Fossil Fuels â€“ At What Cost?

www.globalsubsidies.org

Fossil Fuels – At What Cost? Government support for upstream oil

and gas activities in Norway

JANUARY 2012

Prepared by:

Pöyry Management Consulting (Norway) AS (Econ Pöyry)Frian AarsnesPetter Lindgren

For the Global Subsidies Initiative (GSI) of the International Institute for Sustainable Development (IISD)Geneva, Switzerland


THE GLOBAL SUBSIDIES INITIATIVE FOSSIL FUELS – AT WHAT COST? GOVERNMENT SUPPORT FOR UPSTREAM OIL AND GAS ACTIVITIES IN NORWAY Page III

Fossil Fuels – At What Cost? Government support for upstream oil and gas activities in Norway

JANUARY 2012

Prepared by:

Pöyry Management Consulting (Norway) AS (Econ Pöyry)Frian AarsnesPetter Lindgren

For the Global Subsidies Initiative (GSI) of the International Institute for Sustainable Development (IISD)Geneva, Switzerland


THE GLOBAL SUBSIDIES INITIATIVE FOSSIL FUELS – AT WHAT COST? GOVERNMENT SUPPORT FOR UPSTREAM OIL AND GAS ACTIVITIES IN NORWAY Page IV

© 2012, International Institute for Sustainable Development

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International Environment House 29 chemin de Balexert1219 ChâtelaineGeneva, SwitzerlandTel: +41 22 917-8373Fax: +41 22 917-8054Website: www.globalsubsidies.org

Fossil Fuels – At What Cost? Government support for upstream oil and gas activities in Norway

January 2012

Prepared by

Pöyry Management Consulting (Norway) AS (Econ Pöyry)

Frian Aarsnes

Petter Lindgren


THE GLOBAL SUBSIDIES INITIATIVE FOSSIL FUELS – AT WHAT COST? GOVERNMENT SUPPORT FOR UPSTREAM OIL AND GAS ACTIVITIES IN NORWAY Page V

ACKNOWLEDGEMENTS

The Global Subsidies Initiative (GSI) wishes to thank the authors, in particular Frian Aarsnes and PetterLindgren, for preparing this in-depth and complex research report. Peter Wooders and Kerryn Lang at the GSIprovided guidance on the direction of the research project.

The report also greatly benefited from the expertise of its peer reviewers:

• Anders Bjartnes, Norwegian Climate Foundation

• Doug Koplow, EarthTrack

• Jorgen Randers, Norwegian Business School

• Svend Søyland, Bellona Foundation

The work of the GSI could not have been undertaken without the generous support of the governments ofDenmark, Norway and the United Kingdom.

The views expressed in this study do not necessarily reflect those of the GSI’s funders, nor should they beattributed to them.


THE GLOBAL SUBSIDIES INITIATIVE FOSSIL FUELS – AT WHAT COST? GOVERNMENT SUPPORT FOR UPSTREAM OIL AND GAS ACTIVITIES IN NORWAY Page VI

TABLE OF CONTENTS1. Executive Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22. Approach and Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

2.1 Objective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

2.2 Scope . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

2.3 Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

2.4 Subsidy: A Definition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

2.5 Taxation in Norway . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

2.5.1 The General Taxation System for Enterprises in Norway. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

2.5.2 The Petroleum Taxation System in Norway . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

2.6 Discount Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

2.7 Resource Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

2.8 Option Value and Future Decisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

2.9 Currency and Petroleum Unit Definition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

3. Overview of the Petroleum Industry in Norway. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

3.1 Petroleum Production: Volume and Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

3.2 Petroleum Investments: Exploration Activity, Field Development and Petroleum Extraction . . . . . . . . . . . . . . . . . . . 22

3.3 Petroleum Industry Structure and Governance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

3.4 Taxation of Petroleum Assets: A Valuable Revenue for the Norwegian Government and Society. . . . . . . . . . . . . . . . . 26

4. Discussion of Potential Subsidy Policies in Norway . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

4.1 Government Transfers of Funds and Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

4.1.1 Government Spending on State Direct Financial Investment and Petoro. . . . . . . . . . . . . . . . . . . . . . . . 30

4.1.2 Public Infrastructure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

4.1.3 Research and Development Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

4.1.4 Emergency Preparedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

4.1.5 The Case of a Major Disaster: Insurance Subsidies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

4.2 Public Provision of Goods and Services at Below-Market Prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

4.2.1 Seismic Investigations by the Norwegian Petroluem Directorate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

4.2.2 Gassco Infrastructure and Facilities Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

4.2.3 The Guarantee Institute for Export Credit and Government Credit Guarantees. . . . . . . . . . . . . . . . . . . . 36

4.2.4 Eksportfinans and Favourable Long-Term Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

4.3 Government Revenue Foregone: Potential Preferential Treatment of the Oil and Gas Industry in the Fiscal System . . 36

4.3.1 Government Coverage of 78 Per Cent of Expenditures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

4.3.2 Loss Carried Forward with Interest Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

4.3.3 Guaranteed Reimbursement of Loss Carried Forward . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

4.3.4 Exploration Reimbursement to Exploration Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

4.3.5 Fast Deduction of Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

4.3.6 Liquefied Natural Gas in Northern Norway: The Case of Snøhvit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42

4.3.7 Uplift: An Additional Investment Subsidy? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44

4.3.8 Transfer of Production Licences. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

4.4 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45


THE GLOBAL SUBSIDIES INITIATIVE FOSSIL FUELS – AT WHAT COST? GOVERNMENT SUPPORT FOR UPSTREAM OIL AND GAS ACTIVITIES IN NORWAY Page VII

5. Impact Assessment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

5.1 Seismic Investigations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

5.2 Research and Development Programs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

5.3 Gassco as a Non-Profit Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

5.4 Emergency Preparedness. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

5.5 Loss Carried Forward with a Risk-Free Interest Rate and Guaranteed Reimbursement . . . . . . . . . . . . . . . . . . . . . . . 48

5.6 Exploration Reimbursement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

5.7 Fast Deduction of Investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

5.8 Liquefied Natural Gas in Northern Norway: The Case of Snøhvit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50

5.9 Comparison with Statistics Norway’s KVARTS Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51

6. Summary and Conclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 547. References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 588. Further Reading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61Appendix A: Value of Subsidies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62

A.1 Government Transfers and Public Provision of Goods and Services at Below-Market Prices. . . . . . . . . . . . . . . . . . . . 62

A.2 Non-Profit Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62

A.3 Subsidies with a Critical Time Perspective: An NPV Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62

A.4 Quantifying the Exploration Reimbursement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63

Appendix B: Impact Assessment of a Removal of Potential Investment Subsidies . . . . . . . . . . . . . . . . . 66

B.1 Data. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66

B.1.1 Production Data. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67

B.1.2 Investment Data. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67

B.1.3 Government Revenue Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67

B.1.4 Petroleum-Related Employment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67

B.1.5 Environment Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69

B.2 Methodology for Calculating the Effects of Investment Subsidy Removal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70

B.2.1 Investment Impacts on Production . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70

B.2.2 Investment Impacts on Employment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70

B.2.3 Production’s Impact on Government Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71

B.2.4 Production’s Impact on Employment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71

B.2.5 Impact of Production on the Environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71

About the Authors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72


THE GLOBAL SUBSIDIES INITIATIVE FOSSIL FUELS – AT WHAT COST? GOVERNMENT SUPPORT FOR UPSTREAM OIL AND GAS ACTIVITIES IN NORWAY Page 1

ACRONYMS AND ABBREVIATIONS

GDP gross domestic product

GSI Global Subsidies Initiative

IISD International Institute for Sustainable Development

KVARTS a statistical model employed by Statistics Norway (quarterly data)

LNG liquefied natural gas

MODAG a statistical model employed by Statistics Norway (annual data)

NCS Norwegian continental shelf

NOK Norwegian kroner (currency)

NPD Norwegian Petroleum Directorate

NPV net present value

R&D research and development

Sm3 standard cubic metres

Sm3oe standard cubic metres oil equivalent

WTO World Trade Organization



1. EXECUTIVE SUMMARY

In this report we investigate potential subsidies to the upstream oil and gas industry in Norway. Norway hasa 50 per cent special tax on petroleum activities that is intended to capture the so-called resource rent,which is defined as the return over and above normal profits from oil and gas activities. Norway gives licencesto oil and gas companies under the express understanding that the state, through this special tax, capturesthis resource rent. Thus, this report assumes that what profits the oil and gas companies retain are normalprofits. To the extent that mechanisms in the petroleum tax favourably affect normal profits, these mechanismscan constitute fiscal subsidies to the oil and energy industry relative to other industries that draw on thesame resources.

We investigated 17 policy areas and identified nine subsidies that are offered to the oil and gas industry (fournon-fiscal and five fiscal). The value of these subsidies in 2009 was around 25.5 billion Norwegian kroner(US$4 billion), but the total value is probably slightly higher, as not all the subsidies have a value calculation.The value will also differ from year to year due to the nature of the subsidies and the underlying assets andassumptions. This value is based on a calculation of the potential subsidies in isolation from one another andfor the most part restricted to one year. A multi-year calculation would show a reduction in subsidies overthe years.

The definition we use for subsidy is the one established by the World Trade Organization (WTO), with furthersubcategorization by the Global Subsidies Initiative. This report does not take a position on whether possiblesubsidies are negative or positive, only whether a subsidy exists, its most likely value and the potential effectof removing it.

In table 1.1 (next page) we show the possible subsidies we have identified, as well as our attempt at calculatingtheir value for 2009.



TABLE 1.1: SUBSIDIES IDENTIFIED AND ESTIMATED FOR UPSTREAM OIL AND GAS ACTIVITIESIN NORWAY

Is it a Size of subsidy Section Expenditure/policy subsidy? (million NOK)

Transfer of funds or liabilities

4.1.1 Government spending on SDFI and Petoro No

4.1.2 Public infrastructure No

4.1.3 Research and development programs Yes 216

4.1.4 Emergency preparedness Yes N/A

4.1.5 Insurance subsidies No

Provision of goods and services at below-market prices

4.2.1 Seismic investigations by the Norwegian Petroleum Directorate Yes 257

4.2.2 Gassco infrastructure and facilities services Yes 24

4.2.3 Guarantee Institute for Export Credit and government credit guarantees No

4.2.4 Eksportfinans and favourable long-term financing No

Government revenue foregone

4.3.1 Government coverage of 78 per cent of expenditures No

4.3.2 Loss carried forward with interest rate Yes N/A

4.3.3 Guaranteed reimbursement of loss carried forward Yes N/A

4.3.4 Exploration reimbursement to exploration companies Yes 4,024

4.3.5 Fast deduction of investments Yes 20,812

4.3.6 Liquefied natural gas in Northern Norway: The case of Snøhvit Yes 181

4.3.7 Uplift: An additional investment subsidy No

4.3.8 Transfer of production licences No

We performed an impact assessment for the removal of three of the largest fiscal subsidies: the explorationreimbursements, the investment deductions and the Snøhvit field. In table 1.2 we show what the grossimpact on government revenue, employment and carbon dioxide emissions would be if these fiscal subsidieswere removed. Removing the investment deductions, which are estimated to be NOK 20.812 billion in2009, would likely reduce government revenue from petroleum taxes by about 5.3 per cent, employment inthe oil and gas sector by 0.3 per cent and national carbon dioxide emissions by 1 per cent. Removing theexploration reimbursements, estimated at NOK 4.024 billion in 2009, would likely reduce governmentrevenue from petroleum taxes by 2.9 per cent, employment in the oil and gas sector by 0.2 per cent andnational carbon dioxide emissions by 0.5 per cent. In the case of the Snøhvit field, if it had not beensubsidized, we estimate the overall impact would have been to reduce government revenue from petroleumtaxes by 13.2 per cent, employment in the oil and gas industry by 0.7 per cent and national carbon dioxideemissions by 2.4 per cent.



TABLE 1.2: OVERVIEW OF SUBSIDY REMOVAL IMPACT ASSESSMENT, NPV AND NPV ASPERCENTAGE OF 2010 VALUES

NPV of middle NPV as(6%) estimate percentage of

Impact on: Subsidy type in million NOK 2010 values*

Government revenue Investment deduction –8,479 –5.3%(petroleum taxes)

Snøhvit –21,012 –13.2%

Exploration reimbursement –4,647 –2.9%

Employment Investment deduction –6,933 –0.3%

Snøhvit –19,204 –0.7%

Exploration reimbursement –4,004 –0.2%

CO2 emissions (million tonnes) Investment deduction –0.6 –1.0%

Snøhvit –1.4 –2.4%

Exploration reimbursement –0.3 –0.5%

*We calculated government revenue lost if the investment deduction were removed as a percentage of the total petroleum tax revenue in 2010(Ministry of Finance, 2011), employment effects as a percentage of total labour years from 2010 (data from Statistics Norway, 2011) and theimpact on carbon dioxide emissions as a percentage of the 2010 data from Klima-og forureiningsdirektoratet (Klif, 2011).

We estimate that removing the non-fiscal subsidies would have almost zero direct effect or very unpredictableindirect effects. Removal of the research and development (R&D) subsidy would most likely have zero impacton oil and gas activity itself, and thus no impact on government revenue, employment or carbon dioxideemissions, but consequences could be unpredictable for research programs and research institutions.

The purpose of this report is not make recommendations as to whether the subsidies should be removed ormaintained, but to improve transparency regarding subsidies provided to the oil and gas industry in Norway.Whether or not the benefits from such policies are large enough to justify the existence of the subsidies is aquestion for public debate.

The report also identifies areas where the government can improve transparency of information about subsidyexpenditures.



2. APPROACH AND METHODOLOGY

This study is the third in a series collectively termed Fossil Fuels – At What Cost? by the Global SubsidiesInitiative of the International Institute for Sustainable Development (IISD). This study is preceded by studieson Indonesia (Braithwaite et. al., 2010) and Canada (Sawyer & Stiebert, 2010).

2.1 OBJECTIVE

This study attempts to identify, quantify and assess subsidies to upstream oil and gas activities in Norway.

In economic theory, subsidies contribute to waste and economic inefficiency. They can distort economicdecision-making, and in consequence, resources (such as labour, natural resources and real capital) may beused in a non-optimal way. Thus, the potential costs of subsidies to society can be large. With petroleumbeing a very versatile but non-renewable resource and a fossil fuel contributing to carbon dioxide emissions,we should pay particular attention to possible distortions in economic decision-making affecting oil and gasproduction and consumption. Also, the oil and gas industry constitutes an important part of the Norwegianeconomy, and it is in the interest of policy-makers, organizations and the public in general to have a widerand deeper knowledge of potential subsidies to the Norwegian oil and gas industry.

