LET S TALK ABOUT NORWAY

Transcription

1 LET S TALK ABOUT NORWAY When it comes to royalties, many people have questions and opinions about Norway s approach. Comparing an offshore drilling project off the U.S. Gulf Coast, the United Kingdom, or Norwegian sectors of the North Sea can make some sense because they are of a scale that, cost-wise, may be comparable to Alberta s oil sands projects. Both offshore projects and oil sands projects are multi-billion dollar investments that take years to undertake using innovative technologies. However, trying to compare Norway s taxes and state ownership returns with Alberta s royalties and taxes isn t really an apples-to-apples comparison. In reality, they are two very different systems designed for their own unique circumstances. Geology and Geography One key aspect is Norway s geology. Norway has large individual oil and gas fields served by offshore platforms there is no onshore development in the country. Over the past 50 years, around 5,500 oil and gas wells have been drilled. On average, Norway drills roughly 190 new wells a year. In 2014, Norway produced 3.8 million barrels of oil equivalent per day of oil, natural gas and liquids. This roughly approximates into one well producing 690 barrels of oil equivalent per day.[1] In contrast, Alberta s conventional crude oil fields are spread out across the province. In 2014, Alberta had roughly 165,000 producing wells (30 times the number of wells drilled in Norway). However, wells in Alberta tend to be much less productive than those in Norway. If you include natural gas and liquids as barrels of oil equivalents (like Norway does), average well productivity in Alberta is roughly 17 barrels of oil equivalent per day (about 40 times less than an average well in Norway). This is significant, because a jurisdiction s royalty rates are generally structured based on the revenues and costs involved in producing oil and gas in that jurisdiction. Wells that have low productivity (i.e., that pump little oil) are often less profitable than wells with high productivity. (Ultimately this also depends on costs.) Norway s non-renewable resource revenues are based on the economics of their high-producing wells. Alberta s royalties are based on our lower-producing wells. They are two different systems designed for different circumstances. Norway s system would likely not work here because it was designed for their unique situation, just as our royalty structure wouldn t be suitable there.

2 Norway is now developing oil fields that are further north, which are more expensive to produce. One example is the Snohvit gas field in the Barents Sea, 340 miles north of the Arctic Circle. In this case, Norway has developed different fiscal terms (based on how revenue and costs are allocated) to reflect the higher costs and different economics, so that they can maintain activity and employment and develop this difficult-to-access resource.[2] Geographically, Norway is also very different compared to Alberta. All of Norway s oil and gas is produced offshore, so it immediately has coastal access. This enables Norway to easily transport its oil and gas around the world and receive the highest prices available. Alberta, on the other hand, is landlocked. It is much more challenging and costlier to move our oil to tidewater and we are essentially limited to selling our product to a single customer. Tidewater access is not the only factor that is influencing the higher price that Norway receives for its oil. The majority of oil that Alberta produces is bitumen and heavy crudes, while Norway s oil is typically a lighter crude. Alberta receives lower prices because our products are lower quality oils that are lower valued. Put simply, Norway typically receives Brent prices which are much higher than the bitumen netback price that the majority of Alberta s oil receives today. For natural gas, the comparison between Alberta and Norway is similarly challenged. Shale gas production in the U.S. is eroding Alberta s markets for natural gas, with Alberta production and Canadian exports to the U.S. declining roughly 25% over the last decade. The abundance of natural gas in North America has led to significantly lower natural gas prices over the past several years, with Alberta gas selling at $4.07 per MMBTU in In contrast, strong European demand for Norwegian gas has encouraged investment and resulted in production increases of over one trillion cubic feet in the past decade. Ninety-five percent of this production is exported to the rest of Europe and sold at stronger prices than seen in North America, at $8.25 per MMBTU in 2014 (Twice as much as Alberta s gas.). Non-renewable resource revenue Norway s system of non-renewable resource revenue collection is completely different from Alberta s. Norway does not collect bonus bids on land sales from competitive auctions, nor does it even collect royalties. Norway receives its non-renewable resource revenue from other mechanisms, which are principally: Revenue and dividends from its ownership in in Statoil, its state-owned energy company Revenue from the State s Direct Financial Interest in other resource development projects within its jurisdiction

