A $14 Billion Legal Test Is Latest Threat to Norway's Oil Future

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(Bloomberg) -- Norway’s oil industry has one more thing to worry about.

After an unprecedented lawsuit against Arctic drilling, environmentalists have launched a new legal battle to challenge a tax incentive that’s been a cornerstone of the country’s policy to stimulate oil exploration.

The move comes at a bad time for Norway, which needs to step up up the search for new resources if it wants to avoid a sharp output decline from the middle of next decade. It adds to existing headwinds for the country’s biggest industry, which has emerged stronger from a bruising slump but is facing an intensifying debate over its sustainability.

At stake is a tax mechanism that allows unprofitable oil companies to claim 78 percent of exploration costs as a cash refund, instead of deducting the expenses over time. The government has paid out 109 billion kroner ($14 billion) since 2005 to explorers such as Lundin Petroleum AB and Repsol SA. It helped attract more companies to Norway, nearly doubling the pace of exploration and leading to key discoveries such as the multi-billion-barrel Johan Sverdrup field.

Environmental group Bellona last year filed a complaint to the EFTA Surveillance Authority, a watchdog that makes sure Norway complies with European Union rules. Should ESA decide the refund is illegal state aid, oil companies would need to return some of the cash and Norway dismantle the program.

“It would be serious,” Petroleum and Energy Minister Terje Soviknes said in an interview. “We need more exploration activity.”

Climate activists are increasingly turning to the law to fight the oil industry. Greenpeace has also sued Norway -- unsuccessfully so far -- to stop licenses in the Barents Sea. Opponents say the exploration refund encourages the search for oil the world can’t afford to burn.

Read more about the debate over Norway’s oil future

ESA will by the end of the year decide on whether to formally investigate, which could take 12 to 18 months, Gjermund Mathisen, the director of competition and state aid, said in an email. Norway could appeal in the case of a loss. It has rebuffed claims that the program constitutes illegal aid, most recently in a Feb. 9 letter to ESA.

Erling Hjelmeng, a law professor at the University of Oslo, puts the probability of Norway losing at more than 50 percent. “This is pretty open,” he said in a phone interview.

But the financial impact would be limited since the amount companies would be forced to return would likely be much lower than what has been paid out since 2005, according to Hjelmeng and Oyvind Olimstad, a partner at law firm Selmer Advokatfirma DA.

That’s because the financial advantage is limited to the value of getting an immediate refund rather than a later tax deduction, they said. Many of the companies are also now paying taxes, making them eligible for deductions that would even out the slate.

‘Great Loss’

But a loss would hurt exploration.

Activity would “undoubtedly” drop, said Graham Stewart, chief executive officer of Faroe Petroleum Plc, a London-listed company that’s recouped 2.8 billion kroner since 2006. Faroe is “all but immune” because it will soon be in a tax-paying position, but it would make Norway less attractive to new entrants and could make some companies leave, he said.

“It would be a great loss,” Stewart said in an interview. “It’s worked really well for Norway.”

Norway would then need to look at other measures to compensate, Soviknes said.

One example of how the tax rule has served Norway is the success of Lundin. Backed by the refund, the Swedish company was able to test new exploration theories and eventually in 2010 discovered Sverdrup, Norway’s biggest oil find in decades.

Since 2005, Lundin has received about 6.5 billion kroner in refunds. But it’s also paid more than 25 billion kroner in taxes -- and expects to pay 200 billion kroner more by 2040.

©2018 Bloomberg L.P.

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