Norway Sovereignty over the petroleum resources Ownership and title to the underground petroleum resources

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1 12.5 Norway Sovereignty over the petroleum resources In Norway, all oil and natural gas resources, mainly petroleum, are located on the continental shelf. On 31 May 1963, Norway declared its sovereign rights to explore for and exploit the petroleum resources on its continental shelf, as provided for in the Convention on the Continental Shelf 29 April 1958 which came into force on 10 June 1964 (the Geneva Convention, art. 2). Agreements on dividing the North Sea in accordance with the median line principle (the Geneva Convention art. 6.1) were reached between Norway and the United Kingdom in March 1965, and between Norway and Denmark in December Subsequently, the Norwegian Continental Shelf south of 62 o N (the North Sea) was divided into thirty-seven quadrants, each comprising twelve blocks covering fifteen minutes of latitude and twenty minutes of longitude. On average, the blocks in the North Sea are about 500 km 2 in size. The same division into blocks has subsequently been made for the Norwegian Sea and the Barents Sea. Due to the curvature of the earth, the size of the blocks is gradually reduced towards the north. In the Barents Sea, the size of each block is about 250 km Ownership and title to the underground petroleum resources The Act of 21 June 1963 No. 12 relating to exploration for and exploitation of submarine natural resources stated that the property rights to petroleum resources are vested in the Norwegian State. This provision was also included in a subsequent Petroleum Act of 1985 and in the Petroleum Act applied today, which is Act 19 November 1996 No. 72 pertaining to petroleum activities (known as the Petroleum Act). It states: The property rights to subsea petroleum deposits and the exclusive right to resource management is vested in the Norwegian State (the Petroleum Act s. 1-1). The rights of the Norwegian State under the Petroleum Act are vested in the Ministry of Petroleum and Energy. Issues related to HSE (Health, Safety and [work] Environment) are the responsibility of the Ministry of Social Affairs and Labour, while the Ministry of Environment is responsible for environmental issues related to petroleum activities. The Ministry of Finance is responsible for petroleum taxation. Main principles on which the Norwegian petroleum policy and legislation have been based are: The petroleum resources are managed for the benefit of society as a whole. The petroleum activities are governed by the Norwegian State. Both national and international oil companies are invited to carry out the activities, with a view to achieving a plurality of geological ideas, the best technological competence, a good financial basis for the activities, and good checks and balances. The mapping and exploration of the continental shelf are carried out at a moderate pace. This process has been obtained through a phased opening of areas for petroleum activities on the continental shelf, and through the award of a limited number of blocks in each licensing round. Today, Norway is the seventh largest producer of oil and gas in the world, and the third largest oil and gas exporter. The main aims for the Norwegian petroleum activities are that: The petroleum activities render the highest possible value creation to society and to the companies. VOLUME IV / HYDROCARBONS: ECONOMICS, POLICIES AND LEGISLATION 697

2 NATIONAL REGULATION OF THE HYDROCARBONS INDUSTRY The Norwegian petroleum industry is internationally competitive and works towards an ever higher degree of internationalization. Norway combines its position as a significant petroleum producer and exporter, with environmental concerns in the forefront Structure of the petroleum regulation The right to prospect for petroleum resources No petroleum activities may be conducted in an area before it has been formally opened to petroleum activities (the Petroleum Act s. 3-1). Such opening is made by decision of the Storting (Norwegian Parliament) on the basis of an impact assessment carried out by the Ministry of Petroleum and Energy. To prospect for petroleum resources on the Norwegian Continental Shelf, a reconnaissance licence is required (the Petroleum Act s. 2-1). The licence is granted by the Norwegian Petroleum Directorate, which is the technical branch of the Ministry. This licence gives the holder the right to geological, petrophysical, geophysical, geochemical, and geotechnical activities, including shallow drilling, as well as operation and use of a facility to the extent it is used for the purpose of prospecting. The licence is non-exclusive and is normally given for a three-year period. There is no limitation in the Petroleum Act as regards the area that may be covered by such licence. In practice, the licence covers a fairly large area. According to the Petroleum Regulations (Regulation to the Act of 27 June 1997, s. 6, pertaining to petroleum activities, established by Royal decree), the holder of the reconnaissance licence is