The Revised National Budget 2004

The Revised National Budget 2004

Revised National Budget 2004: Improved economic outlook

Amendments to the Petroleum Tax Act

Ethical Guidelines for the Government Petroleum Fund

Chapter 4 of Report nr. 2 (2003-2004) to Stortinget (The Government Petroleum Fund)

Press Release

No.:

50/2004

Date:

11.05.2004

Contact:

Therese Riiser Wålen , Telephone 22 24 41 09 , Mobile 940 50 886

Amendments to the Petroleum Tax Act

In the Revised National Budget for 2004 the Government announced certain amendments to the petroleum tax act which will be put forward in the budget for 2005.

- The proposals will increase fiscal certainty for new companies and improve the profitability of investments in i.e. tail-end production and improved oil recovery. The proposal will also simplify trading in licenses on the Norwegian continental shelf, says Minister of Finance Per-Kristian Foss.

The proposals are:

  • The state will pay in cash the tax value of deficits connected to exploration in connection with the yearly tax assessment
  • The state will pay in cash the tax value of deficits if a company ceases its activities on the Norwegian continental shelf
  • A simplification of the tax treatment connected to selling and buying licenses
  • The uplift will be accelerated to 7,5 pct. over 4 years
  • An improvement in the tax rules for depreciation of investments with a shorter economic life than six years
  • Larger flexibility in contracts between oil companies and contractors will be allowed (incentive contracts).

The combined effect of the tax reliefs is estimated at about NOK 1.5 billion on average in the years 2006 - 2008.

The Government will increase its share in the financing of petroleum sector research by a capital infusion in the Fund for Research and Innovation of 1 billion NOK from July 1 2004.

The oil industry has, through the the Kon-Kraft tax project, published the report “Proposals for tax amendments to stimulate greater activity and added value”. This report proposes a reduction in the rate of special tax for new fields and a volume allowance for increased production from existing fields.

The Government has not accepted the arguments and proposals from the Kon-Kraft tax project. The Revised Budget calculates a substantial revenue loss over time due to the proposed changes, amounting to some NOK 10 billion per year. The Ministry of Finance therefore rejects the claims from the industry that the proposals can be implemented without a loss of revenue for the Government. The proposals from the industry will, in the opinion of the Ministry of Finance, not have any material effects on exploration and development of petroleum resources. The proposal of a volume allowance would also result in substantial administrative problems and could stimulate investments that are not profitable before tax. The Revised National Budget shows that projects with moderate profitability have a lower tax burden in the existing petroleum tax system than in the ordinary (on-shore) tax system.

- The high cost level is the main challenge for the Norwegian continental shelf and this problem can not be solved through the tax system, says Minister of Finance Per-Kristian Foss. With exploration (drilling) costs up to 60 pct. higher than in the UK sector, efforts must be directed towards cost reductions and new technology together with increased competition and diversity on the shelf. If costs are not reduced, substantial resources will be unprofitable both before tax as well as after tax. With a high oil price and record profits, the oil companies have a good basis for increasing the efficiency of their business. Significant tax reliefs would reduce the pressure for necessary cost reductions, and other taxes would have to be increased to safeguard the state’s revenue, says the Minister of Finance.