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The Norwegian government has been dealt a blow by the state-owned oil company Statoil, which has announced that it plans to delay a $15.5 billion Arctic project due to tax increases that have reduced the profitability of the venture.
The government had hoped that the development of the Johan Castberg field in the far north would have proven a huge boost to improve the infrastructure and economy in the sparsely populated northern region.
To be fair the Norwegian government only has itself to blame. It currently trails in opinion polls as the September elections approach, and it was hoping that the Castberg development would have earned a big boost in public support. Yet the decision to make changes to the oil tax system for the first time in 20 years has angered energy companies, as new projects across the industry become less attractive.
Falling oil prices around the world, and rising costs, has already reduced the amount of investment available for new projects, and now with taxes set to increase, and companies limited as to what they can write down as investment, the break-even point for projects has increased sharply.
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Oeystein Michelsen, the development chief for Statoil in Norway, stated that the tax increase “reduces the attractiveness of future projects, particularly marginal fields and fields which require new infrastructure.”
Castberg’s break-even increased by $7 a barrel making it a far less appealing project and forcing Statoil to consider other options that offer a safer return.
The government is set to make a final decision on the proposed tax increase, and many think that Statoil’s move is aimed at putting pressure on the government to ditch the idea.
Deutsche Bank “interpret Statoil's decision to very publicly defer the final investment decision of a high-profile project ... as a deliberate gesture to demonstrate that the proposed tax change may have consequences which ultimately impair the value of Norway's resource base to the state.”
By. James Burgess of Oilprice.com
James Burgess studied Business Management at the University of Nottingham. He has worked in property development, chartered surveying, marketing, law, and accounts. He has also…