required to submit copies of all data, registrations and other results from the activity to the Petroleum Directorate within three months after the prospecting activity has been carried out. This requirement ensures that Norwegian authorities constantly have access to and knowledge of the most recent geological data from the continental shelf. The right to explore for, develop, and produce the petroleum resources Production licence The right to explore for, develop, and produce petroleum resources requires a production licence. The licence is formally awarded by the King in Council (the Petroleum Act s. 3-3, para. 1). This licence is exclusive and gives the licensees the right to explore for and produce any oil and gas that is discovered within the licence area (the Petroleum Act s. 3-3, para. 3). The award process is carried out by the Ministry of Petroleum and Energy. The Norwegian system for the award of a production licence is discretionary. The Ministry of Petroleum and Energy decides if, when, where, to whom, and on what conditions a production licence is awarded. In this process, however, Norway as a party to the Agreement on the European Economic Area (EEA) is part of the European internal market and is thus obliged to adhere to relevant EU legislation, most importantly the EU licensing directive of 1994 (94/22/EC). Production licences are normally awarded in dedicated licensing rounds, which are carried out by the Ministry approximately every second year. The licensing round begins with the Ministry inviting all companies active in Norway to nominate blocks they would like to see licensed. Such nominations are purely advisory. Based on the nominations, the Ministry consults with the Petroleum Directorate, the Ministry of Fisheries and Coastal Affairs, and the Ministry of Environment on which blocks to put up for licensing. An agreed proposal for blocks is submitted to the Cabinet for acceptance. Any limitations to the periods during which drilling will not be permitted for environmental reasons or due to fisheries concerns have to be included in this proposal to ensure that such limitations are known to applicants when they apply for the award of a block. Subsequently, as provided for in the Petroleum Act (s. 3-5) and the Petroleum Regulations (s. 7), an invitation to apply for blocks on the continental shelf is announced in the National Gazette and in the European Journal. Applications Applicants will have at least ninety days to submit their applications (the Petroleum Act s. 3-5, para. 2). Applicants have to pay to the Ministry a handling fee of Norwegian Kroner (NOK) 60,000 (Petroleum Regulations s. 9, para. 5). The required contents of an application are stated in the Petroleum Regulations s. 8. Applications may be received from natural persons domiciled within the EEA. In practice, no natural person has ever applied for a production licence, either from single joint stock companies or groups of such companies registered within the EEA. In other words, the majority of companies being awarded a participating interest in a production licence is a joint stock company registered in Norway. There is no limitation in Norwegian legislation regarding the nationality of the owner of such joint stock companies. 698 ENCYCLOPAEDIA OF HYDROCARBONS

3 NORWAY Awards Based on the received applications, the Ministry conducts negotiations with all applicants, normally arranging possible work commitments and the term of the licence. Subsequently, the Ministry puts forward a proposal to the Cabinet as to which blocks to award in each production licence, which companies should be awarded the licence in question, the size of their share in the licence, and who should be appointed operator (Petroleum Act s. 3-7). The criteria for awarding a production licence are mainly the financial strength, geological competence, technological capacity, and general experience of the applicant as an oil company (the Petroleum Regulations s. 10). To ensure that all applicants are in fact qualified to be a licensee or an operator, all newcomers on the continental shelf are recommended to seek prequalification from the Ministry and the Petroleum Directorate before they apply for a licence or for the consent of the Ministry to a farm-in agreement. When the proposal for the award is accepted by the Cabinet, the Ministry makes an offer to the relevant companies and gives them a ten-day time limit to accept or decline the award of the production licence. Also included in this offer are all relevant conditions for the award (Petroleum Act s. 3-3). Such conditions foresee the obligation for the group of licensees to form a joint venture within thirty days of the licensee being awarded the licence by entering a Joint Operating Agreement and an Accounting Agreement. These agreements are model agreements formulated by the Ministry. They regulate the relationship between the licensees and how costs related to petroleum activities should be paid and divided among licensees. The appointed operator carries out his responsibility on a no-loss-no-gain basis. The Joint Operating