kind benefits to the petroleum industry
at below-market prices, it is seen as a subsidy. Examples of such subsidies include R&D financing and seismic
investigations that the NPD conducts at the expense of the Norwegian government.
The value of the transfers is the sum of any transfers in a given year. In this report, we present numbers for
2005 through 2010, but we chose the year 2009 for the summary to enable comparison with the exploration
subsidy. See section 4 for the value of the subsidies and further discussion about them.
A.2 NON-PROFIT COMPANY
When the Norwegian government offers services without receiving any profits, the government provides a
service at below-market prices. Hence, a state-provided non-profit company such as Gassco is a subsidy. The
company is a wholly owned government company and conducts an important administration and management
job for the gas production companies.
Calculating the value of such a subsidy is done by deciding a government profit share of the operating costs
of the company. As we discussed in section 2, the government is likely to apply a higher real discount rate
than usual due to the higher systemic risk for the Norwegian government when dealing with the oil and gas
industry. The 6 per cent real discount rate constitutes a good approach to a possible return on the Gassco
business. The sensitivity of this choice is investigated by also applying 8 per cent (high estimate) as well as
4 per cent (low estimate) rates.
A.3 SUBSIDIES WITH A CRITICAL TIME PERSPECTIVE: AN NPV APPROACH
Several of the subsidies concern investments. We have defined three such investment subsidies: the Snøhvit,
exploration and partial investment subsidies. Here we discuss the methodology for calculating the value of
the subsidies. The presentation of the subsidies and their value are presented in section 4.
With every investment decision, the time perspective is critical. An enterprise invests in capital and then can
harvest the return on the investment over a number of years into the future. Thus, with investment subsidies,
it is important to conduct an NPV analysis to understand the value of the subsidies. In fact, the investment
subsidies are only profitable for the industry in an NPV perspective.
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It is important to understand the logic behind applying an NPV methodology. An NPV analysis takes into
account the time perspective of initial investments versus future profits (profits = revenues less costs and
taxes). Profits today have a higher value than the same profits in the future due to the fact that if the profits
appear today, they can be used for alternative purposes to create a return. The NPV method is a proxy for
these lost alternative returns. The investment that creates the highest NPV (the best alternative future return
on an investment) should be chosen if funds for investing are restricted.
In a more theoretical terminology: economic theory says that a company would only invest to the extent that
an economic opportunity has a higher expected return than the closest alternative opportunity, assuming it
can only invest in one of the opportunities. To the extent that a company has funds available to undertake
several (but not all) investments, it is quite common in the oil and gas industry to establish a Profitability
Index ranking, where the economic opportunities available for the company are ranked against each other. If
a company has more funds available than opportunities, it is quite common to set a threshold for undertaking
an investment. All the investments that meet the threshold will be undertaken, possibly phasing the
investments in order to avoid bottlenecks in funding and use of critical resources. For many oil and gas
companies, these two approaches have blended into a minimum NPV threshold. The value of a project is the
NPV of the sum of the expenditures, Et, and the revenues, Rt:
(A.1)
n
NPV = –EO – Σ t =1
Et
(1+r)t
n
+ Σ t =1
Rt
(1+r)t
In this report, an NPV calculation offers us an approach for taking into account the time perspective of the
subsidies for the government and the petroleum industry. We use three discount factors in this study (see
section 2). For the government, we have chosen to use a 6 per cent return on investments. This is in
accordance with the manual for cost-benefit analyses from the Ministry of Finance (2005). In this manual,
the Ministry of Finance states that a 2 per cent real return is the risk-free return. Investments in petroleum
activities are not risk-free. While analyses for ordinary infrastructure projects usually apply a 4 to 5 per cent
real return, we use a 6 per cent real discount rate. There are arguments that the return should be set even
higher, for example up to 7 or 8 per cent.
As discussed in section 2, we apply two different discount factors, 9 per cent and 12 per cent, for petroleum
companies. We do this to capture the different discount factors that are used across the petroleum industry
in Norway and globally. Some companies make use of an even higher discount rate, if they expect a higher
return on their capital investments due to increased risk in the projects or if the discount rate is used as a
threshold for investments. Our results (section 5) show the effects of discount factors on economic
calculations. In section 5 we also discuss variations to the above methodologies for specific subsidies.
