State aid row adds to Norway’s oil concerns

The move comes at a bad time for Norway, which needs to step up the search for new resources if it wants to avoid a sharp output decline from the middle of the next decade.

It adds to existing headwinds for the country’s biggest industry, which has emerged stronger from a bruising slump but is facing an intensifying debate over its sustainability.

At stake is a tax mechanism that allows unprofitable oil companies to claim 78% of exploration costs as a cash refund, instead of deducting the expenses over time.

The Norwegian government has paid out 109bn kroner (€11.4bn) since 2005 to explorers such as Lundin Petroleum and Repsol.

It helped attract more companies to Norway, nearly doubling the pace of exploration and leading to key discoveries such as the multi-billion-barrel Johan Sverdrup field.

Environmental group Bellona last year filed a complaint to the EFTA Surveillance Authority, a watchdog that makes sure Norway complies with EU rules.

Should the ESA decide the refund is illegal state aid, oil companies would need to return some of the cash and Norway dismantle the programme.

“It would be serious. We need more exploration activity,” said Petroleum and Energy Minister Terje Soviknes.

Climate activists are increasingly turning to the law to fight the oil industry. Greenpeace has also sued Norway (unsuccessfully so far) to stop licences in the Barents Sea.

Opponents say the exploration refund encourages the search for oil the world can’t afford to burn.

By the end of the year the ESA will decide on whether to formally investigate, which could take 12 to 18 months, said director of competition and state aid Gjermund Mathisen

Norway could appeal in the case of a loss. It has rebuffed claims that the programme constitutes illegal aid, most recently in a February 9 letter to the ESA.

Erling Hjelmeng, a law professor at the University of Oslo, puts the probability of Norway losing at more than 50%. “This is pretty open,” he said.

However, the financial impact would be limited since the amount companies would be forced to return would likely be much lower than what has been paid out since 2005, according to Hjelmeng and Oyvind Olimstad, a partner at law firm Selmer Advokatfirma.

That’s because the financial advantage is limited to the value of getting an immediate refund rather than a later tax deduction, they said.

Many of the companies are also now paying taxes, making them eligible for deductions that would even out the slate.

However a loss would hurt exploration. Activity would “undoubtedly” drop, said Graham Stewart, chief executive of Faroe Petroleum, a London-listed company that’s recouped 2.8bn kroner since 2006.

Faroe is “all but immune” because it will soon be in a tax-paying position, but it would make Norway less attractive to new entrants and could make some companies leave, he said.

“It would be a great loss. It’s worked really well for Norway,”said Stewart.

Norway would then need to look at other measures to compensate, said Soviknes.

One example of how the tax rule has served Norway is the success of Lundin.

Backed by the refund, the Swedish company was able to test new exploration theories and eventually in 2010 discovered Sverdrup, Norway’s biggest oil find in decades.

Since 2005, Lundin has received about 6.5bn kroner in refunds.

However, it’s also paid more than 25bn kroner in taxes and expects to pay 200bn kroner more by 2040.

- Bloomberg