Agreement contains, among others, voting rules for decision-making in the joint venture. The voting rules are formulated by the Ministry and imply that a defined combination of the number of licensees in the licence group and the size of their participating interest is needed to make a decision. This way of formulating the voting rules also ensures that companies with a smaller share in the licence group will have a voice when decisions are made. Another condition for the award of a licence is the obligation to undertake a work commitment as defined by the Ministry and the term of the licence. As appropriate, specific environmental conditions and limitations of the period in which exploration drilling is permitted are due to fisheries interests and environmental concerns. Awards in predefined areas Recently, a new practice for annual awards of production licences in mature areas has also been implemented: namely, Awards in Predefined Areas. Under this system, blocks in areas on the continental shelf defined as mature (i.e. where the geology is well known), are put up for licensing in the beginning of January each year, with the time limit for applications set on 1 October each year. Any acreage that is relinquished within such predefined area during the year is automatically included in the predefined area. Awards under this system take place before year-end. This timeframe ensures a quick circulation of acreage in mature areas. The process for the award itself is the same as the one described above for a dedicated licensing round. Plan for development and operation If a discovery is made within the licence area, and the licensees deem the discovery to be commercial, they must submit a PDO (Plan for Development and Operation) for the field to the Ministry of Petroleum and Energy for approval (Petroleum Act s. 4-2, para. 1). The PDO consists of two parts: the plan for development and operation tout court, and an impact assessment. The plan contains an account of economic, resource, technical, safety-related, commercial and environmental aspects, as well as information concerning how a facility may be decommissioned and disposed of when the petroleum activities have ceased. The impact assessment states reasons for the effects that the development may have on commercial activities and environmental aspects, including measures to prevent and remedy such effects. The impact assessment is carried out by the licensees on the basis of an assessment programme that has been submitted to and approved by the Ministry after having been on a public consultation (the Petroleum Regulations s. 22). The impact assessment itself is also submitted to the Ministry and is subject to public consultation, normally for a three-month period (the Petroleum Regulations s. 22a). Also, included in this provision are more detailed requirements for issues that are dealt with in the impact assessment. These requirements reflect EU legislation on impact assessments that Norway is obliged to adhere to as a party to the EEA Agreement. If the area that is to be developed is already covered by a regional impact assessment or an existing PDO, upon examination the Ministry may exempt the licensees from the requirement to carry out a new impact assessment or to submit a new PDO (the VOLUME IV / HYDROCARBONS: ECONOMICS, POLICIES AND LEGISLATION 699

4 NATIONAL REGULATION OF THE HYDROCARBONS INDUSTRY Petroleum Act s. 4-2, para. 6 and the Petroleum Regulations s. 22a, para. 3). Until a PDO has been approved by the Ministry, the licensees may not enter into costly contractual obligations for the development without specific consent by the Ministry (the Petroleum Act, s. 4-2, para. 5). In addition, if the field in question extends across blocks covered by a production licence with different licensees, or across the median line of another State, no PDO will be approved until the field has been united. Thus, the Petroleum Act s. 4-7 states that the licensees in such situation are obliged to try to reach agreement on the most efficient way to conduct the petroleum activities in connection with the petroleum deposit, and on how the field shall be divided between the blocks or States in question. An agreement reflecting this is then submitted to the Ministry for approval. If the licensees of the relevant licences are unable to reach agreement within reasonable time, the Ministry has the authority to determine the conditions for such joint petroleum activities, including the apportionment of the petroleum deposit between the groups of licensees. If the field extends across the median line of another State, a treaty for the development between Norway and the State in question will also have to be agreed upon before the PDO may be approved. The approval itself is not given until the King in Council or the Storting, as appropriate, has accepted the development of the new field. The cost of the development decides whether it will be put before the King in Council or the Storting for acceptance. If the cost of the development is less than 10 billion NOK, the proposal is presented to the King in