A.4 QUANTIFYING THE EXPLORATION REIMBURSEMENT
One of the subsidies offered the petroleum industry in Norway is the exploration cash reimbursement to
exploration companies. We explain below how we calculated the value of this exploration reimbursement.
As explained in section 4, the exploration subsidy is the ability to receive a reimbursement the following year
instead of writing off the expenditures in the future when the company has reached a taxable position. The
value of the subsidy is thus a function of how long it takes for companies to reach a taxable position, or indeed
whether they ever do. The dynamics of the development from an exploration company to a production company
in a taxable position are fairly complex:
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1. The exploration companies established themselves in Norway on different dates.
2. The companies spend different amounts on exploration and asset development.
3. Some companies have bought producing or under-development assets through acquisitions.
4. The companies do not have control over which licences they receive in the licencing round.
To calculate the value of the exploration reimbursement, information on the duration of the period from when
exploration expenditures are made to when a tax position is reached is therefore necessary. Such information
about the future is, however, not available.
Instead, we calculated the exploration subsidy value by assuming an average time for reaching a taxable
position for a company receiving an exploration subsidy in 2009. To decide the average time, we have
indicated a timeline for how long it may take a company to reach a taxable position from the establishment
of an office in Norway. Table A.1 shows the estimated time for the development steps from start-up to
reaching a taxable position.
TABLE A.1: SCHEME FOR ESTIMATION OF TIME FROM START-UP TO REACHING TAXABLE POSITION
ACTIVITY
ESTIMATED TIME
Establish office
1 year
Apply for licensee status
1 year
Receive production licence
1 year
Explore to make a discovery
2–4 years
Conduct planning period
1 year
Submit plan for development and operation to the Norwegian government
1 year
Develop field
2–4 years
Produce to enter taxable position
3-4 years
Estimated time from start-up to taxable position
13–17 years
This is an optimistic timeline, and there are examples from the early history of Norway that companies that
invested continuously in new fields took more than 20 years to reach a taxable position (the exploration
reimbursement and loss carry-forward with interest were not in place at that time). The exploration subsidy
was introduced in 2005. Most of the receiving companies arrived in Norway between 2004 and 2009. Since
information about the future does not exist, we have made three scenarios for how long it might take for the
exploration companies to achieve a taxable position. Table A.2 shows the assumptions for these scenarios.
TABLE A.2: ASSUMPTIONS REGARDING THE TIME AN EXPLORATION COMPANY TAKES TO REACH
TAXABLE POSITION, BEGINNING IN 2009
Scenario
Low
Years before establishment of tax position
5
Middle
10
High
15
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The Norwegian government promises the exploration companies an ability to write off expenditures in the
future or receive the expenditures if the companies end business in Norway (this subsidy is discussed in
section 4). The government’s debt to the companies acquired during a period without a taxable income is
increased annually with a risk-free interest rate. Since these expenditure write-offs are guaranteed, the
government believes a risk-free interest rate makes economic sense. We have used the following equations in
our calculations:
(A.2),
(
Valuery = – (EO) +
EO*(1+rf)1
(1+r)1
) – (E ) +
O
EO*(1+rf) y
(1+r)y
),
where Valuery, the value of the exploration subsidy, is dependent on how many years (shown in table 5.2), y,
it takes to reach a taxable position, and the discount factor of the company, r (shown in section 2). rf is the
risk-free interest rate that the government uses for other not-yet-claimed expenditures in the oil and gas
industry. E0 refers to the value that the government owes the companies, the reimbursement, in year 2009,
but in 2011 NOK. The first part of the equation refers to the reimbursement rules: in year 1, the government
pays back the investment conducted in year 0. Thus, the reimbursement is increased with the risk-free interest
rate but decreased in value due to the fact that the companies are not able to invest this money before they
receive it. The second part of the equation shows the tax system without exploration reimbursement. This
part is less than the first part because the year, y, is larger than 1 year.
