Why is the oil and gas industry proposing tax changes now?
We believe that our proposal of bringing forward tax allowances for the companies will be the most significant move for safeguarding jobs, commercial activity and value creation in the oil and gas sector. Receiving the whole allowance for the same year in which the investment is made, rather than spreading it over several years like today, enhances liquidity – in other words, gives the company more money – and thereby improves project economics. This will help to maintain activity on the Norwegian continental shelf (NCS). That in turn will keep the supplier industry going and safeguard a great many jobs which will be important for maintaining future employment in Norway.
Will this proposal cost the government big tax revenues?
This is not a tax relief, but a tax postponement. The government will not lose tax revenues as a result. The proposal provides a high tax allowance for one year, which means in turn that the companies immediately have more money to spend on further and new activity. At the same time, the full tax rate of 78 per cent will have to be paid at an earlier date because depreciation and uplift for investment have been “used up” in a single year rather than over several.
Doesn’t this mean big changes to the tax system?
The changes we propose represent a continuation of basic principles governing today’s petroleum tax system. This means that no systemic alteration will be made, but a change in timing of allowances (immediate) – in other words, accrual. The difference is that the allowances are given earlier than otherwise, with an interest-rate compensation to the government.
What is direct expensing?
Direct expensing means the companies can deduct investment spending from their tax liability at once, instead of the usual system which spreads such allowances over several years. That means the companies get a lower taxable income in the year when the expense is recorded. In subsequent years, however, company tax liability will be increased because the allowance has already been deducted in an earlier accounting year. The tax will thereby simply be postponed until later.
But won’t the government lose revenues as a result?
The proposal is tax neutral. In other words, the government gets the tax revenues it is entitled to, but later. So the government will not lose revenue. The goal is to encourage increased activity, which produces higher tax revenues. The government also saves money by keeping people in work rather than having to make benefit payments because of lay-offs and unemployment.
Won’t this be a subsidy for the petroleum industry?
The petroleum industry in Norway is not subsidised. The oil companies will pay the same amount of tax to the government, but at a different time than they do today.
Will the proposal mean that the government must increase its share and thereby accept greater risk than before?
The proposal involves no change to the share covered by the government. The oil companies pay the same amount of tax, but at a different date.
Much of the investment in 2020-21 will relate to projects or developments already sanctioned/approved. What effect will the proposal actually have then?
Lower oil prices mean the oil companies are making less money. And the great market uncertainty as a result of the coronavirus pandemic makes it both costlier and more difficult to secure capital in the market for projects – in other words, loan financing. The proposal will free up capital which the companies can use to implement projects now rather than postponing them until the market stabilises.
Won’t this encourage the companies to make unprofitable investments?
The cornerstone for all investment is that they must be profitable, even when viewed against lower oil prices and greater uncertainty than before. Projects which are unprofitable today will therefore not be implemented with the measures we have proposed.
Isn’t this just a way for the oil companies to save tax and thereby make even more money?
If the companies don’t use the opportunity to invest in new projects, they won’t benefit from the proposal. The purpose of this proposal is to ensure that today’s level of activity is maintained and to avoid lay-offs and redundancies.
Won’t the coronavirus epidemic and precautions against infection make it difficult to employ people on the projects?
Among the most important things we’re doing is ensuring that our employees are secure and that operations continue as normal. At the same time, we believe it is possible to implement projects. Activity in the construction sector on land is at virtually normal levels. With good planning, we believe this can also be achieved for petroleum-related projects.
The oil and gas is still there, after all. Why can’t we just wait with the investment until the crisis is over and recover them then?
If we don’t do something, the supplier industry will be downsized with the loss of expertise and capacity required to safeguard Norway’s future as a technology and energy nation. The purpose of our proposal is to preserve and develop expertise and technology in the oil and gas companies and the supplier industry. That’s important for the transition to offshore wind power and other green energy.
Demand has fallen, and the world therefore needs less oil and gas. Why should we then pursue more projects?
The petroleum industry and society as a whole have never faced a similar position, where a pandemic is reducing demand so much in such a short time. The coronavirus crisis will eventually pass, society will again function more normally, and demand for oil and gas will thereby rise. All forecasts indicate that oil and gas will be needed for many decades to come.
Shouldn’t we rather be using the crisis to give the supplier industry assignments with green projects?
Parts of the supplier industry are already working on green projects, such as offshore wind power and carbon capture and storage. But it takes many years to build up profitable new industries, and there are not enough projects today to employ anything like the roughly 200 000 people currently working in Norway’s supplier sector. The most important requirement now is to keep the wheels turning for companies large and small throughout the country which deliver to the oil and gas industry.
Read the proposal here.