By defining policies as subsidies, it is not our purpose to be normative. The latter word has, over decades,acquired negative connotations. Instead, our characterization of policies as subsidies to the oil and gas industrymerely follows from the WTO’s definition of a subsidy (defined in section 2.4). This definition does not addresswhether a subsidy contributes to a negative, undesired distortion in the economy or to a desired outcomefollowing clear policy decisions, where any negative distortions have been reviewed and accepted as anecessary side effect. In this study, we do calculate the effects of removing the subsidies, but we do notpropose such removal. Subsidy removal or changes to the fiscal and regulatory regime in a democratic countryare subject to democratic processes. Instead, this study is to inform people about the fiscal and regulatoryregime within which the Norwegian oil and gas industry operates. The study sheds light specifically onsubsidies and the benefits and costs of their removal.

2.2 SCOPE

By oil and gas industry, we refer to the upstream petroleum industry: companies that deal with explorationdrilling, development of petroleum fields and extraction of petroleum resources. Hereafter, we call this industrythe oil and gas industry. We exclude the service and supply industry.

The scope of this study is to identify subsidies in accordance with our definition, measure the most likelyvalue of such subsidies and, if possible, assess the effect of removing them.

In the study, we examine subsidies to the production of oil and gas in Norway. We do not look at subsidiesrelative to other countries. Furthermore, we do not take into consideration the fact that subsidies to industriesother than the oil and gas industry may alter the prices of goods and services that the oil and gas industry inNorway uses.

Moreover, we do not consider the fiscal aspects of the tax system as a whole. In other words, we do notcalculate the need for the Norwegian government to find other sources of revenue and whether these newmeasures to increase the revenue cause larger waste or distortion than the subsidies identified.



We calculate non-fiscal subsidies directly, and fiscal subsidies in relation to the general tax system applied inNorway to normal profits in other energy and extractive industries (renewable and mining, respectively). Thus,we measure fiscal subsidies to the oil and gas industry assuming that a general fiscal system is in place thatcitizens and enterprises have internalized in their decision-making processes. We assume that in a well-functioning modern state, this tax system has, over time, been optimized to balance services that can beprovided by the enterprises themselves and services that form public goods that all enterprises can use.

It is not within the scope of this study to try to establish an optimal tax system or tax rate for either the oil andgas industry or for Norway in general.

2.3 METHODOLOGY

The general framework of the report is as follows:

1) In chapters 2 and 3, we formulate the framework for the study, describe the fiscal framework inNorway, and describe the oil and gas industry in Norway.

2) In chapter 4, we identify possible subsidies, discuss and categorize them, and conclude whether theidentified possible subsidies actually are subsidies. Where we conclude that a subsidy exists, wecalculate the value of the subsidy for 2009. We chose the year 2009 because we do not have datafor later years.

3) In chapter 5, we analyze the impact of removing three fiscal subsidies. For each, we analyze threeimpacts: on government revenue, employment and emissions.

The oil and gas regime in Norway includes a range of potential subsidies, which display differentcharacteristics. For some of the subsidies, calculating impacts of removal is difficult. We have therefore takena more thorough look at removing subsidies related to investments and to exploration activity. These investmentsubsidies are also of the largest value.

The companies have, over time, adjusted to optimize their use of manpower, real capital and know-how onthe Norwegian continental shelf (NCS). The government has made laws and rules regarding emission control,risk avoidance and other regulatory issues. In this study, it is also relevant to ask what will happen incompanies’ decision-making if some of the government policies are changed—that is, how companies willrespond to a removal of subsidies.

The impact of policy removal on decision-making is hard to forecast. There are several alternative ways forestimating behaviour under different government regulations. Instead of creating structural models that canpredict business behaviour, we identify reasonable assumptions on how business behavior changes with neweconomic conditions where a subsidy is removed. Then, to evaluate the impact of our assumptions, we includetwo more scenarios: high and low.

The approach in this study is to use both general activity level data and more specific petroleum industrydata. Several advantages can be mentioned: first, data for the general petroleum activity (production,investments, employment, revenues) in Norway contributes to an overall understanding of the activity in theindustry and the impact on the Norwegian economy in general. Second, data on exploration activity, volumesdiscovered, field development costs and production, etc. are important inputs to understand the Norwegianpetroleum activity at a deeper level. Both are important in order to evaluate potential subsidies correctly withinthe industry itself and in the wider perspective of the national economy of Norway.



Statistics Norway has two general-equilibrium models: MODAG (based on annual data) and KVARTS (basedon quarterly data). These econometric models can predict the influence of increases or decreases in petroleuminvestments on important macroeconomic indicators. Since we are also measuring the effects of a reductionin investments, we include the most interesting results from Eika et al. (2010) at the end of section 5. TheStatistics Norway results can thus be a supplement to this study’s results.

Figures 2.1 and 2.2 illustrate two investment subsidies and one exploration subsidy, respectively, which weidentified and for which we conducted an impact assessment of subsidy removal. The sequential process thatstarts with removal of investment subsidies reduces the level of investments. From economic theory, we knowthat businesses maximize their profits. In any given time, a company adjusts to its external businessenvironment. Thus, if the environment (other competitors, customers, oil prices, government rules andregulations, etc.) changes, we know that business behaviour changes. But exactly how is hard to forecast.However, in the case of subsidy removal, we know that either the level of investments will decrease or theinvestments will be conducted at a later date. When investment is on hold or reduced, it will affect theproduction of hydrocarbons. And again, when the level of production goes down, the level of emissions,government revenue and employment will decrease. It may also be that less investment leads to less efficientuse of existing infrastructure, which could lead to greater investments at a potential future time when resourcesare developed.

FIGURE 2.1: EFFECTS FROM EXTRA INVESTMENT: EMPLOYMENT, GOVERNMENT REVENUEAND EMISSIONS

FIGURE 2.2: EFFECTS FROM EXTRA EXPLORATION ACTIVITY: EMPLOYMENT, GOVERNMENTREVENUE AND EMISSIONS



People are employed in all the areas represented in the figures: exploration, investments and production. Themodelling is static and does not take into consideration how capital, labour and resources will be allocated toother areas. However, the model produces a clear picture of what reduction we may see in the oil and gasindustry if a subsidy is removed. In addition, we will use the Statistics Norway results from KVARTS to showa more dynamic picture of the Norwegian economy.

In the appendices, we describe in more detail the methodologies for valuation and subsidy removal assessment.

2.4 SUBSIDY: A DEFINITION

This study examines potential subsidies to the oil and gas industry in Norway. Opinions differ on what theconcept of a “subsidy” encompasses. We base this study on the WTO’s definition, including the GSI’ssubcategorization of this definition. The subsidy definition is based on the WTO’s Agreement on Subsidiesand Countervailing Measures, to which 153 countries have agreed. Under Article 1: Definition of a Subsidy,the Agreement determines that four types of potential subsidies exist, where:

1. Government provides direct transfer of funds or potential direct transfer of funds or liabilities.

2. Revenue is foregone or not collected.

3. Government provides goods or services or purchases goods (at other than market prices).

4. Government provides income or price support.

The Agreement also requires that a subsidy be specific to an enterprise, industry, or group of enterprises orindustries under Article 2.

When applying the definition, it helps to consider whether preferential treatment is provided to the subsidizedparty (in this case petroleum explorers and producers). The GSI (2010a) states that preferential treatmentcan be provided in three forms:

1. To selected companies inside an industry (market level).

2. To one sector or product when compared with other sectors (national level).

3. To sectors or products in one country when compared internationally (global level).

The third form is not part of this study (as defined in section 2.2).

Based on the WTO’s definition above, the GSI has developed subcategories of subsidies that form theframework for identifying subsidies in the oil sector in Norway (table 2.1). Not all of these subcategories arenecessarily relevant to the oil sector in Norway, as this study will reveal, but rather form a comprehensiveframework for identifying and analyzing subsidies in any country. This framework provides the basis for theInitiative’s series of country case studies, Fossil Fuels – At What Cost?, which identify and quantify subsidiesto upstream oil and gas activities. In the table, we show which subcategory the possible subsidies we identifiedbelong to.



TABLE 2.1: THE GSI TYPOLOGY OF ENERGY SUBSIDIES UNDER THE WTO SUBSIDY DEFINITION

Direct andindirecttransfer offunds andliabilities

Governmentrevenueforegone

Direct spending Earmarks: special disbursements targeted at the sector.

Agency appropriations and contracts: targeted spending onthe sector through government budgets.

Research and development support: funding for researchand development programs.

Government ownership of Security-related enterprises: strategic petroleum reserve;energy-related enterprises securing foreign energy shipments or key assets.

Municipal utilities and public power: significant publicownership of coal- and natural gas-fired electricity stations;some transmission and distribution systems for bothnatural gas and electric power.

Credit support Government loans and loan guarantees: market or below-market lending to energy-related enterprises, or to energy-intensive enterprises such as primary metals industries.

Subsidized credit to domestic infrastructure and powerplants.

Subsidized credit to oil- and gas-related exports.

Insurance and Government insurance/indemnification: market or below-indemnification market risk-management/risk-shifting services.

Statutory caps on commercial liability (can confersubstantial subsidies if set well below plausible damagescenarios).

Occupational health Assumption of occupational health and accident liabilities.and accidents

Environmental costs Responsibility for closure and post-closure risks: facilitydecommissioning and cleanup; long-term monitoring;remediation of contaminated sites; natural resourcerestoration; litigation.

Waste management: avoidance of fees payable to dealwith waste.

Environmental damages: avoidance of liability andremediation to make the environment whole.

Tax breaks and Tax expenditures: tax expenditures are foregone tax special taxes revenues, due to special exemptions, deductions, rate

reductions, rebates, credits and deferrals that reduce theamount of tax that would otherwise be payable.

Overall tax burden by industry: marginal tax rates are lowerthan other industries.

Exemptions from excise taxes/special taxes: excise taxes onfuels; special targeted taxes on the energy industry (e.g.,based on environmental concerns or “windfall” profits).




TABLE 2.1: THE GSI TYPOLOGY OF ENERGY SUBSIDIES UNDER THE WTO SUBSIDY DEFINITION(CONTINUED)

Provision ofgoods orservices belowmarket value

Income or pricesupport

Government-owned Process for mineral leasing: auctions for larger sites; sole-energy minerals source for many smaller sites.

Royalty relief or reductions in other taxes due onextraction: reduced, delayed or eliminated royalties arecommon at both federal and provincial levels. Royaltiestargeted based on type of energy, type of formation,geography or location of reserve (e.g., deep water).

Process of paying royalties due: allowable methods toestimate and pay public owners for energy mineralsextracted from public lands.

Government-owned Access to government-owned natural resources or land: at natural resources or land no charge or at rates below fair market value.

Government-owned Use of government-provided infrastructure: at no charge or infrastructure below fair market prices.

Government procurement Government purchase of goods or services for above-market rates.

Government-provided Government-provided goods or services at below-market goods or services rates.

Market price support Consumption mandates: fixed consumption shares for and regulation total energy use.

Border protection or restrictions: controls on imports orexports leading to unfair advantages.

Regulatory loopholes: any legal loophole, either in thewording of a statute or in its enforcement, that transferssignificant market advantage and financial return toparticular energy-market participants.

Regulated prices set at below-market rates: for consumers(including where there is no financial contribution bygovernment).

Regulated prices set at above-market rates: includinggovernment regulations or import barriers.

Sources: Braithwaite et. al. (2010); Sawyer and Stiebert (2010).



2.5 TAXATION IN NORWAY

This section is broken into two parts: the first provides an overview of the general taxation system in Norway,and the second examines the petroleum taxation system in more detail.

2.5.1 THE GENERAL TAXATION SYSTEM FOR ENTERPRISES IN NORWAYIn this section, we briefly look at the some of the main aspects of the general taxation system for enterprisesin Norway.

The general tax system in Norway was overhauled in 1992. Before that, the general tax rate was 50.2 percent, and the system contained a substantial number of deductions and loopholes. The overhaul in 1992was meant to be revenue-neutral for the government, and it is thus possible to see the difference between thegeneral tax rates before and after the overhaul as a reflection of the value of these deductions and loopholes.In connection with the overhaul, the general tax rate was reduced from 50.2 per cent to 28 per cent. After1992 the Norwegian general tax system became mainly cash-based when dealing with deductions for costs,with the exception of tax depreciation on fixed assets.

Taxation and accounting is based on general economic theory that matches costs with their associated revenuesat the correct time. This general matching principle leads to two outcomes: (1) it allows for economicconsequences with different timing to be presented as one economic value, using discounting (whencalculating net present values (NPVs), internal rates of return, break-even economics, and so on), and (2) itallows for allocation of (parts of) an investment as a deduction against the future revenues the investmentmay generate (used when establishing depreciation mechanisms).

For accounting purposes, one tries to directly match an investment against future revenues through the chosendepreciation methods using an allotment type of thinking (an even distribution of cost against the revenue ofeach period or each unit). However, in Norway the tax depreciation generally takes into greater account thefall in value of an asset over time. Thus, the general tax system in Norway has a system of declining balanceratios for various classes of assets to reflect the reduction in value over time. The percentage varies and isdecided on the basis of the expected decrease in value over the economic lifetime of the investment.Depreciation starts when the investment (cash) has been made. Table 2.2 shows the deduction rates fordifferent types of investments.



TABLE 2.2: DEDUCTION RATES FOR DIFFERENT TYPES OF INVESTMENTSInvestment type Deduction rate (%)

Office machines, etc. 30

Goodwill (acquired business value) 20

Trailers, buses, trucks, etc. 20

Personal cars, machines and furniture 20

Ships, rigs, etc. 14

Airplanes, helicopters 12

Facilities for transfer and distribution of electrical power and electro-technical equipment for power enterprises 5

Buildings and facilities, hotels, etc. 4

Business buildings 2

Fixed technical installations in buildings 10

Data source: Bedin Company Information (2011).

The general tax system allows deduction of all costs, including interest on debt, against revenue. Sale ofassets leads to a gain-and-loss calculation for tax purposes, with some assets that cross international bordersoften (like rigs) having formalized rules for loss of value that occurs while in Norway. These rules do notcorrespond with the declining-balance method of depreciation.