A company operating in a risky business like exploration activity may receive even higher benefits from being
paid back the government share fast. For instance, even though the companies are guaranteed to be able to
write off the expenditures in the future or to be paid back by the government in the case of bankruptcy, the
interest rate on debt is high. This is due to the lack of perfect competition in the financial markets and the
lack of a free float of capital. In this study, we have only taken into account the direct NPV of the fast payback.
The subsidy may have a larger value for the companies than what is taken into consideration here; in other
words, this is a conservative estimate.
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APPENDIX B: IMPACT ASSESSMENT OF A REMOVAL OF POTENTIAL INVESTMENT
SUBSIDIES
Many factors involved affect a petroleum company’s decisions. These factors range from macroeconomic
conditions (oil price, global demand, interest rates, etc.) and government regulations (tax policies, security
policies, labour market policies, etc.) to specific business and geological situations.
A definite value for the impacts is highly uncertain, considering the large variability in how the enterprises
and industry could change their behaviour facing a removal of the subsidies.
Due to the large uncertainty in the calculations, we develop scenarios for the impact assessment. In these
scenarios, we change the basic assumptions underlying the calculations.
When larger institutions conduct analyses of the macroeconomic impact of exogenous shocks, such as political
decisions, they often make use of general equilibrium models. Statistics Norway runs their MODAG (based
on yearly inputs) and KVARTS (based on quarterly inputs) models to estimate the future of the Norwegian
economy (economic activity, investments, wages, unemployment rates, etc.). The Statistics Norway
macroeconomic group and MODAG are two of the most important contributors to the Ministry of Finance in
their economic planning. Also, MODAG and KVARTS receive broad public legitimacy. The impact-assessment
approach outlined below is thus an alternative way to measure the effects of subsidies. We present the main
results from the KVARTS model in section 5 to enable a comparison between our results and the results from
a macroeconomic general equilibrium model.
We make use of general activity numbers from the industry as well as more specific data on the outcome of
petroleum activity. We provide assessments of how the potential subsidies affect the Norwegian economy in
terms of employment, economic activity and government revenue. The results show what a removal of the
potential subsidy regime will involve ceteris paribus, that is, if everything else stays the same. However, in a
dynamic and fast-changing world, such a condition will never be experienced. In addition, one needs to
consider the relationship with the marginal tax rate.
It is important to state that the results are only indications of what the consequences of subsidy removal
to the petroleum industry and the Norwegian economy might be. An attempt to forecast the future or
identify how the present would have been with an alternative policy framework is always characterized by
significant uncertainty.
B.1 DATA
To assess the effects of the subsidies, we use both general petroleum industry data and more specific data
for outcomes of the petroleum activities. Here, we define three general levels of data that we use to indicate
the importance of the subsidies to the Norwegian economy and society. These data concern petroleum
production, petroleum investments, government revenue and employment. These four macroeconomic data
are used for calculating factors for the effect assessment. It is thus important to translate subsidy removals
over to petroleum production and investment. This translation is explained in the paragraphs below.
Related to these macroeconomic data are employment in the petroleum industry and emissions of carbon
dioxide and nitrous oxides. These effects are treated separately below. First, we show the data used in the
effect assessment. Then, we establish the impact on government revenue, employment and the environment
by the reduction of production and investments.
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B.1.1 PRODUCTION DATA
To get a grip on the activity level, the production of petroleum is a good proxy. Production data illustrates the
activity level on the NCS. The total production of hydrocarbons, P, equals the production of each of the types
of hydrocarbon (t), oil (o), gas (g), NGL (n) and condensate (c), on each of the fields (f), from field 1 to q, on
the NCS:
(B.1)
c
q
PT = Σ t =oΣ f =1Pft
The data was provided by the NPD.
B.1.2 INVESTMENT DATA
To enable future production, the industry is required to invest in platforms, subsea installations, processing
facilities, terminals, drilling and so forth. These investments have an impact on both future production and
employment in the petroleum and supply industries. Due to the resources on the NCS, a large supply industry
has developed in Norway. This industry is currently able to supply the petroleum industry with a wide range
of products. Total investments in a given year (I) are defined by:
(B.2)
IT = Σaz =1Ia,
where Ia represents the investments conducted in categories a to z. Thus, total investments are the sum of
investments in each category. The numbers are available from Statistics Norway (2011).
