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Erna Solberg and the government presented a tax package that promises to secure jobs and activities in the oil industry. What the package really does is increase the tax burden. Now the oil industry presents a list of the billion projects that are on hold, if they do not receive the package they request.
CEO Eldar Sætre at Equinor
Mattis Sandblad
published:
When Aker BP, one of Norway’s largest oil companies, released first-quarter results on Wednesday, the effects of a low oil price and the corona virus were easy to detect: the result fell from profits to thousands of millions.
On Thursday morning, Equinor went on with her accounts and the story was the same.
Investments and dividends are declining dramatically, not just in both, but across the industry. It is also strongly affecting the Norwegian supplier industry and the reduction has already started. This happens at a time when the supplier industry had barely recovered after the previous crisis.
To remedy the crisis, secure jobs and maintain activity, the Norwegian Oil and Gas Association, NHO, LO and the entire Konkraft alliance proposed a tax package.
The package would not affect the state’s revenue over time, but would provide less tax now, and consequently more in the future, the industry says.
However, in a letter to Storting, the Finance Minister states that the state will also benefit from the oil industry tax package (the Ministry has only calculated the first two years).
But the government’s own proposal has gone further and further on several key points that imply a tax increase and that a series of projects are not enough to “join” the scheme.
CEO Eldar Sætre at Equinor and CEO Karl Johnny Hersvik of Aker BP warn in interviews with E24 about the consequences of the government’s tax proposal and say it will ensure multiple projects cannot be carried out now.
The oil spike assessment of the tax package is fully supported by Atle Guttormsen, professor at the Norwegian University of Environmental and Life Sciences, and Thore Johnsen, professor emeritus at NHH.
Renowned analytics firm Wood Mackenzie also concludes that the government tax package will not generate more investment, reports industry magazine Upstream.
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Coronasmell for Equinor in the first quarter
“This is a very dramatic situation,” says Aker BP chief Karl Johnny Hersvik, who has so far postponed and not canceled projects.
– The industry package is a total package that will give the industry liquidity to invest and lower the price of the balance, without costing the state a penny, says Hersvik and continues:
– It is positive that the Norwegian authorities are considering measures that can help the industry and, in particular, the supplier industry, but the proposal has important weaknesses and will only give marginal changes to our investment plans.
The reason the industry believes they need this stimulus is because uncertainty and falling revenues mean that you have to prioritize a lot. Eldar Sætre at Equinor explains:
– We can’t drive like before, says Sætre and continues:
– We have reduced our investments and dividends. We do not have unlimited financial capacity and must prioritize. In a situation in which we find ourselves now, projects must have a better profitability in order to compete within the limited capital framework that we must establish.
CEO Karl Johnny Hersvik of Aker BP
Bendiksby, Terje / NTB scanpix
Billions of projects at stake
Prime Minister Erna Solberg said during the press conference that the government is proposing “a comprehensive package of measures to maintain activity in the oil and gas and supply industries” that will ensure that “planned projects are carried out can perform. “
But this is not the case. Both Aker BP and Equinor say the tax package basically just gives them more liquidity, but their calculations for the projects don’t change.
Therefore, the Storting must make changes to the tax package if it wants to generate investments during the crisis, according to peaks in oil. There are some specific things that need to be changed for investments to get the green light:
- The price of the balance of the projects will not be less with the government’s proposal. This is because the government wants to cut free income in half (the investment deduction) and only get immediate deductions on the oil tax, not corporation tax.
- In addition, the government will set the final “deadline” for the scheme in late 2021, not 2022 requested by the industry. Development plans (PDOs) to come after 2021 should not be included.
– We have a total of 20 small and large projects on the Norwegian continental shelf that we will consider in the coming years, including electrification projects. Two-thirds of these are ready to be ready for an investment decision in 2022 alone, Sætre explains.
Therefore, there are many projects that will not meet the government deadline. The consequence of this is that they are likely to be postponed and therefore engineers cannot be hired to start planning and designing jobs in the future, Sætre explains.
Equinor’s 20 projects involve investments of just over NOK 100 billion, according to the company.