The general tax system does not include a carbon tax, but there are carbon dioxide emission quotas.

The general tax system allows losses to be carried forward without interest should an enterprise experience aloss during the establishment phase, due to price fluctuations or due to market loss.

Taxes are paid in equal installments before and after December 31, resulting in December 31 being the dateof the “average” tax payment. There is no ringfencing of individual investments within a company, and thereare mechanisms that allow for pre-tax transfer of profits from one company within a group to cover losses inanother company within Norway.

A detailed tax code makes for small deviations, but the description above covers the main rules affectinglarge investment decisions under the general tax system.

2.5.2 THE PETROLEUM TAXATION SYSTEM IN NORWAYIn this section, we look at petroleum taxation in Norway as it is differentiated from the general tax system inthe Petroleum Tax Act.

Establishing an oil and gas company in Norway is substantially different from establishing an enterpriseoutside the petroleum industry. Oil and gas companies need to be pre-approved in order to carry out businesson the Norwegian continental shelf (NCS). Pre-approval gives these companies the right to apply for licencesunder a discretionary concession system administered by Norwegian authorities. These companies are alsosubject to a strict control system with regard to issues such as health, safety and the environment, monitoredby the Petroleum Safety Authority, and to taxation by the Oil Taxation Office.



The fiscal system changed along with the general tax system in 1992. Before 1992 the oil and gas companieshad a general tax rate of 50.2 per cent, in line with other companies. There was also a special tax on oil andgas companies of 30 per cent, for a total marginal tax rate of 80.2 per cent. The tax system overhaul in 1992was meant to be tax neutral, but while most companies saw a reduction in their general tax rate from 50.2 percent to 28 per cent, when deductions were taken away, the oil and gas companies found their special tax rateraised to 50 per cent. This meant that the total tax rate for the oil and gas companies went from 80.2 percent to 78 per cent, while many of the deductions allowed under the previous tax system were removed. Thusfor all practical purposes, the 1992 tax reform made the tax system harsher for oil and gas companiesin Norway.

The following are some features of the tax system for petroleum companies:

• The general tax rate is the same as for other enterprises, 28 per cent.

• A special tax rate of 50 per cent is laid on top of the 28 per cent to capture the resource rent.

• To protect normal profits from being taxed with the 50 per cent special tax, there is a 7.5 per centuplift on investments each year for four years (totalling 30 per cent), which can be deducted againstthe tax base before the special tax of 50 per cent is applied.

• Declining-balance depreciation is only used for land-based activities. All investments on the Norwegiancontinental shelf have a six-year straight-line depreciation from and including the year the investment(cash) was made, except the Snøhvit liquefied natural gas (LNG) plant, which has a three-year straight-line depreciation from the year of investment.

• The petroleum tax system allows deduction of all (cash) costs against revenue, including interest ondebt. However, the interest allowed is limited to that which is assumed to have relevance for thepetroleum investment. There is thus an allocation rule that splits any interest into two deductibles: onedeductible is allowed against the 78 per cent marginal tax rate for petroleum investments, and theother is allowed against the 28 per cent marginal tax rate for enterprises in general. This latter is to bededucted either against onshore revenue or against the 28 per cent offshore tax base, should the oiland gas company not have onshore activities.

• Sale of assets leads to a gain-and-loss calculation for tax purposes onshore, but all sales of assets onthe NCS lead to a tax-free gain or a non-deductible loss. The tax value of the transferred asset(s) istransferred to the buyer, and the buyer is not allowed tax deductions for a higher amount than the taxvalue transferred.

• The petroleum system does not include a carbon tax, but there are carbon dioxide quotas.

• There is a loss carry-forward in the petroleum tax system, as in the general tax system. Unlike thegeneral tax system, however, oil and gas companies accrue interest on the loss each year.

• Taxes are paid in equal installments before and after December 31, resulting in December 31 beingthe date of the “average” tax payment. There is no ringfencing of individual investments within acompany, but there is ringfencing against onshore investments. Half of onshore losses are allowed tobe transferred and deducted against the 28 per cent petroleum tax.

In addition to the petroleum tax system, Norway also has state participation in the petroleum industry: the so-called state direct financial investment, administered by the state-owned company, Petoro. The state directfinancial investment is a participant on equal footing with other oil and gas companies. It pays its own shareof operating costs and investments, and it receives 100 per cent of the revenues from its share of fieldsin production.



Summing up, the petroleum industry faces a different investment environment than other industries. Whileenterprises in general can deduct an investment with a declining rate over a long period, petroleum enterprisescan deduct an investment linearly over a short period (six years). In addition, the oil and gas company receivesa tax shield against the full tax rate through the 30 per cent uplift mechanism on investments. In table 2.3we show the basic structure of the Norwegian petroleum tax system.

TABLE 2.3 NORWEGIAN PETROLEUM TAX SYSTEMOperating income (norm price)

Operating expenses

Linear depreciation for investments (6 years)

Exploration expenses, R&D and decommissioning

CO2 tax, NOx tax and area fee

Net financial costs

= Corporation tax base (tax rate: 28%)

Uplift (7.5% of investment for 4 years)

= Special tax base (tax rate: 50%)

Data source: Ministry of Petroleum and Energy (2010a).

We see that the industry can deduct an investment in two phases. First, the industry can take a lineardeduction over a six-year period (one-sixth each year), up to a total of 78 per cent of the costs. Second, thereis a linear deduction called “uplift”: 30 per cent of investments over a four-year period, deducted against thespecial tax rate of 50 per cent. This represents 15 per cent of the investment in total. This system of deductionis very different from how other industries deduct investments and allows for 93 per cent payback over sixyears. This fast payback needs to be seen in the context of the high tax rate of 78 per cent, as these elementswere enacted and balanced against each other. The fast payback allows the oil and gas companies to free upfunds faster than an enterprise onshore, and thus allows the oil and gas company to reinvest the funds earlierthan other enterprises would be able to.

All other industries deduct investments using the declining-balance method, with a certain percentage eachyear. Thus, the deduction is relatively large in the first years, but the absolute value of the deductionopportunity decreases over time. If the petroleum industry were subject to the ordinary tax accounting laws,their investment deduction profile would change significantly. The petroleum industry has many differentinvestment components, ranging from long-lived platforms to ships and rigs. In this study, we use a 10 percent average deduction rate as the alternative deduction system for the petroleum industry. This is a blend ofthe 14 per cent floating rig rate, the fixed 10 per cent technical installation rate, and the lower rates of 5 percent and 4 per cent for power plants and industry facilities, respectively. An offshore installation would mostlikely fall within this 4 to 14 per cent range, and we have chosen a rate of 10 per cent—an average close toor equal to the fixed technical installation rate. With the alternative declining balance method, the deductionperiod is longer and the yearly deduction is lower than in the petroleum tax system. The investment deductionrules are favourable for the petroleum industry, and other industries do not receive the same favourabletreatment (although the hydropower sector has similar regulations).1

1 It is, however, not obvious that this is a subsidy, since these deduction rules are part of the rationale for higher tax rates on the petroleum industrythan on other industries. These rules are used to reduce the gap between the mathematically expected monetary value of an exploration decisionand the utility curve of the various oil and gas companies.



2.6 DISCOUNT RATES

To take the time perspective into account, economists apply discount rates on costs and revenues in thefuture. The discount rate then reflects the alternative cost of capital, labour, resources, etc. In the governmentmanual on cost-benefit analyses, the Ministry of Finance (2005) has set forth 2 per cent as the government’sstandard base real rate of return for risk-free projects. The Ministry states that the individual risk involved ina particular project does not increase the total risk for society at large, because the sum of projects will nullifythe individual risks. However, the Ministry argues that if a project is exposed to systemic risk, the discountrate should be higher than the risk-free rate. For instance, if an investment project is sensitive to the activityin the global economy, the project is not free from systemic risk.

The Ministry advises applying a 4 per cent discount rate for normal projects with systemic risk, but statesthat each project needs to consider applying different discount factors. The Ministry states that it is difficultto decide the specific rate of return. In the case of petroleum-related upstream investments, a project isexposed to systemic risk. Given the size of these investments and the size of the government’s revenue fromthis industry, investments in the petroleum upstream industry are increasing the systemic risks to theNorwegian government and society. The demand and supply of petroleum, the price of petroleum, politicalcircumstances and developments around the world are factors that will change the income stream frompetroleum upstream projects.

Considering the systemic risks involved in petroleum upstream industries, we have chosen to calculate thegovernment’s NPV of petroleum activity with a 6 per cent real rate of return. This is a choice based on thefact that, for instance, infrastructure projects usually have a 4 per cent real discount rate. We believe petroleumactivity is more exposed to systemic risk than such projects, though we do not know exactly how much. Thus,we have applied a rather conservative (low) discount rate.

Companies approach investment decisions differently than does the government. They are also concernedabout the individual risks of the project: problems such as drilling a dry well, the geological characteristics ofa reservoir being different from what the companies thought before production development, or needing toclose the processing facilities due to maintenance earlier than anticipated. Therefore, in the petroleum industryit is usual to calculate drilling, development plans, projects, etc. with a discount rate between 7 (state) and15 (oil major) per cent. The higher the discount rate is set, the more the company favours the present incomparison with the future. If a company has other high-profit projects on their hands, the expected returnon the investment under scrutiny needs to be high to justify the capital expenditures. We apply a 9 per centreal discount rate in a normal case. For more aggressive companies, we calculate projects based on a 12 percent discount rate.

Given that losses are allowed to be carried forward indefinitely, that they are carried forward with interest andthat they are reimbursed when a business closes (to the extent that they have not been taken against futurerevenues), it is arguable that both the government and the companies should use a risk-free discount rate.

TABLE 2.4: REAL DISCOUNT FACTORS FOR GOVERNMENT AND PETROLEUM COMPANIESMiddle

Discount factor Low (expected) High

Government 4% 6% 8%

Petroleum companies 6% 9% 12%

Data source: Ministry of Finance (2005)



2.7 RESOURCE RENT

Extraction of petroleum resources is for the most part highly profitable—more profitable than normal economicactivity. The difference between normal return on endowments, real capital, labour and natural resources andthe special return on certain resources is termed resource rent.

In figure 2.3, we show the result of a Statistics Norway analysis. The result suggests that the resource rentaccounts for almost half of the value of the production in the petroleum sector.

The existence of the resource rent in the oil and gas industry has influenced the shape of the petroleum laws.First, as described in section 2.5.2, the oil and gas industry falls under special taxation laws. Second, thepetroleum laws create a distance between oil and gas activity and other industrial activities to enable thecompanies to capture and distinguish what belongs to each taxation sphere by itself.

FIGURE 2.3: RESOURCE RENT, PETROLEUM INDUSTRY AND SUPPLY INDUSTRY RELATIVE SHARESOF GDP, 2010

Data source: Cappelen et al. (2011)

2.8 OPTION VALUE AND FUTURE DECISIONS

According to the Ministry of Finance, the government should calculate the alternative to production today,which is either to wait for better timing of production or to never produce. Since consumption of non-renewableresources is irreversible, investments conducted to produce petroleum have irreversible consequences; forexample, produced and consumed hydrocarbons cannot be produced and consumed again.2 Such investmentshave an “option value” for waiting. The option value increases with the future’s ability to provide technologicalimprovements or higher demand/decreased supply of petroleum (i.e. a higher price). Thus, the Ministry statesthat it is important to take option values into account. The guideline suggests looking critically at the time ofmaking an investment.

Petroleum production is an industry that deals with large uncertainty factors in many investment decisions.Future prices of petroleum, competition from other petroleum-producing areas, or new technologicaldevelopments are examples of factors that contribute to a large uncertainty related to future market conditionsfor Norwegian petroleum resources.

We do not attempt to calculate the value of waiting. But it is important to be aware of the fact that suchwaiting has an intrinsic value.

2 Although changing technologies or higher prices can make “depleted” fields productive again.



2.9 CURRENCY AND PETROLEUM UNIT DEFINITION

The study presents numbers in Norwegian kroner (NOK), but for readers not familiar with the Norwegiandomestic economy, figure 2.4 shows the value of British pounds sterling (GBP), U.S. dollars (USD) and euros(EURO) over the last 10 years. In the petroleum industry, the most significant currency is the USD. A rule ofthumb can be to divide the NOK numbers by six to get USD.3

FIGURE 2.4: THE VALUE OF THE NORWEGIAN KRONE (NOK) IN COMPARISON WITH MAJORCURRENCIES

Data source: Norges Bank (n.d.)

The Norwegian Petroleum Directorate (NPD) uses the term standard cubic metres (Sm3) to quantify petroleumresources. In international contexts, it is standard procedure to use barrels of oil instead of Sm3. However, itis usual to refer to gas in Sm3, by using the gas resource unit of billion cubic metres.

Table 2.5 (next page) shows the conversion factors among units.

3 With a reservation: the value of currencies is exposed to constant change, and the future value is hard to forecast. For instance, the financial crisishad profound impact on the volatility of the exchange rates (also due to the small size of the Norwegian economy and the dependence on rawmaterials). The value of NOK per USD changed from approximately five to seven right after the fall of Lehman Brothers.



TABLE 2.5: CALCULATION FACTORS FOR DIFFERENT TYPES OF RESOURCES INTO OIL EQUIVALENT,AND GAS MEASUREMENTS

Resource type Oil equivalent GasBarrel Sm3 Tonne Barrel Sm3 Cubic feet

Oil

1 barrel – 0.16 0.19 – – –

1 Sm3 6.29 – 1.19 – – –

Condensate

1 barrel – 0.16 0.19 – – –

1 Sm3 6.29 – 1.19 – – –

LNG

1 tonne 11.95 1.90 2.26 – – –

1 Sm3 6.29 – 0.84 – – –

Gas

1,000 barrels – 0.16 – – 159 5,612

1,000 Sm3 6.29 – – 6,290 – 35,300

1,000 cubic feet 0.18 0.03 – 178 28 –

Data source: Ministry of Petroleum and Energy (2011).



3. OVERVIEW OF THE PETROLEUM INDUSTRY IN NORWAY

Petroleum resources are important to the Norwegian economy and government. The first hydrocarbons on theNCS were discovered in 1969. From its beginning, the petroleum sector has grown to become the mostvaluable industry in Norway in terms of share of GDP and government revenue. We examine here the industry’sproduction and investments, as well as the government revenue it produces. We see from figure 3.1 that thepetroleum sector accounts for a large share of the most important macroeconomic indicators: GDP, governmentrevenue, investments and exports.