B.1.3 GOVERNMENT REVENUE DATA
Government revenue data are available from, among others, Statistics Norway. The revenues are available on
an annual basis and are separated into different types of income, p: state direct financial investment, taxes,
taxes on carbon and nitrous oxides, and Statoil dividends:
(B.3)
GT = Σ4p=1Gpy
B.1.4 PETROLEUM-RELATED EMPLOYMENT
Petroleum activity has four direct employment effects:
1. Petroleum industry employment due to production, s1.
2. Petroleum industry employment due to investments, s2.
3. Supply industry employment due to investments, s3.
4. Supply industry employment due to production, s4.
From Vatne (2007), we find that the number of people working in the supply industry is approximately 85,000.
We have produced estimates that increase this number to 100,000 (Econ Pöyry, 2010). In this study, we will
use the publicly available Vatne numbers. The different estimates give a fair indication that employment
effects can be different (higher) than the effect assessment here.
The petroleum supply industry delivers goods and services to both the petroleum industry’s investments and
the current production. Examples of provision of goods and services by the supply industry are platforms,
subsea facilities and processing equipment. The supply of production-related goods and services includes
production well drilling, consultant work, accounting and catering. Eika et al (2010) state that the supply
industry delivers almost as much to the current production as to the petroleum industry’s capital investments.
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In this study, we have thus applied a rule of thumb that 45 per cent of the supply industry is employed in
parts of the industry that deliver for the production of petroleum, while 55 per cent is employed to serve
petroleum investments.
Statistics Norway estimates the number of people working with petroleum production at up to 40,000, with
an additional 20,000 employed in refineries, petrochemicals and plastics (Konkraft 2009, p. 6). We have
too little information on how many are employed because of investments and how many because of production.
We assume that 30 per cent are employed from investment (exploration, development, acquisition), whereas
most (70 per cent) are assumed to be employed from petroleum production.
Both Vatne and Statistics Norway numbers are from 2007. Thus, when we calculate the effect of production
and investments on employment levels, we use 2007 data. It is reasonable to assume that the relation between
employment and production and investment levels are stable over time. It is also reasonable to assume that
the difference in this group between Vatne (2007) and Econ Pöyry (2010) can be substantially attributed to
larger-than-anticipated exports from the Norwegian supply industry, as shown by the difference in exports
between Pöyry (2009) and a report to the Ministry of Petroleum and Energy by Menon (2009) on exports
from the Norwegian service and supply industry.
Taken together, the direct employment in the petroleum and supply industries constitutes the total
employment:
(B.4)
s = Σ4k =1sk,
where sk refers to the four different employment effects shown above.
The petroleum industry has a large need for goods and services both for investments and daily operations.
The petroleum supply industry in Norway rose in response to demand from the Norwegian petroleum industry.
Now, the Norwegian supply industry is market competitive in many areas, but still the NCS constitutes the
most important demand. In the figure below we outline the state of the supply industry as per the Pöyry study
in 2009. It is important to include effects on employment in the petroleum supply industry in the case of a
subsidy removal.
There is an issue that the employment figures do not take into account nationality among the workers. This
means that we may also count foreign labour in the employment figures. Norway experiences an influx of
workers from surrounding countries, such as Sweden, but Middle and Eastern Europeans also come to Norway
to find employment. From a national perspective, these migrants should not count as resources to the
Norwegian society that would be absorbed in other sectors if they did not work in the petroleum sector.
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FIGURE B.1: THE STRUCTURE OF THE NORWEGIAN SUPPLY INDUSTRY
Source: Reprinted with permission from Econ Pöyry (2009).
B.1.5 ENVIRONMENT DATA
From the Ministry of Petroleum and Energy’s Facts 2010, we know that the general level of carbon dioxide
emissions is approximately 51 kilograms per Sm3 (2010). We use these equations to calculate the carbon
dioxide emissions per produced unit of petroleum:
(B.5)
F2009
CO2/boe =P2009 ,
where F2009 is the total emissions in 2009.
The emissions of nitrous oxides are given by this equation:
(B.6)
G2009
NOx/boe =P2009 ,
where G2009 is the total emissions in 2009.