Council. If the cost is more than 10 billion NOK, the Storting must consider the development before it can be approved by the Ministry. This condition is due to the fact that in 1972 the Storting decided that any development of large fields on the continental shelf must be put before the Storting for consideration. In addition, if there is State participation in the field in question, the Storting may also need formally to approve the development in order to ensure that sufficient economic resources are channelled through the State budget to cover the State s share of the cost of the development. When the development of the new field entails construction of a pipeline from the field to transport the oil and/or gas production, or a facility for utilization of the oil and/or gas produced, the construction of such pipeline or facility may be considered as part of the PDO if the pipeline/facility is only meant to transport or process petroleum from the field in question to shore or to a larger trunk pipeline on the continental shelf. If, however, the licensees foresee that the pipeline or facility may also be used for the transport or utilization of oil or gas from other fields in the future, the construction of such pipeline/facility must be described in a separate PIO (Plan for Installation and Operation) (Petroleum Act s. 4-3). The PIO, like the PDO, consists of a plan for installation and operation of the pipeline/facility, and of an impact assessment (the Petroleum Regulations s. 28). The requirements for an impact assessment are the same for a PIO as for a PDO (Petroleum Regulations s. 28, para. 1). Pipeline for transport of petroleum or facility for utilization of petroleum produced In accordance with the Petroleum Regulations s. 28, para. 3, at the time of granting a licence to install and operate a pipeline for transportation of petroleum or a facility for utilization of petroleum produced, or at a later stage, the Ministry may: Stipulate tariffs for use of the pipeline/facility, with respect to both the licensee s own petroleum and a third party petroleum. Decide that the pipeline/facility is tied in with other pipelines/facilities, i.e. the capacity is increased, and/or the pipeline/facility is modified to be able to transport or process other types of petroleum than those for which it was originally built. Such decision must not, however, imply that costs are unduly raised or that the use of the pipeline/facility is unreasonably impeded as compared to the use that has been assured by the (former) approval of the Ministry. The Ministry further decides the costs of implementation of these decisions that are borne by the party or parties in whose favour the decision was made, or are taken into account when the tariff is stipulated. Decide which petroleum shall be transported in a pipeline. This decision may indicate that new petroleum is transported instead of petroleum which has already been assured transport in the pipeline from former approval by the Ministry. The Ministry authorizes the anticipated rate of production when the PDO is approved. In addition, the licensees are required to apply to the Ministry for a production permit when production actually starts, and thereafter annually. Production permits for gas are given for a longer period, which are stipulated in each production permit. The right to dispose of the petroleum produced The licensee becomes the owner of his share of any petroleum produced (the Petroleum Act s. 3-3, para. 700 ENCYCLOPAEDIA OF HYDROCARBONS

5 NORWAY 3). The title to such petroleum passes from the State to the licensee at the well-head. Oil and gas are marketed by each licensee on an individual basis. Crude oil is either transported through pipelines to shore or, most commonly, loaded on tankers offshore. Gas is transported through pipelines to onshore locations in Norway, the European continent (Germany, Belgium, France) or Great Britain. The upstream gas transportation system (around 6,000 km in length) is organized in a joint venture called the Gassled, which is owned by all the largest producing companies. Gassled is operated by the 100%-State-owned company Gassco, which has also been given the task of administering the regulated access regime that applies to Gassled (the Petroleum Act s. 4-9 and the Petroleum Regulations chapter 9). Under this regime, Gassco sees that all companies with a duly substantiated, reasonable need to transport gas from the Norwegian Continental Shelf are ensured the right to do so on non-discriminatory and objective terms. The tariffs for the use of Gassled are regulated in the Tariff Regulations, laid down by the Ministry on 1 January These regulations state that the owners of Gassled are ensured a profit on their investment of around 7% Operating conditions Term A production licence is awarded for an initial period (exploration period) and a prolongation period. The duration of both is stipulated at the time of award (the Petroleum Act s. 3-9). The initial period, in which the licensees are expected to carry out the work commitment they accepted as a condition for the