3 Corporate income tax (27%), analogous to Alberta s 12% corporate tax and Canada s 15% corporate tax The Special Tax, which is a profit-based tax of 51% on oil and gas revenue (this is analogous to Alberta s oil sands royalty) Other miscellaneous fees and rentals To explain the first two revenue streams, it is necessary to understand the structure of Norway s oil and gas industry, which is very different from Alberta s. Structure of the Industry Oil and gas development in Norway is dominated by its state-controlled entities and a few other large multinational corporations. Statoil is Norway s largest producer and controls approximately 60% of current Norwegian production. Statoil was created by the Norwegian government in 1972, soon after oil was discovered in the North Sea. Statoil was wholly owned by the Norwegian government until 2001, when it was publically listed. Today, two-thirds of Statoil is still directly held by the Government of Norway; the other onethird is held by private shareholders. Statoil requires a two-thirds majority of shareholders to pass major decisions; therefore the Norwegian government controls all major decisions of Statoil. Like other companies producing oil in Norway s offshore, it pays Norwegian corporate income tax, the petroleum Special Tax and is subject to the State s Direct Financial Interest. The ability of private companies to invest in Norway s energy sector is more restricted than it is in Alberta. Besides Statoil, there are only 13 other companies that operate oil fields in Norway. Rather than auctioning the right to develop oil and gas resources through an open and competitive process, Norway selects the company that will develop an area and enters into a private agreement with them. For each oil and gas area developed, the Norwegian government reserves the right to take a working interest in the project this is called the State s Direct Financial Interest. This means the government becomes a commercial partner in developing the project; pays for its share of the development costs upfront; is included in management decisions; and also receives its share of the revenues. The Norwegian State s Direct Financial Interest is managed by Petoro, which is wholly-owned by the Government of Norway. The working interest taken by the Government of Norway depends on the character of the oil or gas field it s involved with and is negotiated separately for each project. For example, in 2011 it took a 30% share of the Maria field (planned for production in 2018), and a 17.4% share in the Johan Sverdrup field (planned for production in 2019). This is a very different system from Alberta, where our government does not directly develop or hold any share in developing our province s oil and gas resources. The Government of Alberta leases rights to explore for and

4 develop petroleum and natural gas rights through a competitive bid auction system. The process is not selective of which companies can develop the resources here so long as they meet statutory and regulatory obligations. This has created a situation where there are many more companies that operate in Alberta than in Norway. In 2014, there were over 1,400 companies that produced crude oil and liquids, natural gas, and bitumen in Alberta 100 times the number of companies operating in Norway! Many of these companies are referred to as junior companies that are started by local entrepreneurs. Jurisdiction Norway is also different because it is a country Alberta, on the other hand, is only one province within a larger country. Consequently, the Norwegian government has considerably more power over things that impact its energy sector, including taxing power and the approval and development of energy infrastructure such as pipelines. As a provincial government, Alberta does not have exclusive authority over things like taxes and fees, and Alberta cannot decide all by itself when and where pipelines are built and how the federal portion of taxes collected from Alberta are spent. Part of what government collects overall goes to the Government of Canada rather than Alberta, and is used across Canada. This is another factor that makes it challenging to directly compare Norway and Alberta. Use of Non-renewable Resource Revenue Although how royalties are spent are not in the scope of the royalty review (only how they are collected), this is probably the biggest reason why people bring up Norway, so it is worth noting. Norway has a large savings account, which was known for many years as The Petroleum Fund of Norway. Under legislation (which can be found at ), the Norwegian government is required to deposit all of its net cash flow from petroleum activities into this fund. This includes: Tax revenues it has collected from petroleum activities, including corporate taxes and the Special Tax Revenues and dividends from its ownership of Statoil Revenues from the State s Direct Financial Interest in oil and gas fields Revenues from taxes on carbon dioxide and nitrogen oxide emissions from petroleum activities Other miscellaneous fees and rentals.

5 Norway also has a budgetary rule that only the expected real return on the fund, estimated at 4%, can be spent by the government each year. All the rest is saved. This means that Norway has had to collect all the taxes it needs for expenditures (other than the real return on the fund) through other measures. The choice Norwegians made was to rely on a consumption tax of 25%, plus non-energy related corporate taxes and higher personal taxes. Alberta historically made different choices with the taxes and royalties it raises from energy development. All tax revenues and non-renewable resource revenues from energy activities are used in Alberta s budget just like taxes from non-energy activities to fund day-to-day services such as health and education, and to build infrastructure. Historically, non-renewable resource revenues in Alberta have accounted for about a quarter to a third of Alberta s annual budget. Use of Technology and Innovation Another way in which Alberta can be compared to Norway is its focus on technology and innovation to overcome challenges. Like Alberta s oil sands, developing oil and gas resources in the North Sea is very challenging due to the geology and operating conditions. Statoil has become a world-leader in developing offshore oil and gas resources. This is not dissimilar to the Government of Alberta s support in the development of technology and innovations to develop and market the oil sands. Norway is one of the largest proponents in the world for using carbon capture and storage (CCS) technology to reduce greenhouse gas emissions from the oil and gas industry. This technology captures large quantities of carbon dioxide (CO 2 ) emissions from industrial facilities and injects them in deep geological formations for permanent sequestration. Norway has several commercial CCS projects (found here ), including the world s first commercial project called Sleipner, which is part of a natural gas processing plant and has been operating since The Government of Alberta supports two CCS projects in the oil and gas industry here, the first of which began commercial operations on November 6 of this year (for more information visit Sources: Alberta Energy; Statoil; Government of Norway; Norwegian Petroleum Directorate [1] Further complicating any relevant comparison between Alberta and Norway is the fact that we report things a bit differently. Norway does not distinguish between and oil well and a natural gas well, and so they report all petroleum products produced from all wells as barrels of oil equivalents, which approximates the energy contained in the various hydrocarbons. [2]