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Norway proposing fiscal stimulies to boost investments in the petroleum sector

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The Norwegian Government has proposed a temporary adjustment of the NCS fiscal regime. Pursuant to the proposal, companies operating on the NCS will be entitled to immediate tax deductions for investments made in 2020-2021 and for investments made as part of new projects sanctioned before end of 2021 and approved during 2022.

Introduction

The oil and gas industry has been hit hard by the COVID-19 outbreak and the oil price collapse. Several oil companies have already reduced investments and the industry has urged the authorities to propose incentives to maintain the level of activity on the Norwegian Continental Shelf (NCS) and thereby ease the pain for the oil service industry and to retain employees and knowledge that will be important and valuable at a later stage.

The Norwegian Government has today proposed a temporary adjustment of the NCS fiscal regime. Pursuant to the proposal, companies operating on the NCS will be entitled to immediate tax deductions for investments made in 2020-2021 and for investments made as part of new projects sanctioned before end of 2021 and approved during 2022. The right to direct tax deductions will not apply to investments made after 2024. In addition, the uplift is reduced from 20.8% to 10% but with direct allowance for the reduced uplift in the same period. A final feature is a right to claim cash refund of the tax value of tax losses incurred in fiscal years 2020-2021.

Prime Minister Solberg stated that the government propose targeted, temporary changes to the tax system so that planned projects can be realized.

The proposal will be assessed by the Norwegian Parliament in May.

The proposal

  • The government allows the oil companies to claim immediate tax deductions for investments, instead of depreciating investments over a six years period.
  • The uplift will be reduced from 20.8% to 10%. Normally the uplift is 5.2% spread over the first four years after the expenditure. The revised uplift can be deducted immediately for tax purposes.
  • The proposals are applicable to investments made in 2020 and 2021, and those that are made as part of projects sanctioned (PDO/FID) by 2021 and approved during 2022.
  • The proposal will have effect for investments under projects and investment decisions incurred in the period 2020 to 2024.
  • The tax value of tax losses for the fiscal years 2020 and 2021 will be paid out in cash directly to the oil companies. This means that the tax losses each 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).
  • The government is also proposing a green/sustainable business package. It includes increased funding for Enova, more money for research, development and innovation, and increased funding for green shipping.

Effects and potential future adjustments

The proposal will have a positive cash effect for the oil companies and will increase NPV in projects and reduce balancing prices for new investments which will benefit from these changes in the tax system. Thereby, the proposal is expected to boost new investments and further to avoid cancellation of approved investments.

Albeit the industry had asked for more extensive temporary changes to the fiscal system, this proposal will probably have positive effects on the level of activity on the NCS the 2020-2021 term.

It is also likely so that the proposal will be very beneficial to some of the companies with significant investment projects being subject to sanction during 2020-2021 and which would have tax losses for same years in a normal situation.

We further expect that the government at a later stage, after having gained more experience with the long term effects of the market situation and the development in the oil price, will consider incorporating changes or adjustment to the current proposal. Changes may include considering to allow projects approved after 2021 (as proposed by the industry) to have the same tax treatment as 2020-2021 projects. The 2024 timeline may also be subject to adjustment. It is a fair assumption that any adjustments will have the effect of extending timelines and the benefits proposed, not reducing same.

A key take-away is that the government now has been willing to implement quite exceptional temporary changes to the NCS fiscal regime. The fiscal regime has been very stable over time. This only underpins that the situation is deemed to be very critical for the Norwegian oil and gas industry and that the government is willing to take extraordinary steps to mitigate the short and long term negative effects of the current "double hit" situation. It is likely that this will also be the case at a later stage, if the situation does not improve.

The proposal is sure to raise more discussions. Norsk Olje og Gass (NOROG) has already stated that this stimulus package is not sufficient to remedy the critical situation in the industry. The final approved package will surely be a compromise between industry interests and a wider fiscal view. The package is expected to be assessed by the Parliament during May. There has been a number of packages directed at variety of sectors in the Norwegian economy, and all of them have been quite heavily debated after being approved and set into motion. It will be very interesting going forward to see the effect of the expected package.

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