award, may be maximum ten years. Normally, it is stipulated at five or six years. If the licensees find that they need more time to carry out their work commitment, they may apply to the Ministry for a prolongation of this period. The Ministry may then prolong the initial period within the time limit of ten years. An initial period may be prolonged several times within this ten-year time limit. The prolongation period is set individually for each production licence, but as a main rule it covers thirty years. It may, in particular cases, be set at fifty years (the Petroleum Act s. 3-9, para. 2). According to the Petroleum Act s. 3-9, para. 5, the Ministry may, in particular cases and on the basis of an application from the licensees, prolong the licence period for one or more periods after the expiry of the first prolongation period. Such application in this case must be submitted to the Ministry no later than five years before the expiry of the licence period. The Ministry in these cases is free to decide the length of the new prolongation period, and to set any necessary conditions for it. Area A production licence may cover one or several blocks or parts of blocks on the Norwegian Continental Shelf (the Petroleum Act s. 3-3, para. 2). The Ministry decides the number of blocks to be awarded in each licence. In mature areas, a production licence may cover several blocks, in certain cases between ten and twenty. Normally, however, a production licence covers one or two blocks. Licensees may also apply to the Ministry for a geographical division, including a horizontal division of the area of a production licence (the Petroleum Act s and the Petroleum Regulations s. 15, para. 2). In such case, the conditions applying to the original licence will also be applied to the new production licence covering the area that has been separated from the original one. Consequently, this geographical division of the area of a licence is not considered to be a new award. Rentals There is no obligation to pay a fee during the initial period of a production licence. The reasoning behind this lack of fee is that Norwegian authorities want the companies to use their financial resources to map the continental shelf and explore it, and not as cash payments to the Norwegian State. However, after the expiry of the initial period, the licensees are obliged to pay an area fee (the Petroleum Act s and the Petroleum Regulations s. 39). The area fee is calculated per square kilometre and is primarily meant as an instrument to make the licensees relinquish acreage where they have no activities. The fee for the first year is 7,000 NOK per km 2. Thereafter, the fee increases by 7,000 NOK per square kilometre per year until it has reached 70,000 NOK per km 2. Subsequently, the fee shall be 70,000 NOK per km 2 per year for the remaining duration of the production licence. However, this increase of the fee does not apply to production licences awarded in the Norwegian part of the Barents Sea. Thus, to stimulate activities here, the area fee continues to be 7,000 NOK per km 2 for the whole prolongation period. Relinquishment The prolongation of the licence period after the expiry of the initial period is a right conferred upon the licensees under the Petroleum Act (the Petroleum Act s. 3-9, para. 3). However, the right to require a prolongation of the licence is subject to fulfilment of two conditions: the VOLUME IV / HYDROCARBONS: ECONOMICS, POLICIES AND LEGISLATION 701

6 NATIONAL REGULATION OF THE HYDROCARBONS INDUSTRY licensees must have carried out the work commitment they accepted as a condition for the award of the licence, and a defined part of the acreage originally awarded must be relinquished. As a main rule, half the acreage of the production licence is relinquished upon prolongation of the licence period (the Petroleum Act s. 3-9, para. 3). The exact percentage to be relinquished is stipulated in the licence at the time of award. This issue is negotiated between the Ministry and potential licensees as part of the award process. During the initial period, the licensees may at any time, and on three months notice, relinquish their production licence in whole or in part (the Petroleum Act ss and 3-15 and the Petroleum Regulations s. 15). In the prolongation period, the licensees may relinquish their production licence in whole or in part at the end of each calendar year, and on three months notice. The Ministry may require that all obligations that have been accepted by the licensees be fulfilled before any relinquishment takes place. The form and size of the licence area after relinquishment is subject to approval by the Petroleum Directorate. Work and/or expenditure commitments As a condition for the award of a production licence, the licensees must accept to carry out a work commitment during the initial licence period (the Petroleum Act s. 3-8 and the Petroleum Regulations s. 13). The work commitment is formulated by the Ministry as an obligation to carry out a certain amount of work in the licence area within a stipulated time limit. Expenditure commitments are not