The two CEOs list specific projects that will start with the industry tax package, but not the government package, and then postpone:
- Noaka: Perhaps the biggest upcoming development after Johan Sverdrup. It will employ 50,000 full-time equivalents according to Aker BP and could cost an estimated NOK 40 to 50 billion (alternatively Krafla if Equinor develops on its own, without an agreement with Aker BP)
- Wisting – The next major oil field in the Barents Sea for which Equinor assumed responsibility for OMV development. This is also a project in the Noaka price range
- Peon’s development, as the Equinor chief says, is important to the development of technology for unmanned facilities.
- The electrification of Melkøya at Hammerfest
- Aker BP projects: Valhall Hod (to be decided this spring, but to be postponed), Kameleon and Gekko
- In addition to this, there are projects from various other oil companies on the Norwegian continental shelf
Giggles of Claiming Unprofitable Investment
Fear of supplier industry damaged by injuries
Equinor chief Eldar Sætre and Aker BP chief Karl Johnny Hersvik fear that this crisis could permanently harm the Norwegian supplier industry if nothing happens:
– That’s exactly what I’m afraid of. It targets the shipyard and engineering capacity, and the entire value chain on which we fully depend. Engineering environments need work and “food” to work now. If these environments are being demolished, it will be a very difficult job to rebuild them, Sætre tells E24.
Eldar Sætre notes that the level of investment in the Norwegian continental shelf was already in decline before the crisis and that there is now a danger of further weakening that may have “permanent consequences”.
– In a situation like this, it is incredibly important for the short and long term image that we can keep the jobs and the activity, also to achieve green change in the future. Meanwhile, you can’t switch to a green future if you file for bankruptcy, says Hersvik at Aker BP.
– How soon should a tax return be clarified?
– The sooner the better. In fact, many parts of the industry are now on the brink where they are about to take great strides. If you now receive a signal that the activity will come, it will be of great importance, says Eldar Sætre.
While Equinor under the previous 2014 oil brake began renegotiating to lower supplier prices as part of the effort to save money, this time it’s not the case:
– During the previous oil crisis, the situation was quite different, but now the suppliers’ position is completely different and many have nothing to follow. It is not a current strategy for us to renegotiate prices now. We are trying to create predictability and therefore the tax proposal is important, says Sætre.
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Government oil package
Finance minister believes he is winning the tax package
In a letter to the Storting, the Minister of Finance stated that the oil industry tax package will increase the state’s tax revenue by NOK 5.1 billion in 2020 and 2021, measured at current value.
In another letter, the Minister of Finance presents estimates of nominal change until 2027 that show that the state’s revenues end 3.5 billion more with the proposal of the oil industry itself.
In other words: the tax burden on the oil industry is increasing overall, even with the industry package itself, according to the ministry.
Although the Ministry of Finance emphasizes that the calculations are estimates with uncertainty, therefore, the state is expected to earn more money by deferring the tax to oil companies to incentivize activity and projects, and rather to collect the tax in the next years.
E24 has asked the Ministry of Finance why it is launching a package of measures that claims to secure jobs, but actually increases the tax burden, and how the government package should ensure that projects are carried out:
– In the extraordinary situation we are in now, measures are needed to facilitate more of the planned investments in the oil industry. The government’s proposal will help increase the liquidity of the oil companies and help ensure that planned projects can be carried out. However, it is true that the proposal is not as comprehensive as the industry itself has wished, Secretary of State Magnus Thue said in a statement.
The Åsmund Aukrust of the Labor Party asked how much free income (the additional deduction on investments in the oil tax) should be reduced so that the state does not lose money in the tax package.
The response of the Minister of Finance. It may surprise you: Free income (investment deduction) actually needs to be increased by 4.3 percentage points to 25.1 percent so that the state doesn’t win in the package.
When the government presented its own package, they made adjustments that worsened the outlook for the industry. The free income was cut in half, in addition to the time period to which the scheme should apply, and it tightened dramatically.
“In the long run, there will actually be a bit more tax revenue for this,” business minister Iselin Nybø said of the package.
