Status of exploration of the Faroese Area Ben Arabo, Faroe Oil Industry Group

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1 Status of exploration of the Faroese Area Ben Arabo, Faroe Oil Industry Group Offshore Faroes 2003 Conference, Tórshavn, 2 December 2003 FOÍB - its twelve members are very pleased to get this opportunity to address Offshore Faroes 2003 and provide our view on where we are, and more importantly where we are going. A wise man once said that if you don t know where you are going, you are likely to end up somewhere else. 8 wells were committed in the First licensing Round. Half of that number has been drilled. The results so far have not provided any commercial discovery. Although there is no reason to celebrate, it is also too early to despair What we can say at the moment is that there are great uncertainties with regards to the future outlook for a Faroese oil industry. Some of the results so far have been disappointing but there are some positive signs as well. We are still working towards unlocking what the Faroese shelf may hold and that is a challenging task that we are approaching with the very latest that science has to offer. Next year will not see any drilling activity on the Faroese shelf. No drilling does not mean no work. The bulk of the work is carried out on desks and work stations and more importantly in the minds of people. This is, however, a good time to review where we stand. I am saying this because half of the 6 year term of the first round licenses with drilling commitments has expired, and a second round is planned for next year. A second round opens opportunities but it is also a time for reviewing regulations and terms and conditions in general. We must not forget that the Faroese area is in close competition not only with the neighbouring areas where licensing rounds are expected in the UK, Norway and Greenland. The Faroese area is indeed in competition with the whole world and every factor will be compared against the competing areas. There are factors that can t be changed such as the geological factors. The only thing that can be done in respect to these is to increase our understanding and knowledge to get the optimal result that can be achieved from whatever nature provides us with. Other factors are favourable in the general NW Europe area such as political stability. However, there are other factors that can be changed in more or less favourable ways. Let us look at the prospect of a 2nd Round - How are we as an industry received? What is the message from the Faroese Government? Are we wanted as an industry? Are we welcome?

2 The Ministry of Petroleum has done a great job. We do not always agree with their approach and have objected to some of the requirements but the messages from this Ministry are consistent and clear. There have been issues of importance that this Ministry has dealt with well and there will be issues of importance to deal with in the future, but whenever an issue is addressed with pragmatism and professionalism, it is a message saying welcome to the industry. The license terms are clear although some items like Enclosure 4 and the royalty could benefit from a discussion of merits. Whatever is decided it is important that everything is clear and that everybody knows the playing field. There must never be any shifting of goal posts during the game. The Ministry of Finance is a different matter. Their approach is not very inviting to industry, and the Ministry s pragmatism leaves a lot to be desired. Before I go on, I would like to emphasise that this is not meant as criticism of the individuals that work for the Ministry of Finance. They are just administering a poor piece of legislation. We all have to play the hand we are dealt. The responsibility for this legislation lies at the very top of the Ministry of Finance. The hydrocarbon tax regime in general is clear. We as an industry may be less than enthusiastic about some of the individual provisions such as 27% corporate tax rate compared with the general corporate tax rate in the Faroes of 20% but at least we know what the scores are. The hydrocarbon tax administration legislation is another matter. The provisions laid out in this piece of legislation are unclear and are written in a way that makes it impossible to administer. One example is the provision that makes the operator responsible for all tax and all information relating to tax from all contractors in the value chain. This is the equivalent of a private individual building a new home being responsible for the tax of the carpenter, the electrician, the plumber and their vendors and their employees ad infinitum. This is an unrealistic requirement. Why is it there? The only justification we have heard is that it makes is easier for the Ministry of Finance to have one party to vouch for all contractor taxation. In other words it is a matter of convenience rather than a matter of what is reasonable.