used in Norway because the best geological mapping and exploration of the continental shelf is believed to be obtained through clearly defined work commitments. The work commitment is often formulated so as to oblige the licensees to carry out a defined seismic activity and to drill a defined number of exploration wells. This drilling obligation may be for the drilling of a number of firm wells, or for the drilling of one or more firm wells and one or more wells that are conditional upon the result of the previously drilled exploration well. In mature areas, the work commitment may also be formulated so that the licensees get a defined number of years to decide whether or not they want to take on a drilling obligation. If they then decide not to take on this obligation, the whole area of the licence must be relinquished at once. In such areas, the work commitment may also state that the licensees must submit a PDO for a field before the expiry of the initial period. If no PDO is submitted to the Ministry within the set time limit, the whole licence must be relinquished. If a PDO is submitted within the set time limit, the licensees may keep the area surrounding the field in the prolongation period. The rest of the acreage must then be relinquished. The reasoning behind these types of work commitments is to guarantee that acreage in mature areas is circulated between companies fairly quickly, thereby ensuring that acreage is considered from many different geological angles and at an active pace. Royalty and bonuses The licensees are not obliged to pay royalty on production. Such an obligation existed in the early years of petroleum activities in Norway, but was repealed for production from fields for which the PDO was approved after 1 January Today, the payment of royalty is being phased out altogether as unnecessary. Nor are the licensees obliged to pay any signature bonus for the award of a licence (reconnaissance licence, production licence or a licence to install and operate a pipeline) State participation through a state oil company or otherwise State participation in the Norwegian petroleum activities started by the establishment of the 100%-owned, joint-stock company Statoil in Statoil was to have a 50% participating interest in all production licences awarded after However, due to the numerous discoveries that were made in the subsequent years, the Storting saw that this policy would result in Statoil growing to enormous proportions within a very short time. Thus, in 1984 the Storting decided that Statoil s 50% share in all joint ventures was to be divided in an underlying relationship between Statoil and the State. One part (on average: 20%) was to continue to be owned directly by Statoil, and one part (on average: 30%) was to be owned directly by the Norwegian State. The State s underlying part of the Statoil share was not to be a company; it was simply a stream of money going out of and into the State. The share was called the State Direct Financial Interest the SDFI. All costs and revenues connected with the SDFI were covered directly by the Norwegian State. Statoil continued formally to be the licensee for the whole 50% share. Thus, Statoil was the manager of the SDFI 702 ENCYCLOPAEDIA OF HYDROCARBONS

7 NORWAY on behalf of the State. This role implied that Statoil voted on all commercial matters in the joint ventures on behalf of the SDFI. Further, Statoil marketed the oil and gas produced from the joint shares together with its own production. In 2001, Statoil was partly privatized and its shares were listed on the Oslo and New York Stock Exchanges. At the same time, the existing arrangement concerning the SDFI was changed. A 100%-State-owned company, Petoro AS (Petoro), was established for the sole purpose of managing the SDFI portfolio. Its tasks and responsibilities are regulated in a new chapter eleven of the Petroleum Act. As manager of the SDFI, Petoro is formally the licensee for the SDFI share in all joint ventures (production licences, pipelines and other facilities, as appropriate). Petoro is not to become an operator of a joint venture, and its activities are to be solely on the Norwegian Continental Shelf unless otherwise decided by the King in Council. When the Norwegian State decides to reserve a share for itself in a new production licence (the Petroleum Act s. 3-6 and the Petroleum Regulations s. 12), Petoro becomes the manager of the new share as well. Petoro does not apply for production licences in licensing rounds. Statoil has been obliged by the State to continue to market the State s share of petroleum produced, together with its own petroleum. The State has at the same time obliged Petoro to monitor Statoilì s marketing activities on behalf of the State Fixing the price of oil or gas for tax and other purposes Within fifteen days after expiry of each quarter, details of the quantities of petroleum which have been sold during this period, to whom they have been sold, and at what price are submitted to the Ministry (the Petroleum Regulations s. 49). The Regulations laid down on 25 June 1976 on the fixing of