FIGURE 3.1: THE IMPORTANCE OF THE PETROLEUM SECTOR, 2010

Source: Adapted with permission from Norwegian Petroleum Directorate (NPD, 2010)

3.1 PETROLEUM PRODUCTION: VOLUME AND VALUE

Petroleum production has a 40-year history in Norway. As seen in figure 3.2, petroleum production hasincreased every year from the 1970s to the early 2000s. The total production peaked in 2004.

FIGURE 3.2: PRODUCTION OF OIL, GAS, LNG AND CONDENSATE, 1971–2010

Data source: NPD (n.d.)

The production of petroleum in Norway has been in a transformation phase throughout the 2000s. While oilproduction has experienced a large decrease in the last ten years, gas production has more than doubled,resulting in the NCS becoming more of a gas-producing area. From a relatively low level of gas production onthe NCS in 2000, in 2010 gas production surpassed oil in volume (figure 3.3, next page).



FIGURE 3.3: OIL AND GAS PRODUCTION, 2000–2010

Data source: NPD (n.d.).

As can be seen in figure 3.4, the value of petroleum production in Norway is large. It peaked in 2008, dueto high demand and high prices, when the total production value of the petroleum industry was nearly 700billion NOK (2010 prices). In relative terms, as a share of total GDP, the petroleum industry constituted over20 per cent for almost every year of the 2000s. Figure 3.4 shows that the value of petroleum production hasfluctuated more than has the production volume. The reasons for this are principally the change in oil andgas prices as well as the currency differences between the NOK and the USD.

FIGURE 3.4: TOTAL PRODUCTION OF PETROLEUM AND SHARE OF GDP, 1970–2010

Data source: Statistics Norway (2011).

Domestic consumption of the oil and gas produced on the NCS is very low. Most of the hydrocarbon productionis exported. While the oil is loaded on oil tankers and sold on the world oil market, the gas is traded in theregional European marketplace. The gas is transported through a gas pipeline grid that connects to the UnitedKingdom, France, the Netherlands, Belgium and Germany. Figure 3.5 (next page) shows that as a share oftotal exports, the value of petroleum exports has fluctuated between 30 and 50 per cent since the late 1980s.Currently, petroleum exports make up 50 per cent of total exports. Again, the prices of oil and gas and theUSD relative to NOK are important factors in explaining the variation over the years compared with production(figure 3.4).



FIGURE 3.5: PETROLEUM EXPORT AND SHARE OF TOTAL EXPORTS

*Includes crude oil and natural gas exports and exports of refined oil products.


Comparatively, Norway is a large exporter of oil and gas. In 2009, Norway was the eleventh-largest oil producerand the fifth-largest gas producer in the world (NPD, 2011). But due to its small consumption of its ownpetroleum products, Norway was the sixth-largest exporter of oil and second-largest exporter of gas in 2008.This is shown in figure 3.6.

FIGURE 3.6: EXPORTS OF OIL AND GAS (MILLION SM3 OF OIL EQUIVALENT), 2009

Data source: Ministry of Petroleum and Energy (2011).

Gas (million Sm3oe)

Oil (million Sm3oe)



3.2 PETROLEUM INVESTMENTS: EXPLORATION ACTIVITY, FIELD DEVELOPMENT ANDPETROLEUM EXTRACTION

Petroleum production requires large investments along all points of the value chain: exploration, development,production and transportation. As seen in figure 3.7, the investments have grown over time, to a peak at theend of the 2000s of around 120 to 130 billion NOK (2010 prices). Petroleum investments constitute between20 and 30 per cent of total Norwegian investments. Taking into account the petroleum industry’s share ofGDP and the fact that it is a capital-intensive industry, it is not surprising that petroleum investments accountfor such a large share of total investments.

FIGURE 3.7: PETROLEUM SECTOR INVESTMENTS AND SHARE OF TOTAL INVESTMENTS, 1970–2010


If we look closer into petroleum investments, we find that a shift has occurred on the NCS in the last 15years. In figure 3.8, we see two important changes. First, investments into fields in production have increasedtheir share relative to investments related to field development. Second, exploration investments haveincreased their share of petroleum investments, from approximately 10 per cent to 20 per cent.

FIGURE 3.8: PETROLEUM INVESTMENTS BY CATEGORY, 1995–2010




The reasons for these developments in the investment structure are as follows: as the NCS matures, thereservoirs are both smaller and harder to discover. Since the smaller discoveries are only economically viableas long as established infrastructure exists, companies are eager to find, develop and produce smaller fieldsbefore the existing infrastructure is abandoned. For instance, a small deposit of oil may only reach aneconomical threshold if it can be connected to a larger facility as a subsea tie-in. If the deposit is discoveredafter abandonment of the larger surrounding facilities, the value of the resources in the deposit will not justifylarge investments in a new platform. Thus, the relative share devoted to exploration will increase.

Because of this, the Norwegian government changed the petroleum tax laws in 2005 to increase explorationactivity and the number of companies participating. The older, giant fields on the NCS are maturing and needheavy investments to keep up the production as the reservoir depletes, and to increase the recovery rate. Also,the newer fields are smaller and cheaper in absolute terms. Thus, a shift from new field development toinvestments in already-developed fields is occurring.

The number of exploration wells has varied greatly over the years. Exploration surged in the 1980s, withslightly above 50 wells during the most active years. Since then, exploration activity has reduced over time(except for a few peaks), until a new surge started in 2006. From a historical low of 12 wells in 2005, theperiod from 2008 to 2010 has been one of the most active three years on the NCS, and 2011 also seems tobe a year with many exploration wells.

Figure 3.9 divides exploration wells into two categories: wildcats and appraisals. By drilling a wildcat, thecompany seeks to discover new petroleum reservoirs. With an appraisal well, the company tries to acquiremore knowledge about an already-discovered reservoir. The increase in drilling activity is highly correlatedwith a major increase in the oil price.

FIGURE 3.9: EXPLORATION WELLS, 1966–2010




3.3 PETROLEUM INDUSTRY STRUCTURE AND GOVERNANCE

The petroleum industry in Norway is upstream dominated. Midstream activities such as refining and chemicalproduction or energy generation are less prevalent. The country refines almost none of its own petroleum. Themajor midstream activity is the pipeline transport network of gas to continental Europe and the UnitedKingdom. Norway’s handful of onshore midstream facilities includes the Mongstad oil refinery and theTjeldbergodden methanol plant. There are limited plans for gas-to-power plants in Norway, but no large-scaledownstream use of gas. There are, however, some small-scale LNG plants and a large LNG plant in Melkøya,as well as limited LNG facilities and local gas distribution in the county of Rogaland.

The Norwegian government is of the opinion that revenue should be taken out at the upstream level. A norm-price system has been put in place for pricing of oil, while the pricing of gas is based on large-scale contractswith downstream buyers or hub prices in the United Kingdom or continental Europe. This means thatcompanies are taxed on a norm price instead of what is realized in the market. The system is in place to keepthe profits achieved in the oil and gas industry inside the fiscal system of this particular industry. With nomajor downstream activities in Norway it is essentially only in the mid-stream pipeline network where theeffect of this policy becomes apparent. Revenue from the pipeline system, owned by Gassled and operatedby Gassco (refer section 4.2.2), has been fixed by the Norwegian authorities, allowing Gassled to earn a 7 percent return on invested capital. Gassco recovers operating costs, but does not collect any revenue, fromcompanies transporting gas via the pipelines.

Access to petroleum resources has been strictly governed by Norwegian authorities since the start of petroleumactivities before 1970.

Norway established a petroleum administration early, with the Ministry of Petroleum and Energy and the NPDas main bodies, but also with Statoil as a national oil company. An old industry consortium, Norsk Hydro,established its own oil company, and another private company, Saga Petroleum, was also established. Until2000 these three companies and the large international majors were the primary actors on the NCS. Statoil,Norsk Hydro and Saga received preferential treatment for concession awards for a long time, and the largeinternational companies had to share technology, methodology and concepts with Statoil in the early part ofthe company’s history.

As integration with Europe increased, the preferential treatment receded, but it was not until around 2000and the privatization of Statoil (33 per cent is now publicly owned) that the preferential treatment ended.However, by this time Statoil had merged with the petroleum part of Norsk Hydro, which in turn had mergedwith the private Norwegian oil company Saga and had become all-dominant on the NCS, with 80 per cent ofthe operatorships there.

During the 1980s Statoil’s increasing power was recognized, and a significant portion of its petroleumresources were organized into a direct state ownership: the state direct financial investment, which sinceStatoil’s privatization in 2001 has been managed by a state-owned company, Petoro (established in 2001).Petoro does not have any operator duties and functions only as a partner in the licences it owns.

Between 2000 and 2005, the NCS was opened up generally for all types of oil and gas companies, as aconsequence of the Statoil privatization and the merger of the three dominant Norwegian companies (Statoil,Norsk Hydro and Saga). The NCS now hosts a multitude of companies, including traditional European utilitycompanies, but most of their activities are minor relative to the large international companies that enteredthe NCS during the 1960s and 1970s.



To participate in petroleum activity in Norway, a company needs to acquire production licenses. These regulatethe ownership structure of all aspects of petroleum upstream activity. The licence owners share the costs forexploration wells and for developing a discovery or a field, and also share the petroleum revenues. Figure3.10 shows that many companies compete on the NCS. The figure shows not the total number of licences onthe NCS, but rather the number of shares. Statoil and Petoro constitute the two largest participants in Norway.Also, large international companies such as Total, ExxonMobil, ENI and ConocoPhillips have large interestsin production licences. Note also that Petoro participates only as a licensee in the petroleum activity, not asan operator.

FIGURE 3.10: OPERATORS AND LICENSEE SHARE IN PRODUCTION LICENCES, MAY 2011


When it comes to producing fields, the company structure shows stability. Figure 3.11 (next page) shows thecompanies that own shares in producing fields. Again, Statoil and Petoro own the most fields. Then, theinternational majors own a substantial part of the fields. A majority of the companies, however, have ownershipin fewer than five fields.



FIGURE 3.11: SHARE IN PRODUCING FIELDS, OPERATOR AND LICENSEE, MAY 2011


3.4 TAXATION OF PETROLEUM ASSETS: A VALUABLE REVENUE FOR THENORWEGIAN GOVERNMENT AND SOCIETY

The Norwegian government has, from the time petroleum production began on the NCS, enforced a stricttaxation system for the petroleum industry. With a 28 per cent profit tax and a special 50 per cent petroleumprofit tax, as well as other taxes such as environmental taxes (e.g. on carbon dioxide or nitrous oxides) theNorwegian government receives large tax revenues from the petroleum industry.

In addition, the government owns 67 per cent of the largest company on the NCS, Statoil (formerly 100 percent government owned), and receives dividends from the company. Finally, the Norwegian government hasestablished a wholly owned company, Petoro, which manages the government’s direct ownership of licenceson the shelf—the state direct financial investment. Petoro is a special company that pays no taxes but transfers100 per cent of its profits directly to the government. Figure 3.12 (next page) shows the Norwegiangovernment’s income from different sources.



FIGURE 3.12: GOVERNMENT INCOME FROM PETROLEUM ACTIVITY, BY CATEGORY, 1998–2010

*SDFI = The state’s direct financial investment.

Data source: Ministry of Finance (2002; 2009).

As a share of the government’s income, total petroleum revenues constitute around a fourth (see figure 3.13).Thus, the petroleum industry is a very important contributor to the Norwegian government’s large surpluseson the national budgets.

FIGURE 3.13: GOVERNMENT’S TOTAL INCOME AND PETROLEUM INCOME, 2010

Data source: Ministry of Finance (2011).

The Norwegian government is relatively well-positioned among other European countries. In figure 3.14 (nextpage), we show the surpluses and deficits on the budgets of European governments in 2010.

75%

25%

Petroleum incomeIncome excluding petroleum income



FIGURE 3.14: DEFICITS AND SURPLUSES ON GOVERNMENT BUDGETS, IN PER CENT OF GDP,AMONG EUROPEAN COUNTRIES, 2010

Data source: European Commission (2011).

However, if we look beyond the petroleum industry’s contribution to the Norwegian government, the financialposition of the government changes. Adjusted for the large petroleum incomes, the Norwegian governmentruns a yearly deficit of almost 4 per cent of GDP. Figure 3.15 shows this.

FIGURE 3.15: PETROLEUM-ADJUSTED DEFICIT ON THE NORWEGIAN GOVERNMENT’S BUDGET,2002–2010

Data source: Ministry of Finance (2011).



Although the petroleum revenues contribute to a larger ability to spend money for welfare purposes, thesurpluses on the national budgets in the 2000s have been invested in the Government Pension Fund Globalto secure a strong and healthy financial position in the future. Figure 3.16 shows the historical developmentin value, but also the forecasted total value of the fund through the 2010s. Currently the fund consists ofobligations, stocks and property valued at around three trillion NOK, which is around 20 per cent more thanthe Norwegian GDP. It is estimated to double in the next 10 years.

FIGURE 3.16: VALUE OF GOVERNMENT PENSION FUND GLOBAL, HISTORICAL AND PROGNOSIS,2001–2020

*Prognosis

Data source: Norwegian Bank Investment Management (n.d.).



4. DISCUSSION OF POTENTIAL SUBSIDY POLICIES IN NORWAY

In this chapter, we analyze fiscal and regulatory policies to identify subsidies that exist in Norway. As pointedout in section 2.4, we examine the Norwegian economy for subsides with four different characteristics:



3. Government revenue is foregone or not collected.


We have investigated possible subsidies in the first three categories. We do not find any candidates for possiblesubsidies in the fourth category (government provides income and price support).

The categories below are possible subsidies. This means that we are highlighting the government policies andthen investigating whether or not the policy is a subsidy to the oil and gas industry. We have bolded ourconclusions to make chapter 4 easy to read.

4.1 GOVERNMENT TRANSFERS OF FUNDS AND LIABILITIES

Government transfers of funds and assumptions of liabilities distort the use of resources in the economycompared with a situation without such government subsidies.

4.1.1 GOVERNMENT SPENDING ON STATE DIRECT FINANCIAL INVESTMENTAND PETORO

The government in Norway owns many shares of production licences on the NCS. This ownership is termedthe state direct financial investment. Since its establishment in 2001, the wholly owned enterprise Petorohas been responsible for managing the government’s assets on the shelf, except for marketing and transportingpetroleum, which Statoil does on Petoro’s behalf. The budgets for administration of the state’s direct financialinvestment are transferred from the Ministry of Petroleum and Energy, but the cash flow is not spent on thepetroleum industry per se. It is the cost of managing the government’s own assets.