3 It does not increase the confidence in the legal framework when legislation is written that can not be adhered to. It is in fact demoralising. This was noted by our members in 1999, so this is by no means a new issue but since a second round is planned, it is the right time to mention it yet again. Another rather unusual provision is the provision that foreigners working for Faroese companies in the oil industry pay 42.5% tax while foreigners working for foreign companies in the Faroese sector pay 35.5% tax. There is an official explanation for this but it eludes my logic. Maybe it is true what Albert Einstein said: The hardest thing in the world to understand is the income tax. And, ladies and gentlemen, he was a genius. With regards to individuals working onshore we thought we had a 30 day rule where individuals could work in the Faroes without paying tax in the Faroes as long as they did not stay in the country for more than 30 days in 12 consecutive months. We were working according to such a rule in 2001, but in November 2002 we received a letter from the MoF saying that this was only done in special cases in 2001 due to lack of resources and that there was no authority in the Faroese legal framework to grant such a period and that individuals working onshore were taxable from day one. This was a shocking letter. We have since then met with the Ministry of Finance and have been in correspondence with them for over a year. We received a letter 7 November this year that informed us that the Minister of Finance does not wish to change anything. I and several of my Faroese colleagues spend a lot of time abroad. If the countries we visited had similar draconian rules as the Faroese rules this would be impossible. What ever happened to treat your neighbour as you want to be treated yourself? How is the occasional visitor working in the oil industry treated in the Faroes? What are the exact requirements? Well, as things stand a person has to fill in an application form for a temporary NI number (p-tal), he has to establish a Faroese account, as his salary for the period has to be taxed through the Faroese A-taxation system. The license holder needs to supply the Hydrocarbon Tax office with two forms one supplying info on the Contracting company and one with info on the individual employee. The employer needs to apply for a V-

4 number to be able to pay salaries in the Faroes and he also needs to establish an account and pay the salaries through the Faroese A-taxation system. In addition to this the employer of the person needs to submit a tax assessment for the year and submit an extract of accounts. Are we over interpreting the law? I don t know. Why is that? We have been in correspondence with the Ministry and have asked them the specific question on whether a person needs to fill in all those forms etc. for a brief visit. They have so far ignored our question even though we specifically asked for an answer prior to this event. We also asked to be notified if it wasn t possible to reply prior to this event but we have not received anything from the Ministry of Finance. President Calvin Coolidge said that if you don t say anything, you won t be called upon to repeat it. I don t know whether this is the strategy our letter has been met with, but this is not an option in this matter as answers need to be given. In defence we hear from the Ministry of Finance that other countries do have similar rules. True! There are other countries with similar rules but with one significant difference. Double tax agreements. Denmark has 81, Norway has 85 and the UK has 117 double tax agreements with countries and independent areas. The Faroes has got 9 double tax agreements (Nordic countries, Switzerland, Austria and India). We have been told that a minimum rule such as a 30 day rule for working onshore is something they want to negotiate in connection with a double tax agreement. UK already unilaterally has a rule for incidental work. We have also been told that the lead time for one double tax agreement is years. If we are optimistic and say 2 years, it will take approximately 150 years to take us Faroese to the level of Denmark and Norway. My great great grandchildren may live to see it, but this is clearly not going to solve our immediate problems. A country with next to no double tax agreements can not legislate in the same way as countries with double tax agreements with all their trade partners, in the same way as one can not load a rowing boat according to the specifications of an ocean-going cargo liner. In relation to the oil industry, the result of such a set of regulations is a barrier to relations outside of the few countries the Faroe Islands have double tax agreements with. The often heard Faroese complaint of too few channels of trade is in this respect a self made problem. The system as it is is very bureaucratic and the refusal

5 to change anything reminds me of a quote by Laurence J Peter who said that bureaucracy defends status quo long past the time when the quo has lost its status. The purpose is not to moan about everything in the Faroese regulations that put burdens on the shoulders of the oil industry. It is not for us to decide Faroese policy, but I think we can all agree that whatever is decided needs to be clear, concise and consistent. The regulations and the approach adopted by the Faroese Ministry of Finance are not. I realise that I am spending a significant portion of my time talking about tax but it is also important. I want to emphasise in closing yet again that the Faroese shelf is in competition with the whole world for exploration funds. The message we get from the MoP is Welcome while the message from the MoF is Keep out. A good example of the contradicting messages is the provision in the 1st round licenses (Clause 12) that says that the licensee undertakes to promote and to instigate the entering into of contracts between Faroese companies and foreign companies on the building up of competence and technological know-how within the Faroese company. Now, ladies and gentlemen, compare this to the hydrocarbon tax legislation where a severe bureaucratic burden is placed upon the shoulders of individuals and companies for the briefest of visits. Compare, ladies and gentlemen, the inviting messages sent out by the Ministry of Petroleum in connection with the second round, with the refusal of the Faroese Minister of Finance to bring in a minimum rule or rule for incidental work. Left hand is doing one thing and the right is doing the opposite. What does the brain say? What is Faroese government policy? It is not possible to turn people away in a welcoming way or welcoming people in a hostile way. Whatever is Government policy, we need a clear and consistent message. The load on the shoulders of those in industry and particularly in the Faroese government who try to walk towards a possible oil industry in the Faroes, has not been made lighter by recent drilling results in the area, but, ending on an optimistic note, please remember that it is not the load that breaks you down, it s the way you carry it. Thank you. Ben Arabo, Chairman FOÍB