norm prices stipulates that norm prices on petroleum (in practice: crude oil) may be fixed for tax purposes. The norm price corresponds to the price the crude oil could have been traded for between independent parties in a free market. The norm price is fixed retroactively for each quarter. The Ministry has authorized a Petroleum Price Council to fix the norm price. The Council is chaired by a Supreme Court Justice. Companies have the right to file a complaint to the Ministry regarding the Council s decision on the norm price for a specific kind of crude oil. The Ministry may set aside the norm price in question on the basis of the complaint or, if it for some reason becomes clear that the norm price is wrong, on its own account. As regards gas, the Petroleum Regulations s. 19 requires that all gas sales contracts are subject to approval by the Ministry. Thus, profits from gas sales are taxed on the basis of the obtained price Fiscal structure The Norwegian government petroleum tax system consists of a company tax (28%), a special petroleum tax (50%), a CO 2 tax, area fees, the revenues from the SDFI and dividends from Statoil (the State s share of the company is presently 70.9%). The tax provisions are laid down in the Petroleum Tax Act 13 June 1975 No. 35. Profit tax is paid by all companies earning revenue from the conduct of petroleum activities in Norway, irrespective of their country of registration. As previously mentioned, however, the Petroleum Act states that production licences may only be awarded to companies registered within the EEA. Thus, all licensees on the continental shelf are subject to taxation in Norway. The taxation system is so structured that there is full consolidation of income and expenses (no ring fencing). All expenses incurred by a licensee from the petroleum activities are tax deductible. Investments are depreciated at a high rate (six years), and financial costs may be deducted against both the corporation tax and the special petroleum tax. The special petroleum tax is paid when companies earn their income from the petroleum activities. Licensees are allowed an uplift against the special petroleum tax, implying that they may deduct 30% of the investment (7.5% each year over four years). Losses may be carried forward with a risk free interest, which is reimbursed if activities cease. Companies which are not in a position to pay the special petroleum tax may each year claim reimbursement of the tax value of exploration expenses from the government. The Act of 21 December 1990 No. 72 pertaining to fees on discharges of CO 2 in the petroleum activities obliges the licensees to pay a fee to the State on discharges of CO 2 resulting from the burning of petroleum and from natural gas discharged to the air as part of the petroleum activities on the continental shelf. This fee, called the CO 2 tax, is to be paid retroactively every six months and is a cost that can be deducted against the corporate tax and the special petroleum tax. The rate of the fee for 2005 has been set at 0.78 NOK per litre petroleum or Sm 3 of natural gas. VOLUME IV / HYDROCARBONS: ECONOMICS, POLICIES AND LEGISLATION 703

8 NATIONAL REGULATION OF THE HYDROCARBONS INDUSTRY The petroleum contract and the parties thereto Concession Petroleum activities in Norway may only be carried out by other bodies than the Norwegian State if they have been awarded the necessary licence (the Petroleum Act s. 1-3). Exploration, development and production require a production licence. This is a kind of concession awarded by the Norwegian State to qualified oil companies (foreign or national). As a condition for the award, licensees are required to enter into two agreements between them: a Joint Operating Agreement and an Accounting Agreement. These agreements are model agreements formulated by the Ministry of Petroleum and Energy. Companies may also carry out prospective work under a reconnaissance licence, and they may install and operate pipelines and facilities for the utilization of petroleum under a specific licence granted to them by the Ministry for this purpose. Production sharing agreements, risk and non-risk service contracts and technical assistance contracts are not used in the petroleum activities in Norway. Investment protection In Norway, petroleum activities are regulated by public law, mainly the Petroleum Act, the Petroleum Taxation Act 13 June 1975 No. 35 and the Public Administration Act 10 February 1967, which apply to all decisions made by Norwegian authorities and which affect companies undertaking petroleum activities. No legislation applicable to the petroleum activities differentiate between nationals and foreigners. All investors and investments in the petroleum activities are treated equally, irrespective of nationality. As part of the EU internal energy market, Norway is also obliged to apply the principles of transparency, objectivity and non-discrimination as regards nationality to all authority decisions made concerning petroleum activities. The State has a right to take over a facility on the continental shelf when a licence expires, is