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Compromise solution on fiscal stimulus package for NCS – significant improvements compared to the original proposal

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A temporary change to the NCS fiscal regime has been agreed by the majority in the Norwegian Parliament. Significant improvements have been made to the proposal presented by the Government earlier in April. The adjusted proposal is likely to boost activity and improve NPV for certain projects.

Introduction

The Norwegian Government presented certain temporary proposed changes to the NCS fiscal regime at the end of April 2020. We gave an overview of the proposal in our April newsletter.

The proposal was presented to the Parliament in Proposition 113 (2019-2020) and was subject to criticism and strong lobbying to make improvements (as viewed by the oil and gas industry). As mentioned in our previous newsletter, we expected that the proposal would be subject to possible adjustments.

Substantial increases in the temporary benefits have now been included compared to the original proposal from the Government. The revised proposal will be voted on in Parliament on the 12th of June. A final and detailed proposal has not yet been presented in white paper format but the main content is clear. The adjusted temporary proposal now contains the following features:

  • Immediate deduction of investment costs against the special tax rate (56 %).
  • Temporary regime is now applicable for projects with PDO/PIO no later than 31 December 2022 and approved no later than 31 December 2023.
  • Uplift increased to 24 % (significantly increased from the 10 % proposed by the Government in April 2020). It is expected that the uplift may be deducted immediately for tax purposes as per the original proposal from the Government.
  • No extraordinary deductions allowed in corporate tax (22 %) – which means that the standard corporate tax remains "as is" which was important for the Government.
  • In addition a regime for negative tax installments to be payable in cash during 2020 and 2021 which will significantly boost liquidity in the short term for some E&P players.
  • Other elements in proposal remain the same as per the April proposal, as shown below.

Summary of the proposal that now is expected to be adopted by the Parliament:

  • The oil companies are – in the relevant period - allowed to claim immediate tax deductions for investments, instead of depreciating investments over a six year period as per the existing rules. This allowance for deductions applies against special tax (56 %) only, which means that the corporate tax (22 %) is sheltered from the temporary regime and thus not affected.
  • The uplift will be temporarily increased from 20.8 % to 24 %. Normally the 20.8 % uplift means that 5.2 % is allocated to the first four years after the expenditure is made. The revised temporary uplift, on the other hand, can be deducted immediately for tax purposes. (Note that this is our current assumption based on available data, as no information has been provided about other changes to the original proposal from the Government. We recommend that the final and detailed white paper to be presented is carefully reviewed on this point.)
  • The temporary rules will apply to investments made in projects sanctioned (PDO/FID) by latest 31 December 2022 and approved latest during 2023. This means that in the adjusted proposal also 2022 projects are included, whilst the Government proposal only included 2020 and 2021 projects.
  • The proposal will have effect for investments under the applicable projects and investment decisions incurred for an indefinite period until production start for the project. The original proposal from the Government was to make the temporary regime applicable for the period 2020 to 2024 only.
  • The tax value of tax losses for the fiscal years 2020 and 2021 will be paid out in cash directly to the E&P companies. This means that the tax losses each such company has in these years will be treated as if the company was ceasing its activity on the NCS (in which case a direct payout of tax losses carried forward will take place).
  • No temporary changes will be made in terms of deductions against the standard corporate tax (22 %) which means that all deductions in corporate tax will continue to follow standard rules. Based on media reports, this point was important for the Ministry of Finance and the Government, to avoid making temporary changes in the fundamental corporate tax features.
  • A temporary regime with negative tax installments have been introduced, which means that companies in the relevant period can claim payment (cash out) for expected negative taxes during 2020 and 2021 and thereby increase liquidity.

Effects on activity level on NCS

The revised proposal will have a positive cash effect for the oil companies and a positive effect on the level of activity on the NCS. The changes will increase NPV of the projects included in the scope and will reduce the balancing prices for those new investments which will benefit from these temporary changes in the fiscal regime. Hence, the revised proposal is expected to boost new investments and is likely to have more positive effects than the original proposal from the Government, given that the stimulus features have been extended and improved.

The proposal will also increase NPV in some of the key projects subject to sanction during the next couple of years; typically the Breidablikk and Noaka projects. It is also likely that the proposal will be more positive to some of the NCS players. It is expected that the proposal will be positive for companies like OKEA, Aker BP and DNO. In short, companies with little production and/or with oil price sensitive projects will benefit the most – whereas players with a steady cash flow and with low break even prices in their portfolio will benefit somewhat less.

Compromise between supporting oil and gas and also preparing a new renewables industry

The adjusted package has been criticized by the green/environmentalist parties and organizations. Media report indicate that certain key features have made the majority in the Parliament to approve this adjusted package:

  • The legal framework for green investments shall be reviewed and updated by a governmental task force.
  • The Government shall start working on a plan to reduce emissions on the NCS with 50 % (compared to 2005 levels) within 2030.
  • Offshore supply vessels will be subject to new and stricter emissions rules.
  • Plugging and abandonment of wells will be prioritized going forward.
  • Oil and gas regulatory authorities will have increased funding going forward.

It remains to be seen the exact effects, however with such significant benefits applicable to the industry it is expected that the players on the NCS with projects fitting into this time frame will look carefully how to be able to benefit from the temporary rules. A full evaluation of the rules are to be made in 2023, according to the compromise agreement. No specific details are known as to this evaluation, but based on media reports the key performance indicator will be whether these rules have saved jobs in the supply industry. If not, changes in these advantageous rules may be done, according to the media reports. Again, we recommend to check the final white paper carefully for details about these potential 2023 changes. It will be key to understand the risk for changes in these temporary rules for all interested parties.

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