Norway oil tax hike only a small setback to booming sector

Mon May 6, 2013 10:00am EDT

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By Gwladys Fouche and Nerijus Adomaitis

OSLO, May 6 (Reuters) - A tax hike on Norway's oil and gas sector will likely lead to only a modest slowdown in activity in a overheating sector grappling with cost overruns and delays, industry players said on Monday.

Norway, the world's seventh-biggest oil exporter, announced on Sunday it would lower the amount energy firms can write down on their investments to 22 percent of their investment costs from the special energy tax, down from 30 percent earlier.

The measure is part of a package of tax changes by the centre-left government to boost the competitiveness of non-oil industries, struggling with low demand in Europe, while the energy sector is booming on the back of high crude prices.

While energy firms see their tax bill rise, non-oil firms will see their corporate tax rate cut to 27 percent from 28 percent.

The tax hike for the oil sector will average around 3 billion crowns ($520 million) a year through 2050.

The change may stop companies from developing several small oil projects and will raise the costs of larger ones, but otherwise the effects will be limited as activity is booming.

"The industry is still in a very, very generous situation. It does not have much to complain about," said Oeystein Noreng, a professor of petroleum economics at the BI Norwegian School of Management.

"By putting a slight damp on the activity, you can hope to reduce bottlenecks, and to have the costs rising less quickly, and this could have a general advantage to the Norwegian economy."

Suppliers are under heavy strain now so some breathing room would be welcome, he argued.

Only last week, engineering firm Aker Solutions said cost overruns and project delays would affect its first-quarter results, sending its share plunging over 20 percent in one day.

In the short-term however, the news was not welcome by the market, with shares in Nordic oil companies such as Statoil , Det norske and Sweden's Lundin Petroleum among the losers.

Shares in suppliers such as Kvaerner and Aker Solutions were also down on the news, while shares of non-oil companies reponded positively to the cut in the general rate of taxation.

SECOND CHANGE THIS YEAR

Oil firms were critical of the tax change. Statoil said on Monday it made it less attractive to invest in marginal oilfields made commercial by high crude prices.

Overall some 10 projects could be be put on ice, according to John Olaisen, an analyst at Oslo-based ABG Sundal Collier, mostly small oilfields Statoil wanted to develop.

The state-controlled firm and Lundin Petroleum both argued that the change would make the financial conditions for working off Norway less predictable and stable - one of the main draws for investing in the high-tax country.

"It has to raise questions in people's minds from an investment perspective (over) how predictable and attractive the Norwegian fiscal regime is, and what this means in terms of future changes," said Ashley Heppenstall, Lundin's chief executive, on Monday.

It is a criticism Norwegian governments are very sensitive to as they want the Nordic country to be considered a reliable place to do business.

This is the second change in conditions in less than six months Norway has announced, after a proposal to slash natural gas transport tariffs for new gas contracts in January. Pipeline investors risk big losses as a result.

But Oslo has not made changes to its tax system for oil companies in a decade, during which time crude prices have multiplied by five.

Shares in Statoil were down 0.73 percent at 1324 GMT, Det norske's were down 2.18 percent, Lundin's 2.25 percent and Aker Solutions' 1.37 percent. (Additional reporting by Henrik Stolen in Oslo and Simon Johnson in Stockholm, editing by William Hardy)

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