surrendered or revoked, or when the use of such facility has been permanently terminated (the Petroleum Act s. 5-6, para. 1). If a licensee s onshore facilities are expropriated by the State, the licensee is fully compensated (the Norwegian Constitution s. 105 and the Petroleum Act s. 5-6, para. 3). Environmental protection Environmental protection in the petroleum activities is regulated by the act pertaining to protection against pollution and on discharges (the Pollution Act 13 March 1981 No. 6), under the responsibility of the Ministry of Environment and its subordinate body, the State Pollution Control Authority (SPCA). As a main rule, any activity in Norway that may result in pollution is subject to a permit from the SPCA (the Pollution Act, s. 11). Thus, petroleum activities are subject to a specific permit. Such permit is given, upon application from the licensees, for the relevant kind of pollution that may result from the petroleum activities, including discharges into the sea and the air. The environmental authorities may stipulate any necessary conditions when such permit is given. This system of integrated pollution control is in accordance with the European directive on Integrated Pollution Prevention Control (IPPC) 96/61/EC. According to the Petroleum Act chapter seven, liability for pollution damage in the petroleum activities may only be claimed in accordance with the Petroleum Act. As a main rule, the licensee is strictly liable for any pollution damage that occurs from the petroleum activities (s. 7-3). In the act, pollution damage is defined as damage or loss caused by pollution as a consequence of petroleum leakage or discharge from a facility, including a well. It also includes costs of reasonable measures to avert or limit such damage or loss, as well as damage or loss as a consequence of averting measures. Damage or loss incurred by fishermen as a consequence of reduced possibilities for fishing may also be subject to compensation from the licensees. Claims for pollution damage are initially directed to the operator. If the claim is left unpaid in whole or in part, the other licensees of the joint venture are directly responsible for the full payment of the claim (the Petroleum Act s. 7-3, para. 2). Currency regulation There is no currency regulation in Norway. This lack of regulation implies that Norwegian Kroner may be freely converted into any foreign currency and vice versa, without any restriction as to the amount. However, certain acts have been passed for the purpose of preventing and controlling whitewashing of profits resulting from illegal transactions: see for instance the Act of 20 June 2003 No. 41 pertaining to measures against whitewashing of profits resulting from illegal actions. This act obliges relevant legal persons and institutions, such as banks, insurance companies and finance institutions, to report suspicious transactions to the police for further investigation. 704 ENCYCLOPAEDIA OF HYDROCARBONS

9 NORWAY Applicable law All petroleum activities in Norway are regulated and carried out under Norwegian law. This practice also follows from the Petroleum Act s. 1-5, where it is stated that any relevant Norwegian laws and regulations other than the Petroleum Act shall be applied in the petroleum activities, as appropriate. Further, a condition for the award of a production licence and a licence to install and operate a pipeline or other facilities is that the relationship, and any disputes between licensees and their contractors, be regulated by Norwegian law. This condition, among others specifically stated in the Joint Operating Agreement and the Accounting Agreement, requires licensees to enter into a relationship between themselves upon the award of a production licence. As a consequence of this requirement, licensees must see to it that all contracts for deliveries of goods and services necessary for the performance of petroleum activities under licence are also regulated by Norwegian law Dispute settlement Disputes between two licensees in a group of licensees (joint venture), or between two or more groups of licensees are settled, as a rule, by arbitration and in accordance with Norwegian law. This condition is stipulated in the model Joint Operating Agreement that is entered into by the licensees as a condition for the award of a production licence. However, if the parties to the dispute so agree, the dispute may be brought before the Norwegian courts of law. The same will apply to a joint venture owning and operating a pipeline on the Norwegian Continental Shelf. A dispute between the Ministry of Petroleum and Energy (or another Ministry, as may be appropriate) and the licensees concerning, for instance, a decision according to the Petroleum Act, will normally be tried before the ordinary courts of law. This is a three-tier system, with City or District Courts, Appellate Courts and the Supreme Court. Mette Gravdahl Agerup Ministry of Petroleum and Energy Oslo, Norway VOLUME IV / HYDROCARBONS: ECONOMICS, POLICIES AND LEGISLATION 705

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