The choice to participate in licences (exploration, field development and petroleum production) is a way oftaxing resource extraction. Government expenditures on such a joint venture with other companies resemblea cash-flow type of taxation. Thus, spending through Petoro is a consequence of direct participation inpetroleum activity.

We conclude that this is a government investment and not a subsidy of the petroleum upstream sector.

4.1.2 PUBLIC INFRASTRUCTUREPublic authorities provide the petroleum industry with infrastructure, ranging from roads to railways, harboursand airports. But the infrastructure is publicly available and not built for the petroleum industry per se. Manyinfrastructure projects require user payments as well, at market rates. The petroleum bases serving the NCSare built by the oil and gas companies or service companies charging market rates for their use.

We conclude that publicly financed infrastructure is not a subsidy to the petroleum upstream industry.



4.1.3 RESEARCH AND DEVELOPMENT PROGRAMSResearch and development (R&D) is an important policy area for the Norwegian government. Norwayparticipates in a global trend to invest in human capital, increase the application of science in society anddevelop research areas with international excellence. Actually, one of the central traits of the modern state isthat it invests heavily in education and the sciences.

The petroleum industry invests in R&D to enable more efficient business operations and increase profits. R&Dis conducted in research institutes, universities and government institutions (such as the NPD and thePetroleum Safety Authority), but also in enterprises.

The Ministry of Petroleum and Energy supports the Norwegian Research Council with the means to offer sevenpetroleum-oriented research programs. Three of these programs are pointed toward petroleum production.Figure 4.1 presents government expenditures. The figure shows the contribution from the Ministry of Petroleumand Energy to petroleum-specific research programs.

FIGURE 4.1: CONTRIBUTIONS TO PETROLEUM-ORIENTED RESEARCH PROGRAMS

*Still subject to change, 2.5 per cent inflation.

Data sources: Ministry of Petroleum and Energy (2002–2009; 2010b).

4.1.3.1 DEMO 2000DEMO2000 was established in 1999. Its objective is threefold: first, the program supports new fielddevelopment through new and cost-efficient technology and new models for field development. Second, DEMO2000 encourages projects to stay on-budget. Third, the research program attempts to contribute to newNorwegian industrial products being exported to the global market.

The Ministry of Petroleum and Energy transfers the DEMO2000 budgets to the Norwegian Research Council,which then provides support to demonstration projects. The demonstration projects are conducted with thecooperation of petroleum companies, the supply industry and research institutions. Together with PETROMAKS(below), DEMO2000 was worth 182 million NOK in 2009 (2011 currency).

PetroSaMPETROMAKS & Demo 2000



4.1.3.2 PETROMAKSThe objective of PETROMAKS is to strengthen knowledge development, business development andinternational competitiveness. This ensures that PETROMAKS contributes to an increase in the value ofpetroleum resources to Norwegian society.

As with the DEMO 2000 program, the Ministry of Petroleum and Energy transfers the PETROMAKS budgetsto the Norwegian Research Council. The Research Council then grants and allocates the budgets to therecipients: universities, university colleges, research institutions and businesses. The PETROMAKS researchprogram aims at financing basic research (pure research/fundamental research) and applied research as wellas technological development.

The PETROMAKS research program was established in 2004. It is the largest petroleum-oriented researchprogram that the Research Council administers, worth 182 million NOK in 2009 (2011 currency) whencombined with DEMO2000.

4.1.3.3 PETROSAMThis research program’s objective is to contribute insights and knowledge about society, politics and theeconomy. This insight and knowledge are fundamental for strategies and policy-making for Norwegianauthorities and petroleum businesses. The program is focused on petroleum research in the social sciences.

PETROSAM has two goals. First, the program attempts to stimulate the development of a more stable,permanent and competent research environment in Norway in the field of social scientific petroleum research.The ambition is to develop strong professional groups of researchers that can compete internationally in theprogram’s themes. Second, PETROSAM is targeted to increase knowledge within these themes:

• Management of Norwegian oil and gas resources.

• International development trends and the value of Norwegian petroleum resources.

• Development in the main petroleum areas.

The Ministry of Petroleum and Energy finances the public share of the program. The Ministry transfers thePETROSAM budget to the Research Council, which then decides the recipients of the research resources.Universities and research institutions are the receiving institutions. Scholars and researchers apply toparticipate in relatively large research programs that the Research Council sets up.

PETROSAM was started in 2007 and continues until 2012. The program is a continuation of earlier programs:Oil and Society, Petro, Petropol I and Petropol II. Its value in 2009 was 10 million 2011 NOK.

Government financing of R&D to specific industries is a subsidy to the particular industry under the WTO’sdefinition. We conclude that the Norwegian government subsidizes the petroleum upstream industry with thethree R&D programs discussed above.

4.1.4 EMERGENCY PREPAREDNESSIn Norway, there is a high level of awareness of the risks stemming from the petroleum production industry.Disasters, petroleum spills, etc. can occur due to petroleum extraction, but there are other risks, as well,stemming from transportation of petroleum along Norway’s long coast. It is hard to separate the efforts fordecreasing exposure to potential disasters in the petroleum production industry and the exposure that stemsfrom other sources.



The responsibility for being prepared for petroleum disasters is split mainly between the industry andmunicipalities, with support from the state. If the scale of the disaster requires it, the government intervenesmore heavily to ensure the best treatment of the problem. The Coastal Administration is responsible on behalfof the government.

Data on the expenses of Norwegian municipalities are provided by Statistics Norway. However, the data aretoo aggregated to be valuable for our purposes. The municipalities’ total expenditures are divided into function,and data for all functions and municipalities are accessible from the Statistics Norway website. The functionsthat include expenditures for emergency preparedness for disasters, spills and so on from the petroleumproduction industry are termed “prevention of fires and other disasters” and “preparedness for fires and otherdisasters.”

As the Norwegian state and municipalities have expenditures tied to being prepared for and preventingpotential disasters and spills from the petroleum production industry, we conclude this is a subsidy. However,due to lack of data, we are unable to calculate its value.

4.1.5 THE CASE OF A MAJOR DISASTER: INSURANCE SUBSIDIESIn the case of a major disaster on the petroleum production facilities on the NCS, companies are required tofinance the clean-up operations. The question is then, what happens to the companies’ responsibility if one ofthe partners is not able to pay its share of the rescue and cleaning operations? The shareholders of a licenceare all responsible for the full costs in the case of disasters. Their responsibility is based on solidarity, whichmeans that if a company is not able to pay its share of the costs, the other shareholders must cover the expenses.

We conclude that the case of a major disaster is not a subsidy to the oil and gas industry, because thecompanies are responsible for the full cost of a major disaster.

4.2 PUBLIC PROVISION OF GOODS AND SERVICES AT BELOW-MARKET PRICES Government provision of goods and services at below-market prices is a form of preferential treatment to therecipient and is considered a subsidy within the WTO definition under the Agreement on Subsidies andCountervailing Measures.

4.2.1 SEISMIC INVESTIGATIONS BY THE NORWEGIAN PETROLEUM DIRECTORATEThe NPD conducts seismic investigations on the NCS on behalf of the Ministry of Petroleum and Energy. TheNPD has responsibility for investigating areas that are proposed to be opened for the petroleum industry. Forinstance, the continental shelf around Jan Mayen is currently being investigated. Also, an investigation of theareas previously disputed with Russia is planned for after the summer of 2011.

The objective of the seismic investigations is to get a better understanding of the geological and geophysicalcondition of the area under scrutiny. The information is for sale from the NPD, but the price only correspondsto the administration costs. Thus, the cost of the seismic investigations is covered by the Norwegiangovernment and is thus characterized as a subsidy to the oil and gas production industry. Information can bea public good as long as the data becomes freely available. Also, the information contributes to more efficientlicence-application rounds.



The Ministry of Petroleum and Energy transfers the necessary resources to the NPD, which is responsible forconducting the seismic investigations. The information from the investigations is publicly available, but israrely interesting for those not in the petroleum industry. For the petroleum companies, however, theinformation is of major interest. In particular, it improves the companies’ knowledge of which productionlicence to apply for and what to expect in the licence. Thus, it is reasonable to argue that the petroleumcompanies are the recipients of the seismic information that the NPD produces.

We conclude that the seismic investigations done by the NPD are a subsidy.

The NPD has conducted seismic investigations on the NCS since 1969, but the size of the budget variesbetween years. Since investigation of virgin areas constitutes the majority of the NPD seismic investigationbudgets, this subsidy is largest in the years when Parliament has decided to examine whether new areasshould be opened to petroleum activity.

Figure 4.2 shows the seismic investigation transfer from the Ministry of Oil and Energy to the NPD. We seethat the scope of the seismic investigations the NPD conducts on behalf of the Ministry of Petroleum andEnergy varies. In 2009 the subsidy constituted approximately 250 million NOK, while in 2010 and 2011,the Ministry of Petroleum and Energy transferred 20 million NOK.

FIGURE 4.2: SEISMIC INVESTIGATION SUBSIDIES, 2005–2011

*2010 and 2011 numbers may still be subject to change. 2.5 per cent inflation (2011).

Data sources: Ministry of Petroleum and Energy (2004–2009; 2010b).

Although the seismic investigations are a subsidy to the petroleum production industry, we do not assess theimpacts of a removal of this subsidy, as the cost of the seismic investigation is very small compared with theoverall activity of the oil and gas industry.

4.2.2 GASSCO INFRASTRUCTURE AND FACILITIES SERVICESGassco is an enterprise that administers and operates the gas pipeline grid and the onshore processing facilitiesin the North Sea and the Norwegian Sea. Gassco is wholly owned by the Norwegian government, and theMinistry of Petroleum and Energy is responsible for overseeing Gassco’s operations. When established in2001, the objective of Gassco was to secure an independent and neutral utilization and development of thenatural gas resources on the NCS.



Gassco owns neither the pipelines nor the processing facilities. Most of the gas pipelines and the twoprocessing facilities are owned by Gassled, a joint venture between 12 oil and gas companies operating onthe NCS. The Haltenpipe in the Norwegian Sea is, however, not part of the Gassled ownership structure.Traditionally, petroleum companies with gas fields built and owned gas pipelines. Lately, internationalinvestment funds have started to acquire shares in the gas pipeline grid.

Gassco is a non-profit enterprise. Thus, as the owner of the enterprise, the Norwegian government receivesno return on their business operations. The price for administration and maintenance of the midstream gasfacilities as well as the management of capacity and orders are lower than the market price. The recipientsof this non-profit organization are the upstream gas shippers or the upstream companies owning the gaspipeline grid and processing facilities. These companies pay less for transportation of gas to the Europeanmarkets—the tasks Gassco conducts—than they would if Gassco was a profit-seeking enterprise.

In other words, the government subsidizes the maintenance cost of the pipeline grid and processing facilities.The government has been involved in this subsidy since the establishment of Gassco in 2001. Although wehave defined only subsidies to the oil and gas industry as our scope, the non-profit management of the pipelinesystem directly affects the business of the shippers of gas from Norway.

Thus, we conclude that the Norwegian government provides a subsidy, because Gassco does not apply marketrates in its business activity.

Figure 4.3 shows the value of the Gassco non-profit-orientation subsidy. The value was calculated by assumingwhat profit Gassco could receive from its business. The profits are derived from the government’s discountfactors, discussed in section 2.6. In the middle scenario, the oil and gas industry is subsidized by 24 millionNOK in 2009.

FIGURE 4.3: GASSCO OPERATION COSTS AND PROFIT SUBSIDY

Data source: Gassco (2009; 2010; 2011).



4.2.3 THE GUARANTEE INSTITUTE FOR EXPORT CREDIT AND GOVERNMENT CREDITGUARANTEES

The Guarantee Institute for Export Credit provides guarantees for Norwegian companies’ exports andinvestments. The Institute issues guarantees on behalf of the Norwegian government. A daughter enterprisehas the responsibility of short-run credit insurance.

The Institute has a few industries as its main customers: the oil and gas supply industry, the maritime industryand the energy industry. However, the Institute has no customers from the oil and gas industry. Thus, there isno need to analyze either whether the Institute provides a subsidy or the size of the possible subsidy. In section2.2, we explained that we are only looking at subsidies that directly affect the oil and gas industry. The changein prices on inputs to the oil and gas industry from the subsidies offered to the suppliers of the oil and gasindustry is thus outside our scope.

We conclude that the Guarantee Institute for Export Credit’s provision of guarantees and credits are not asubsidy to the oil and gas production industry.

4.2.4 EKSPORTFINANS AND FAVOURABLE LONG-TERM FINANCINGEksportfinans is an export credit institution in Norway. The institution is owned by banks and the Ministry ofTrade and Industry on behalf of the Norwegian government. Eksportfinans provides long-term financing forNorwegian exporting firms.

The oil and gas sector constitutes 30 per cent of Eksportfinans’ total financing. However, these loans areprovided to support financing of rigs and other equipment. Eksportfinans thus only satisfies financing needsof the industry that supplies the oil and gas industry. Since we have defined our scope to constitute onlysubsidies to the oil and gas industry, we do not examine subsidies to other industries that in the end maychange the prices of the inputs to the oil and gas industry.

As Eksportfinans does not provide financing for the oil and gas industry, we do not consider Eksportfinanswithin this study.

4.3 GOVERNMENT REVENUE FOREGONE: POTENTIAL PREFERENTIAL TREATMENT OFTHE OIL AND GAS INDUSTRY IN THE FISCAL SYSTEM

As explained in section 2.5, the fiscal system differs between the oil and gas industry and the general fiscalsystem. In this section, we identify and measure the value of possible subsidies to the oil and gas industrystemming from the differences in the fiscal systems applied.

Below, we use the thorough description of the fiscal systems from section 2.5. We identify possible subsidiesthrough discussing the differences in the fiscal systems.

4.3.1 GOVERNMENT COVERAGE OF 78 PER CENT OF EXPENDITURESThe oil and gas industry faces a 78 per cent tax on profits, whereas other industries have a 28 per cent tax.However, the high marginal tax implies also that the government lets companies write off 78 per cent ofexpenditures and investments. This is clearly better than the 28 per cent rate allowed in other industries.

The reason behind the preferential coverage of expenditures and investments in the oil and gas industry isthat the industry faces a higher tax on profits. The government wants to achieve neutrality in the investment



and operation decisions of the oil and gas companies. It does this by allowing a tax deduction on expendituresat the same marginal rate as they tax the companies’ profits.