The emissions of mnVOC are given by this equation:
(B.7)
H2009
/boe =P2009 ,
mnVOC
where H2009 is the total emissions in 2009.
We assume here that the emission factors stay constant over time.
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B.2 METHODOLOGY FOR CALCULATING THE EFFECTS OF INVESTMENT SUBSIDY
REMOVAL
In this section, we show the methodology for calculating the effects of investment subsidy removal. As we
showed in section 2, the exploration subsidy has slightly different characteristics than the other investment
subsidies. The reason is that the exploration subsidy increases the exploration activity, a step that occurs
before investment in production.
As the figures in section 2 show, we take two independent variables into account in the calculation:
investments and production. Investments impact the level of production and employment. Production impacts
government revenue, employment and the environment. These five impacts are explained below.
B.2.1 INVESTMENT IMPACTS ON PRODUCTION
Investments in production facilities enable companies to extract petroleum resources from reservoirs on the
NCS. Investments are long term. Thus, the impact on production of an investment must be seen in a reservoir
lifetime perspective. From Facts 2011 (Ministry of Petroleum and Energy, 2011), we can acquire data on
both historical and forecasted investments in all producing fields as well as the estimated resource base for
these fields. Hence, we can assume that the relationship between investments and production will proceed
into the future:
2011
(B.8)
=1970Py
P/l = Σy2011
,
Σy =1970Iy
This assumption is fairly general. The accuracy of P/I is given by the ability of the companies to consistently
achieve the same rate of production per investment through time.
By multiplying (B.8) by the reduction in investments, we get the reduction in production:
(B.9)
ΔP=P/I*ΔI
B.2.2 INVESTMENT IMPACTS ON EMPLOYMENT
Personnel are required to produce and install petroleum production equipment, drill wellbores, place subsea
installations on the sea bottom and so on. Employment in the petroleum industry is affected by investment
levels. The effect is equal to:
(B.10 a)
Δs2=α2 x ΔIT
where α2 is defined as the employee per investment in sector 2:
(B.10 b)
α2=
s2
IT
,
Above we stated that the investment part of the supply industry has the largest market share. The effect on
the investment-related employment in the supply industry is calculated as:
(B.11 a)
Δs3 = (1 – β3) x α3 x ΔIT
where is defined as the number of employees per invested NOK:
(B.11 b)
α3=
s3
IT
,
and β3 is defined by investment goods and services offered by domestic companies, ID:
(B.11 c)
β3=
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ID
,
IT
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From Eika et al. (2010, p. 5), we know that the import factor is 0.42 when it comes to the supply of goods
and services for petroleum investments.
B.2.3 PRODUCTION’S IMPACT ON GOVERNMENT REVENUE
The impact of production on government revenue is given by total government revenue summed over the years
with surpluses on the budgets:
2011
(B.12)
G/P= Σy =1980GTy ,
PT
B.2.4 PRODUCTION’S IMPACT ON EMPLOYMENT
Production of oil and gas requires employees. We have shown above the impact of investments on employment.
Below, we show the calculation of the impact on employment from a change in the production level.
The effect on production-related employment levels in the petroleum industry is equal to:
(B.13 a)
Δs1 = α1 x ΔPT,
where α1 is defined as the employees per produced Sm3 in sector 1:
(B.13 b)
α1= Ps1T ,
The supply industry also serves the petroleum industry in their daily operations with goods and services. This
industry experiences minor competition from international enterprises. Thus, the calculation does not include
the import factor, as it does with the investment supply industry employment:
(B.14 a)
Δs4 = α4 x ΔIPT,
where α2 is defined as the number of employees per invested NOK:
(B.14 b)
α4= Ps3T ,
In table B.1, we present the investment and production factors that we used to evaluate the effect of subsidy
removal on employment in the four defined sectors.
TABLE B.1: EFFECT FACTORS OF PRODUCTION AND INVESTMENT
Employment
Effect factor
Term
3
Value
Petroleum production
α1
Empl./million Sm oe
191
Petroleum investment
α2
Empl./billion NOK investment
171
Supply industry investment
α3
Empl./billion NOK investment
172
Supply industry production
α4
3
Empl./million Sm oe
160
Data sources: Vatne (2007), Statistics Norway (2011), Eika et al (2010).