We conclude that the 78 per cent coverage of expenditures is not a subsidy to the oil and gas industry. Thereason is that the principle of symmetry is the same in the other fiscal systems.

4.3.2 LOSS CARRIED FORWARD WITH INTEREST RATEIn Norway’s general fiscal system, losses may be set against income from all sources, including capital gains.Excess losses may be carried forward indefinitely. In the fiscal system for the petroleum industry, however,losses may be carried forward with a risk-free interest rate. This rule was made to achieve a more neutralfiscal system for the petroleum industry, but is not part of the general fiscal system.

The value of this subsidy in 2009 is the NPV of the losses taken in 2009 increased with an interest rate untilthe company achieves a taxable position or the company is sold to a company that is in a taxable position.There are, however, almost no losses, as most of the losses go into the exploration refund.

We conclude that the ability to carry forward losses with a risk-free interest rate is a subsidy to the oil and gasindustry, but that the value is small.

4.3.3 GUARANTEED REIMBURSEMENT OF LOSS CARRIED FORWARDIn Norway, the Petroleum Tax Law guarantees that an oil and gas company will receive the government’sshare of the loss in the future when and if the company is closed down (not sold or merged). Since thegovernment has guaranteed reimbursement of losses, the Ministry of Finance can apply this risk-free interestrate to the loss carried forward (as discussed in section 4.2.2). It has not happened yet that a company hasreceived the government reimbursement, but the policy in itself is a favourable treatment of petroleumcompanies compared with companies in other extractive or energy industries.

The Ministry of Finance argues that the petroleum companies have been evaluated thoroughly by the Ministryof Petroleum and Energy to be pre-qualified as licence holders or operators, and that the critical assessmentconducted by the Oil Taxation Office is much more comprehensive than what other companies experience.4

The Ministry of Finance therefore states that in a perfect world, all expenses could have been reimbursed toany company the following year (or the same year). But we do not live in a perfect world. As long as thegovernment treats the petroleum companies favourably, a couple of subsidies are offered the companies inthe petroleum industry that have not yet reached a position of substantial income.

We consider the guarantee of government reimbursement to be a subsidy to the oil and gas industry, but thevalue of this subsidy is close to zero, as it has never been used.

4.3.4 EXPLORATION REIMBURSEMENT TO EXPLORATION COMPANIESThe petroleum tax law was changed in 2004 to include a paragraph on exploration payback for companies ina non-taxable income position. Such companies were then able to reclaim 78 per cent of their explorationexpenditures the following year. This is what established companies with a taxable income manage to reclaim.

4 This was presented in a meeting with the Ministry of Finance on September 2, 2011.



The reasoning behind the exploration reimbursement is twofold. First, the Ministry of Finance seeks to levelthe playing field between new entrants and more traditional players on the NCS. Second, the explorationreimbursement follows the logics of the guarantee of reimbursement and the ability to carry loss forward witha risk-free interest rate. Since the government has guaranteed the payback of its share of exploration costs (78per cent) and has made an offer to the companies to increase the value each year with a risk-free interest rate,the government is indifferent to the choice of whether to reimburse its share immediately or wait. In the caseof the exploration costs, the government has chosen to reimburse its share of the costs the following year.

The exploration payback is a financial treatment of exploration expenditures that is different from the treatmentof other companies operating in Norway. Usually, companies are required to reach a taxable position beforethey can write off their expenses.

The government rationale for granting the exploration subsidy is to increase the number of companies on theNCS in order to increase competition for exploration activities. From figure 4.4, we see that beginning in2005, the number of petroleum companies in Norway has increased. But even with a large growth in thenumber of entrants, the numbers are still lower than during the 1980s. There have been many mergers andacquisitions of companies in the industry, but part of the reason for fewer companies lies in the fact that theNCS is maturing, and thus less commercially interesting. Notwithstanding the exploration reimbursementrule from 2004, other variables, such as oil prices, may also explain the increase in the number of companieson the NCS.

FIGURE 4.4: NUMBER OF PETROLEUM COMPANIES ON THE NCS AND COMPANIES IN A TAXABLEPOSITION

Date source: Oil Taxation Office (personal communication, 2011).

The exploration reimbursement is a very hot issue to the Norwegian public. The Ministry of Finance statesthat such reimbursement is not to be viewed as a subsidy (Lund & Henriksen, 2011). It is true that establishedcompanies can write off the expenditures on revenues from producing fields, and that the reimbursementrule levels the playing field for less established companies. However, in other industries, companies runningdeficits have to postpone a deduction until a future with high enough revenues.



We consider the ability to have exploration expenses reimbursed in such a fast and secure manner to constitutea subsidy. This is a preferential treatment of deficit-running companies in the petroleum industry comparedwith such companies in other industries.

The Oil Taxation Office is responsible for the taxation of the oil and gas production companies. Whereas thenew law was implemented by the Ministry of Finance, the Oil Taxation Office is the immediate grantorinstitution of the exploration payback subsidy.

The companies that received exploration payback in 2010 for the 2009 exploration year are shown in figure4.5. The tax list shows that 44 companies receive a fast payback of their exploration expenditures. The fivelargest recipients received almost 50 per cent of their expenditures, and 25 per cent of the companies (11companies) received approximately 70 per cent.

FIGURE 4.5: EXPLORATION PAYBACK 2009, MILLION NOK

Data source: Oil Taxation Office (personal communication, 2011).

Figure 4.6 (next page) shows that the value of the payback has increased rapidly over the last five years. Froma negligible sum in 2005, the exploration reimbursement constituted over 9 billion NOK in 2009.



FIGURE 4.6: EXPLORATION REIMBURSEMENT 2005–2009


The value of the exploration reimbursement is largely dependent on two factors:

1. How long the exploration companies operate in a non-taxable position. This is because the value ofthe subsidy is equal to the difference between receiving the payback in cash and waiting to write offthe expenses in a future taxable position.

2. The discount rate used to calculate the value. If all the receiving companies have high expected returnson alternative investments (operating with a high discount factor), the value of the exploration subsidycan be larger than the payback itself.

It is difficult to calculate the duration that a company receiving the exploration subsidy will operate beforethe company reaches the status of having taxable income. The results are sensitive to the assumptions made(see Appendix A).

Figure 4.7 (next page) shows the value of the exploration payback to pure exploration companies. We haveused the three discount factors discussed in section 2.6. The companies should discount the rate of returnon their exploration costs with a lower discount rate, because these costs are guaranteed by the Norwegiangovernment. However, the fast reimbursement reduces the political risk, since taxation laws can be changedin the future. Also, the Lund-Osmundsen debate showed us that the companies on the NCS are applying onediscount rate on a petroleum project, instead of splitting the investments into categories according to therisks associated with each part.5

We can conclude that for this calculation, it is likely that the true value would be closer to the outcome of acalculation with a 6 per cent discount rate than to the high case of 12 per cent. The importance of thediscount rate shows that the magnitude of the exploration subsidy varies from company to company and alsowith the perspective of the government vs. the company.

As well, it is hard to estimate the number of years it takes a company to achieve a taxable position. The abilityto achieve a taxable position relies on many factors, such as discovering petroleum, developing fields andmaking acquisitions. Instead of estimating a precise value of the exploration reimbursement, we havecalculated a range based on three durations: 5, 10 and 15 years. In our middle estimate (10 years with a 9per cent discount rate), the value of the 2009 exploration subsidy is 4 billion NOK.

5 While Lund (2009) argues that, according to investment theory, companies should split a project into parts that take into consideration thedifferent risks involved, Osmundsen (2000) argues that the companies should apply one risk-weighted discount factor for a project.



FIGURE 4.7: VALUE OF EXPLORATION PAYBACK, 2009


4.3.5 FAST DEDUCTION OF INVESTMENTSThe petroleum industry works within a different investment deduction system than other industries. Whileenterprises in general can deduct an investment using a declining rate over a long period, petroleumenterprises can deduct an investment linearly over a short period (six years).

The objective of the investment deduction rules is to provide incentives to invest on the NCS. Upstreampetroleum activity is characterized by major capital investments to enable the production of petroleum. Theinvestment rules are supposed to contribute to easing the large investments necessary on the shelf.

The Ministry of Finance is responsible for the tax system. The Ministry has delegated responsibility for thisdeduction to the Oil Taxation Office, a branch of the Norwegian Tax Administration. The recipients of thesubsidy are all the companies that invest and earn a petroleum income. For companies with only investmentexpenditures, the deduction is built up with an interest rate, ready to be reaped when income from petroleumproduction begins.

The value of the potential subsidy is shown in figure 4.8 (next page). The results show that the investmentdeduction rules are highly favourable to the oil and gas industry. The discount rates applied are discussed insection 2.6. In 2009 the value of the deduction with a 9 per cent discount rate was 19 billion 2011 NOK. Wecalculated this by summing up the total investments in 2009 and subtracting the exploration expenditure,then comparing the difference between the existing investment deduction rules and a 10 per cent yearlydeduction.

Bill

ion

NO

K (2

011)



FIGURE 4.8: VALUE OF FAST INVESTMENT DEDUCTION RULES, 2009, THREE DISCOUNT RATES

Source: Statistics Norway (n.d.).

It is important to note that the favourable investment deduction rules are made in relation to the high tax onprofits. Removal of the favourable deduction rules without lowering the profits tax would shift the balance ofthe system. In our calculation, we have made no attempt to identify what the “right” profit tax should be inorder to treat investments in the same manner as in the general fiscal system. We have just focused on thefact that investments are treated favourably in the oil and gas fiscal system compared with the generalfiscal system.

The investment deduction rules fall under the definition of a subsidy to the oil and gas industry, as long aswe also acknowledge the relationship between the high profits tax and the fast investment deduction. Theinvestment deduction rules provide for a faster payback of investments on normal profits than other comparableindustries get under the general tax system. This faster payback may result in the oil and gas industryreinvesting in new opportunities faster than other industries may, and thus the investment deduction rulesare a subsidy, since they may skew investment decisions and channel resources toward the petroleum industryat the expense of other investment opportunities onshore.

4.3.6 LIQUEFIED NATURAL GAS IN NORTHERN NORWAY: THE CASE OF SNØHVITThe Snøhvit field in the Norwegian Barents Sea comprises three main discoveries, Snøhvit, Albatross andAskeladd, in addition to a few minor reservoirs. The discoveries were found during the first surge of interestin the Arctic Barents Sea in the 1980s. Snøhvit was developed as a subsea solution, with multi-phase gaspipelines to Melkøya, outside Hammerfest, where the gas is processed and liquefied before it is loaded on tothe LNG ships.



MAP 4.1: THE SNØHVIT FIELD AND THE FIVE REGIONS WITH SPECIAL LNG INVESTMENT SUBSIDIES

Data source: NPD (personal communication, 2011).

Because the field was developed from 2002 onward, the lead time from discovery to development can beconsidered long. The lack of established infrastructure offshore and onshore, as well as harsh climate andgeological difficulties, contributed to a long discovery-to-development process. However, one of the mainissues for natural gas in general is the distance to potential markets. This is particularly the case for naturalgas in the Arctic region, since the distance to populated areas and the markets is long. In the case of Snøhvit,even with a relatively large amount of hydrocarbons, the industry claimed that the Norwegian petroleum taxregime hindered development. The Norwegian government declined the recommendation of reducing the taxrate, but instead proposed reducing the time for deducting the LNG investments.

The treatment of LNG projects in the proposed law was found to contravene the European Union’s competitionlaws by the European Free Trade Association Surveillance Authority. Thus, the Norwegian government had towrite a geographical dimension into the law, since efforts to improve the economic conditions of rural areasare seen as legitimate under European Union law. The LNG subsidy then became viable for projects only inthe most rural northern part of Norway: Finnmark county and the four most northern municipalities in Tromscounty (see map 4.1).

We conclude that the change in the law to differentiate this petroleum investment from others and to facilitatedevelopment of the Snøhvit LNG plant qualifies as a subsidy.

This change to the petroleum law ensured that the owners of Snøhvit would conduct the necessary investmentsinto the LNG facility. To provide a value for the subsidy depends on the alternative investment opportunities.We have calculated the Snøhvit subsidy using several discount factors.

The Oil Taxation Office, a branch of the Norwegian Tax Administration, is the institution that directly grantsthe subsidy. The Norwegian Tax Administration reports to the Ministry of Finance.



The Snøhvit field is owned by Statoil (currently at 33.53 per cent; 12 per cent went to GDF Suez in 2001,but Statoil received a 10 per cent share from Norsk Hydro and 1.24 per cent from Svenska Petroleum in2004), Petoro (30 per cent), Total (18.4 per cent), GDF Suez (12 per cent), Hess (3.26 per cent) and RWE-DEA (2.81 per cent).

The law is not specific to the Snøhvit field development, but the law applies to any LNG project in thegeographical area shown in map 4.1. The law was in effect beginning in 2002.

Figure 4.9 shows the value of the LNG subsidy in 2009. We calculated these figures using industry data oninvestments in 2009 and deducting 78 per cent of the investments over three and six years linearly. In 2009,the difference resulting from the subsidy was worth 180 million 2011 NOK.

FIGURE 4.9: VALUE OF THE LNG DEDUCTION LAWS IN 2009

Data source: WoodMackenzie (2011)

4.3.7 UPLIFT: AN ADDITIONAL INVESTMENT SUBSIDY?The petroleum enterprises are able to deduct a special uplift in addition to the investment deduction describedabove. The uplift is an extra 30 per cent deduction on the special tax (50 per cent), constituting 15 per centof the total investment value. The uplift is deducted linearly over an even shorter period (four years).

The objective of the uplift is to provide a tax shield to avoid what the Ministry of Finance refers to as “normalprofits” being taxed with the 50 per cent special tax.

As discussed in section 4.2.5, it is not obvious that this is a subsidy, since these uplift rules are part of therationale for higher tax rates on the petroleum industry. These rules are used to reduce the gap between themathematically expected monetary value of an exploration decision and the utility curve of the various oil andgas companies.

The uplift mechanism, however, was introduced to shield “normal” profits against taxation under the 50 percent special tax, and thus it cannot be isolated from the level of the special tax. Had the special tax rate beenset at zero, there would be no uplift deduction. Therefore, the uplift is directly connected to the level ofresource rent taxation.

We conclude that the uplift is not a subsidy to the oil and gas industry as long as its value is directly connectedto the special tax rate and thus provides a tax shield against special taxation of “normal” profits.



4.3.8 TRANSFER OF PRODUCTION LICENCESThe Ministry of Petroleum and Energy administers application rounds, both for new and mature areas. Inthese announced rounds, the petroleum companies apply for production licenses, which, if awarded, givethe companies the opportunity to explore, develop and produce oil and gas. The licences are normally givenfor a period of 10 years and come with a work obligation, in the form of seismic investigation and/orexploration drilling. If the obligation is fulfilled, the owners can apply for an extension of the licence period,usually 30 years.

The companies have to pay an application fee equal to the expenditures associated with administering theapplication rounds. Thus, the companies have access to government-owned land and perhaps resources, withonly administrative costs. As stated in section 2, the Norwegian government has chosen to tax the companiesas well as to participate as a partner in the licences. The government could also have sold the licences or letthe licence rounds be organized as lotteries. But since the government has chosen other means of taxing thecompanies for petroleum extraction, it makes little sense to state that the companies should pay for thelicences as well. Shareholding and licence auction are ways of acquiring the profits of the petroleum resourcesex ante, that is, before we know about the actual existence of petroleum, while taxation is a way of acquiringresource rent after the discovery of resources. We are not questioning the means of acquiring the share of thepetroleum production, nor are we questioning the level of rent acquisition.

In many countries, the petroleum companies pay for the access to licences. In Norway, the taxation of accessto petroleum resources does not occur during the handover of petroleum activity rights. Rather, the taxationis placed on production. This is done to secure a neutral taxation system, that is, a system that ensures thatan investment that is profitable pre-tax is still profitable post-tax.

We conclude that the transfer of petroleum activity rights through the application rounds for productionlicences is not a subsidy to the oil and gas production sector.

4.4 SUMMARY

The potential subsidies have been presented and discussed above. Here, we sum up their value. The subsidiesvary from year to year. We chose the year 2009 as the baseline year, since this is the year of the latest dataon the exploration subsidy. The category of government transfers and public provision of goods and servicesat below-market prices is volatile given the fact that the government bases their decisions on the perceivedneed for such subsidies. In the category for subsidies in the fiscal system, the level of subsidies is basedmore on the level of activity; for example, large investments in a year release more value of the subsidies.



TABLE 4.1: SUMMARY OF SUBSIDIES TO THE PETROLEUM PRODUCTION INDUSTRY IN 2009,MILLION 2011 NOK

Category Low Middle HighSubsidy Million NOK (2011)

Transfers and provisions of goods and services

Seismic investigations 257 257 257

R&D programs 216 216 216

Gassco 16 24 32

Fiscal system subsidies

Exploration reimbursement 2,692 4,024 4,955

Snøhvit 135 181 217

Investment 17,791 20,812 22,289

Total 21,106 25,514 27,966

Data sources: Investment: Statistics Norway (2011); seismic investigations and R&D programs: Ministry of Petroleum and Energy (2010b);exploration reimbursement: Oil Taxation Office (personal communication, 2011); Gassco: Gassco (2010); Snøhvit: Wood Mackenzie (2011).



5. IMPACT ASSESSMENT

In this section, we look into the effects of removing the subsidies. We provided the methodology we appliedfor the effect assessment in section 2, but have given a more detailed framework in Appendix B.

The effects are separated into three categories:

1. Financial impact on government revenue.

2. Social impact on the number of jobs.

3. Environmental impact on emissions.

The numbers are used as indications of what happens if any subsidies are removed.

In this chapter, we develop two extra sensitivity cases by changing the underlying assumptions. Thus, weoperate with a low, middle and high estimate. This is important in order to show how the estimates are sensitiveto the assumptions applied in the calculations. Instead of treating the results as exact figures, we shouldinterpret them as indications of how important the subsidies are (or are not) for the industry and for theNorwegian society and economy.

5.1 SEISMIC INVESTIGATIONS

Seismic investigations were valued at 20 million NOK in 2010. In 2009, the value was approximately 257million NOK. It is difficult to assess what the situation would have been if the government had not takenresponsibility for conducting the initial seismic investigations. Information is a public good, as defined ineconomic theory, but it also provides a competitive advantage for those acquiring that information privately.

To be a public good, the information needs both to be non-rival and non-excludable. Non-rivalry means thatconsumption of the good does not reduce the ability of others to consume the good. Non-excludability meansthat economic agents shall not be effectively excluded from the good. Pure public goods are rare in the realworld, but the information gathered from seismic investigations scores high on these two features.

If the government had not taken on the responsibility of providing the information, the competition on theshelf to apply for production licences would have been reduced. Few companies on the shelf have the abilityand capacity to conduct their own large-scale seismic investigations. This could have led to less competition.

It is likely that fewer companies would have shot and interpreted seismic data if this data were not availablefrom the NPD, but we cannot rule out that the same acreage would have had seismic data shot. This ambiguity,combined with the fact that the subsidy is not directly related to production or investments and the hugevariability of the subsidy, makes it difficult to analyze and assess the impact of removing the subsidy.

5.2 RESEARCH AND DEVELOPMENT PROGRAMS

In section 4 we stated that the Norwegian government invests 216 million NOK in R&D directly in the oil andgas industry. Given the scope and budget of this study as well as the complicated nature of R&D activity, wehave chosen not to assess the impacts of removing R&D subsidies. We also note that the R&D subsidies tothe petroleum industry are lower in relative terms than similar R&D subsidies to other sectors of the economy.If R&D subsidies were to be removed for all sectors, the petroleum industry would be least affected, but theinvolved academic institutions would be significantly affected.



5.3 GASSCO AS A NON-PROFIT ORGANIZATION

Gassco, a government non-profit organization, is a subsidy to the gas-exporting companies on the NCS.Changing Gassco into a profit-seeking organization would cost the shippers of gas or the owners of the gaspipelines and processing facilities between 16 and 32 million NOK per year. With 6 per cent profits, Gasscooperations would have produced profits that constitute a large amount for a Norwegian municipality. But forthe shippers and owners of the gas pipeline grid, such an amount would at best have a very minor impact ondecisions related to exploration, development of fields and petroleum extraction.

We have not assessed the impact of introducing profits to the operation of Gassco.

5.4 EMERGENCY PREPAREDNESS

The Norwegian Coastal Administration and municipalities in Norway are, together with the oil and gascompanies, responsible for being prepared for environmental emergencies related to the oil and gas industry.We have not been able to calculate the value of this subsidy, so it is not part of the removal calculation.

5.5 LOSS CARRIED FORWARD WITH A RISK-FREE INTEREST RATE ANDGUARANTEED REIMBURSEMENT

Although the loss carry-forward is a subsidy, its value is highly questionable. Almost all the oil and gascompanies are running with a significant surplus in the current price picture, and those companies that aremainly doing exploration activities are already being reimbursed for the tax share of their exploration costs(see 5.6 below). Thus, very few companies have losses to carry forward in the bigger picture, and these lossesare low in comparison with exploration costs and with the current price picture. As no company has exited theNorwegian continental shelf without having been acquired by another company, there are no examples ofsituations where the guarantee has ever been exercised, and this is also the expectation in the future.

The subsidy would thus, in our opinion, be the risk-free interest rate itself. This subsidy is very small and hasnot been included in the effect calculations, as the effect of removing it would be negligible. The likely effectis that removal would improve the negotiation position of a company that wants to exit with a company thatwants to acquire it. With reimbursement, the value of any loss carry-forward could potentially increase.However, when such a situation occurs, the timing between a potential sale and a potential reimbursementwould be very short, and thus the improvement in the negotiation position should also be minor.

5.6 EXPLORATION REIMBURSEMENT

What happens if the exploration reimbursement subsidy is removed? Will the exploration companies continuetheir investments? Will the other companies increase their exploration activity?

If the exploration reimbursement is removed, we need to make assumptions about whether the explorationcompanies’ wells will be drilled in the future by other companies. We have built three cases, based on anassumption that the drilling conducted in 2009 was drilled by existing companies and newcomers that wouldhave come anyway. We need to remember that the oil price has experienced a large increase in the period weare looking at. In the low estimate, only 25 per cent of the exploration companies’ wells are drilled. In themiddle estimate, 50 per cent of the wells are drilled. Then in the high estimate, 75 per cent of the wells are



drilled. Thus, we assume that 25 per cent of the wells that the exploration companies financed will never bedrilled. The methodology is based on an ex ante perspective, that is, what we can expect exploration activityto result in (see Appendix B).

Table 5.1 presents the results of removing this subsidy. Government income would be reduced. Also, thenumber of employees in the four petroleum-related sectors would be reduced. However, the amount of carbondioxide emissions would also go down.

TABLE 5.1: GROSS EFFECT ASSESSMENT OF EXPLORATION PAYBACK REMOVAL, 2009Indicator Low estimate Middle estimate High estimate

Investments (Million NOK) –2,317 –4,734 –7,152

Government revenue (Million NOK) –2,323 –4,647 –6,970

Labour market

Oil and gas industry employment (persons) –1,033 –2,090 –3,147

Supply industry employment (persons) –949 –1,914 –2,879

Emissions

To air

CO2 (million tonnes) –0.153 –0.306 –0.459

NOx (1,000 tonnes) –0.615 –1.229 –1.844

nmVOC (1,000 tonnes) –0.562 –1.123 –1.685

To sea

Chemicals (1,000 tonnes) –2.160 –4.320 –6.480

Data sources: Investment: Statistics Norway (2011.); labour market: Eika et al. (2010) and Vatne (2007); emissions: Klif (2011) and Ministry ofPetroleum and Energy (2011).

5.7 FAST DEDUCTION OF INVESTMENTS

The investment subsidy is related to how the petroleum companies deduct their investment costs. If thesubsidy were removed and the deduction rules became based on general tax rules (declining balancedepreciation with a specific percentage of the remaining expenditure deducted each year), the petroleumcompanies would have faced a less favourable deduction regime. The new regime would have made thepetroleum companies more hesitant to invest in projects on the NCS.

In this impact analysis, we assume that the companies change their investment behaviour by delaying apercentage of the investment and instead smoothing this investment over the next five years. We believe thatthe companies will become more reluctant with their investment strategy if the economics behind it worsen.In addition, the companies reduce their total investment, and the amount represented by this particularreduction will never be invested. We anticipate that some resources would be stranded due to a removal ofthe investment subsidy. The justification for this assumption is that with a reduction in the value of a fieldproject, some of the discoveries that have very low profitability would fall under the threshold for economicviability (this assumption may not be valid with high oil prices). The delayed share and the investmentreduction percentage are shown in table 5.2 (next page). We assume that by their very nature, the marginalfields are expensive to develop.



TABLE 5.2: ASSUMPTIONS ABOUT BUSINESS BEHAVIOUR OF INVESTMENT SUBSIDY REMOVAL Scenarios Smoothed Reduction

Next 5 years

Low 10% 2%

Middle 20% 4%

High 30% 6%

As we showed in section 3, petroleum investments constitute a large share of the total investments in Norway.Also, the investments enable petroleum production that contributes large revenues to the Norwegiangovernment. In table 5.3, we see that the investment delays and reductions have a significant impact ongovernment revenue, employment and emissions. In the middle estimate, the discounted government revenuestream is reduced by approximately 8.5 billion NOK (US$1.4 billion). Also, the decreased investments reducethe employment in the oil and gas industry by approximately 3,400 people, and by nearly another 3,600 inthe petroleum supply industry. At the same time, the removal of these subsidies reduces emissions. The effectcalculations may underestimate the reduced government revenue stream or overestimate the size ofpersonnel reductions.

TABLE 5.3: REMOVAL EFFECTS OF INVESTMENT SUBSIDY, 2009 Indicator Low estimate Middle estimate High estimate



Labour market


Supply industry employment (persons) –1,784 –3,568 –5,352

Emissions

To air


NOx (1,000 tonnes) –0.001 –0.002 –0.003

nmVOC (1,000 tonnes) –0.001 –0.002 –0.003

To sea

chemicals (1,000 tonnes) –0.004 –0.008 –0.012


5.8 LIQUEFIED NATURAL GAS IN NORTHERN NORWAY: THE CASE OF SNØHVIT

For all the other impact assessments, we have examined the 2009 subsidies. In the case of Snøhvit, however,it makes little sense to just look at the impact of what was given in fiscal year 2009. Instead, we calculatethe impact of the whole Snøhvit project.



It would be an exercise in alternative history to decide whether Snøhvit would have been developed withoutthe investment subsidy. Instead, we suggest making three cases. In the low estimate, Snøhvit is developedwith a three-year delay. In the middle estimate, the field is delayed by 10 years. In the high estimate, thefield is never developed.

Table 5.4 shows the results of the effect assessment on removal of the Snøhvit subsidy. In the low case,Snøhvit is developed with a three-year delay. Thus, the government loses revenue in the perspective of NPV.Also, emissions and employment are reduced due to the delay. In the middle case, the delay of 10 yearsfurther decreases the NPV of employment. Also, the government receives the tax payment later, and its valueis reduced. On the other hand, the carbon dioxide emissions occur further in the future. In the high effectestimate, the Snøhvit field is not developed at all. Thus, the losses to government revenue and employmentare the largest in this estimate.

TABLE 5.4: GROSS IMPACT ASSESSMENT OF THE SNØHVIT LNG SUBSIDY, DISCOUNTED TO THEBEGINNING OF THE PROJECT

Indicator Low estimate Middle estimate High estimate



Labour market


Supply industry employment (persons) –3,941 –10,028 –24,573

Emissions

To air


NOx (1,000 tonnes) –2.185 –5.559 –13.622

nmVOC (1,000 tonnes) –1.996 –5.079 –12.445

To sea

Chemicals (1,000 tonnes) –7.677 –19.534 –47.866


5.9 COMPARISON WITH STATISTICS NORWAY’S KVARTS MODEL

In the impact assessment, we have only taken into consideration the dynamics of the oil and gas industry andthe supply industry. We have not examined how the general Norwegian economy would react to the removalof any subsidies. In a real scenario excess labour, real capital and natural resources formerly used in the oiland gas industry plus the supply industry would be turned over to other economic activities. However, thereare economic costs related to this transformation. First of all, not all the resources will find other uses. Second,the time gap between employment of a resource in the oil and gas and supply industries and finding otheruses is costly in itself. Third, the economic rents will change. By definition, the rent on labour, real capitaland natural resources will be lower in other industries, or at least not higher. Otherwise, the resources wouldhave already been transferred from the oil and gas industry before subsidy removal.