B.2.5 IMPACT OF PRODUCTION ON THE ENVIRONMENT
Since we have already established the contribution of petroleum production per kilogram to carbon dioxide,
nitrous oxide and volatile organic carbon emissions, as well as chemicals released into the sea, it is an easy
task to generalize the total reduction in these emissions (M), achieved by subsidy removal:
(B.15)
ΔMw = factorw x ΔPT,
where w refers to the different types of emissions.
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ABOUT THE AUTHORS
Econ Pöyry is the Norwegian part of Pöyry Management Consulting, with offices in Oslo and Stavanger. They
offer insight and understanding into the complex interaction among markets, technology and policy. They
offer services in market analysis, market design, and strategy and business consulting. Their three core
competency areas are energy, economics, and environment and climate.
Pöyry Management Consulting has about 500 consultants in Europe, North America and Asia Pacific,
including Australia. Their main focus area is consultancy for large clients in the energy sector and industry,
plus the financial sector, public authorities and international organizations. Services range from traditional
strategic advice via market analysis and market design to process consultation and process optimization.
Pöyry is a global consulting and engineering company dedicated to balanced sustainability. They offer their
clients integrated management consulting, total solutions for complex projects, and efficient, best-in-class
design and supervision. Their in-depth expertise extends to the fields of industry, energy, urban design and
mobility, and water and environment. Pöyry has 7,000 experts operating in about 50 countries.
www.globalsubsidies.org
THE GLOBAL SUBSIDIES INITIATIVE (GSI) OF THE
INTERNATIONAL INSTITUTE FOR SUSTAINABLE DEVELOPMENT (IISD)
The International Institute for Sustainable Development (IISD) launched the Global Subsidies Initiative (GSI)
in December 2005 to put a spotlight on subsidies – transfers of public money to private interests – and how
they undermine efforts to put the world economy on a path toward sustainable development.
Subsidies are powerful instruments. They can play a legitimate role in securing public goods that would
otherwise remain beyond reach. But they can also be easily subverted. The interests of lobbyists and the
electoral ambitions of officeholders can hijack public policy. Therefore, the GSI starts from the premise that
full transparency and public accountability for the stated aims of public expenditure must be the cornerstones
of any subsidy program.
But the case for scrutiny goes further. Even when subsidies are legitimate instruments of public policy, their
efficacy – their fitness for purpose – must still be demonstrated. All too often, the unintended and unforeseen
consequences of poorly designed subsidies overwhelm the benefits claimed for these programs. Meanwhile,
the citizens who foot the bills remain in the dark.
When subsidies are the principal cause of the perpetuation of a fundamentally unfair trading system, and lie
at the root of serious environmental degradation, the questions have to be asked: Is this how taxpayers want
their money spent? And should they, through their taxes, support such counterproductive outcomes?
Eliminating harmful subsidies would free up scarce funds to support more worthy causes. The GSI’s challenge
to those who advocate creating or maintaining particular subsidies is that they should be able to demonstrate
that the subsidies are environmentally, socially and economically sustainable – and that they do not undermine
the development chances of some of the poorest producers in the world.
To encourage this, the GSI, in cooperation with a growing international network of research and media partners,
seeks to lay bare just what good or harm public subsidies are doing; to encourage public debate and awareness
of the options that are available; and to help provide policy-makers with the tools they need to secure sustainable
outcomes for our societies and our planet
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The GSI is an initiative of the International Institute for Sustainable Development (IISD). Established in 1990,
the IISD is a Canadian-based not-for-profit organization with a diverse team of more than 150 people located
in more than 30 countries. The GSI is headquartered in Geneva, Switzerland and works with partners located
around the world. Its principal funders have included the governments of Denmark, the Netherlands, New
Zealand, Norway, Sweden and the United Kingdom. The William and Flora Hewlett Foundation have also
contributed to funding GSI research and communications activities.
FURTHER DETAILS AND CONTACT INFORMATION
For further information contact Ms. Kerryn Lang at: [email protected] or [email protected]
or +41.22.917.8920.
GSI Programme
International Institute for Sustainable Development
9 chemin de Balexert, 1219, Geneva, Switzerland
Fax: +41.22.917.8054
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