Since the impact assessment has been done on a gross level, we find it necessary to use results from StatisticsNorway’s KVARTS model. Statistics Norway models the Norwegian economy with two models, MODAG (annualdata) and KVARTS (quarterly). These are simulations of the Norwegian economy, where Statistics Norwayidentifies, through econometrics, reaction patterns in each industry and among industries. While MODAG isbasically used for long-term macroeconomic forecasts, the KVARTS model is used for short- to medium-termpredictions. The models are built up by demand-side and supply-side functions and based on historicalrelationships among consumers, industries and the government. The models are used to predict the outcomeof policy changes.

The results from these models contribute to a better understanding of the interplay between economic actionsin the petroleum industry, the general economy and the government. The models are symmetric, in the sensethat a positive exogenous shock has the same sized impact as a negative shock, with only the sign changing.Also, the models are log-log linear. This means that a percentage change in the exogenous shock increasesthe predicted change by the same percentage. Thus, a 300 per cent shock will have three times the forecastedimpact. However, the relationship between unemployment and wage change is not modelled to be linear.Thus, to predict wage changes, we need to run the model with the exact value of the exogenous shock.

In table 5.5, we present data from Eika et al (2010), which is a study of delivered products and services fromother industries to the petroleum industry. A permanent increase in petroleum investments of 11.2 billionNOK has impacts on every part of the Norwegian economy, through the interplays of markets for goods andservices or labour, government’s response with regard to financial and monetary policy, and so on. As describedabove, these results can be used to calculate the net change in macroeconomic indicators from a permanentincrease or decrease in the petroleum investments, except the wage level.

Eika et al. (2010) finds that a permanent increase in petroleum investments increases the GDP, but with adecreasing impact on production. Imports increase, and exports decrease slightly over time. The labour marketseems to profit substantially from an investment increase, with both wage and employment increasing. Onthe other hand, petroleum investments drain the domestic economy of capital, and this is seen in the decreasein both real estate investments and prices. The reductions in real estate investment and prices are progressiveover time.

Table 5.5 (next page) is based upon a permanent increase in investments. If we want to use these results, weneed to assume that impacts on investments are the same from 2010 forward, as the impacts were calculatedfor 2009. This is a reasonable assumption for the investment and exploration subsidies, but not for the Snøhvitsubsidy, since this is a field project. For 2009, our middle estimate predicts a decrease in investments ofapproximately 26 billion NOK, 3 billion NOK and 2 billion NOK due to the removal of the investment, Snøhvitand exploration subsidies, respectively. In the modelling, we remove only one subsidy at a time. For instance,the Snøhvit investments are an integrated part of the investments that are affected by the modelling of theinvestment subsidy.



TABLE 5.5: NET IMPACT ON MACROECONOMIC INDICATORS OF A PERMANENT 11.2 BILLION NOKINCREASE IN PETROLEUM INVESTMENTS, STARTING IN 2004

Indicator 2004 2005 2006 2007 2008 2009 2010

Gross domestic product 0.3 0.3 0.3 0.2 0.2 0.2 0.2

Consumer price index 0.0 0.0 0.0 0.0 0.0 0.0 0.1

Trade

Import 0.9 0.9 0.9 0.9 0.8 0.9 0.9

Export 0.0 0.0 –0.1 –0.1 –0.1 –0.1 –0.1

Labour market

Employment 0.2 0.2 0.2 0.2 0.2 0.2 0.2

Wages 0.2 0.2 0.2 0.2 0.2 0.3 0.4

Real estate markets

Real estate investments 0.0 0.0 –0.2 –0.4 –0.6 –0.7 –0.7

Real estate prices 0.0 –0.1 –0.3 –0.4 –0.5 –0.4 –0.5

Financial market

Money market interest rate 0.1 0.1 0.1 0.1 0.2 0.2 0.2

Weighted exchange rate –0.3 –0.4 –0.5 –0.5 –0.5 –0.4 –0.4

Source: Eika et al. (2010, p. 32), Statistics Norway (n.d.)

For the investment subsidy, the reduction in investments is nearly 2.5 times what is calculated with theKVARTS model. As we stated above, since the KVARTS model is linear for the impact of an exogenousinvestment shock, the effects from table 5.5 can be grossed up to match the decrease in the investmentsfound in our own analysis. We can thus see that for the first year in the modelling—here 2004 but in generalyear 1—GDP would be reduced by approximately 0.7 per cent (0.3% * (26/11.2) = 0.7%). Moreover, importswould be reduced by over 2 per cent. This is mainly due to the import leakage of oil and gas industryinvestments. The labour market would have experienced a reduction in employment of around 0.5 per cent.Wages would have fallen as well, but an exact prediction is hard to make because of the modelling of thewage function. With subsidy removal, the real estate markets would see increased investments over time, withan additional real estate price increase.

Both the investment subsidy removal and the removal of the Snøhvit LNG subsidy are assumed to causedelays in investments. While subsidy removal will be permanent, parts of the investments in 2009 will bemade in the future. For instance, in 2014 around 13 billion NOK of the 2009 investments will be invested:9 billion NOK at Snøhvit and 4 billion from the investment subsidy removal. These delayed investments willcounter the negative impact on the Norwegian economy.



6. SUMMARY AND CONCLUSION

In this study, we have identified possible subsidies, calculated their most likely value and assessed the impactof their removal. We identified subsidies within the first three of the four categories of our subsidy definition:


2. Government revenue is foregone or not collected.



TABLE 6.1: SUBSIDIES IDENTIFIED AND ESTIMATED FOR UPSTREAM OIL AND GAS ACTIVITIESIN NORWAY

Is it a Size of subsidy Section Expenditure/policy subsidy? (million NOK)

Transfer of funds or liabilities

4.1.1 Government spending on SDFI and Petoro No

4.1.2 Public infrastructure No

4.1.3 Research and development programs Yes 216

4.1.4 Emergency preparedness Yes N/A

4.1.5 Insurance subsidies No

Provision of goods and services at below-market prices

4.2.1 Seismic investigations by the NPD Yes 257

4.2.2 Gassco infrastructure and facilities services Yes 24

4.2.3 Guarantee Institute for Export Credit and government credit guarantees No

4.2.4 Eksportfinans and favourable long-term financing No

Government revenue foregone

4.3.1 Government covers 78 per cent of expenditures No

4.3.2 Loss carried forward with interest rate Yes N/A

4.3.3 Guaranteed reimbursement of loss carried forward Yes N/A

4.3.4 Exploration reimbursement to exploration companies Yes 4,024

4.3.5 Fast deduction of investments Yes 20,812

4.3.6 LNG in Northern Norway: the case of Snøhvit Yes 181

4.3.7 Uplift: an additional investment subsidy No

4.3.8 Transfer of production licences No



We have identified nine subsidies and potential subsidies that are offered to the oil and gas industry (fournon-fiscal and five fiscal) from a total of 17 investigated policies and expenditures. The value of these subsidiesin 2009 was around 25.5 billion NOK (US$4 billion), but the total value is probably slightly higher, as notall the subsidies have a value calculation. The value will also differ from year to year due to the nature of thesubsidies and the links to the underlying assets and assumptions. We calculated the value by isolating eachsubsidy and estimating the value for 2009. As the fiscal subsidies are long-term and closely linked to theactivity level, a one-year calculation of the subsidy represents an approximation of the subsidy level in Norway.An average calculation over several years may have showed a lower subsidy level, since, for instance, thepetroleum activity in 2009 was relatively high.

We have calculated a middle estimate, with two sensitivities (high and low). The difference between the estimatesis due to the use of different discount rates and different assumptions about time frames—for example, thetime until an exploration company enters a taxable position. As a percentage of total revenue from the oil andgas industry, subsidies constitute around 13 per cent. This number needs to be interpreted with care, though.For example, the investment subsidy need not have as high an impact if seen in the longer picture, where on atime horizon longer than 15 years it would establish a rolling average for tax depreciation that would essentiallynegate some of the effects (for example, if the subsidies had been removed in 1995 or earlier).

Care should also be taken when interpreting the Snøhvit numbers. We did our calculations based on ex ante(plan for development and operation estimates) numbers for investments. Using ex post (actual cost) numbers,the whole project has a negative NPV and is thus a waste of both company and societal resources. This maynot be the final verdict on the project though, as re-use of the LNG plant and changes in product prices mayinfluence the ex post end result.

For the subsidies that were preferential treatments in the fiscal system, we have assessed the effect of removal.The subsidies in this category concern how the fiscal system is more preferential to the oil and gas industrythan is the general tax system. The calculations were based on certain assumptions; for instance, how thecompanies in the oil and gas industry will invest given an alternative future with no subsidies. We found thatsubsidy removal will have gross impact on government revenue, employment and environmental emissions.In table 6.2 (next page), we show the values from the middle estimate of the gross impact assessment. Thethree subsidies we remove provide different impacts on government revenue, employment and carbon dioxideemissions. Also, we provide a relative estimate of the importance of the impacts to the Norwegian economy,society and environment. The reduction is not taken in one year, however, as we are dealing with long-termeffects. Moreover, the impact assessment is based on a gross calculation, where we have only taken intoconsideration what will happen inside the oil and gas industry and the supplying industries.



TABLE 6.2: OVERVIEW OF SUBSIDY REMOVAL IMPACT ASSESSMENT, NPV AND NPV ASPERCENTAGE OF 2010 VALUES

NPV (6%) of NPV asmiddle estimate percentage of

Impact on: Subsidy type in million NOK 2010 values* (%)

Government revenue Investment deduction –8,479 –5.3(petroleum taxes)

Snøhvit –21,012 –13.2

Exploration reimbursement –4,647 –2.9

Employment Investment deduction –6,933 –0.3

Snøhvit –19,204 –0.7

Exploration reimbursement –4,004 –0.2

CO2 emissions (million tonnes) Investment deduction –0.6 –1.0

Snøhvit –1.4 –2.4

Exploration reimbursement –0.3 –0.5

*Government revenue lost if the investment deduction were removed has been calculated as a percentage of the total petroleum tax revenue in2010 (Ministry of Finance (2011)), employment effects have been calculated as a percentage of total labour years in 2010 from Statistics Norway(2011), and the impact on carbon dioxide emissions has been calculated as a percentage of the 2010 data from Klif (2011).

Because of the need to identify the net impact on the Norwegian economy, society and environment as wellas the gross impacts calculated in section 5, we included a section on Statistics Norway’s KVARTS modelling.With the modelling of the whole Norwegian economy, including all industries, we found that the impact onNorway’s GDP was 0.7 per cent. Also, we found that the employment level would go down by 0.5 per cent,together with a 0.5 per cent reduction in wages the first year. Even though we modelled the subsidy removalas permanent, the future picture derived from the KVARTS model becomes somewhat complicated. The reasonfor this is that we have assumed that some of the 2009 investment reduction will be smoothed over thecoming years. Thus on the one hand, we see a yearly decrease in investment, but on the other hand, parts ofthe investment reduction will only be delayed, and will thus have a positive impact on the Norwegian economyin the medium term.

Although referring to the policies analyzed in this study as subsidies or potential subsidies, we do not refer tothe concept with any normative connotations. In our report, a subsidy is a neutral concept, thoroughly definedin section 2.4, except for the connotation that it affects economic decision-making in the oil and gas industry.It is up to the government of Norway to decide whether the subsidies to the oil and gas industry are meetingtheir public policy objectives. The purpose of this report was to improve transparency regarding subsidiesprovided to the oil and gas industry in Norway. Whether or not the benefits from such policies are large enoughto justify the existence of such subsidies is a question we leave to the policy-makers to answer.

In this study we have also been asked to identify issues of transparency and data access. Transparency anddata are very important to ensuring a corruption-free society, knowledge-based debates and a critical civilsociety. First of all, we need to state that the Norwegian government seems to strive for transparency, althoughthere are examples where information has been requested by media and others and such information hasbeen withheld. The government strikes a balance between serving civil society with data and analyses andkeeping the faith of the companies that the government will not provide sensitive information. The Ministryof Finance, Ministry of Petroleum and Energy, NPD, Statistics Norway, Petroleum Safety Authority, Climateand Pollution Agency, and Norwegian Coastal Administration are all contributing to openness and transparency,but there are areas where the government needs to further strengthen accessibility.



The Oil Taxation Office should develop data concerning taxation at aggregate levels, to enable more systematicinsight into the oil and gas industry. Also, the data on environmental costs are not specifically made for thepurpose of showing what the oil and gas industry actually costs the Norwegian society. Given the size andimportance of the oil and gas industry, the government should ensure a neutral provision of data concerningwhat the government spends on prevention of damage caused by the oil and gas industry. We have also seenvery recently that, for example, the NPD has restructured its data so that it is less accessible than before.Data on R&D in Norway has also been shown to be lacking, not so much in transparency, but in overallcompilation of financing sources and post-implementation cost-benefit analyses.



7. REFERENCES

Bedin Company Information. (2011). Depreciation. Online resource last updated April 7, 2011.Retrieved on December 8, 2011, fromhttp://www.bedin.no/php/d_emneside/cf/hPKey_2331/hDKey_1

Braithwaite, D., Soelaiman, S., Wiroyudo, G. K., Trimurdadi, H., Soeleman, S., Utomo, S. P., andRakhmanto, P. A. (2010). Fossil fuels – At what cost? Government support for upstream oil andgas activities in Indonesia. Geneva: The Global Subsidies Initiative of the International Institutefor Sustainable Development. Retrieved on December 8, 2011, fromhttp://www.globalsubsidies.org/ffs_atwhatcost_indonesia

Cappelen, Å., Eika, T., and Prestmo, J. (2011). Redusert petroleumsaktivitet: En utfordring fornorsk økonomi?” [Reduced petroleum activity: A challenge for the Norwegian economy?]Økonomiske analyser [Economic analyses], 30(2), 8–15.

Eika, T., Prestmo, J., and Tveter, E. (2010, August). Ringvirkninger av petroleumsvirksomheten.Hvilke næringer leverer? [Effects of petroleum activity: Which industries supply?]. Rapporter2010(8). Statistics Norway.

European Commission. (2011). Statistics. Retrieved October 30, 2011, fromhttp://epp.eurostat.ec.europa.eu/portal/page/portal/statistics/themes

Gassco. (2011). Home page. Retrieved from http://www.gassco.no/wps/wcm/connect/Gassco-EN/gassco/Home

Gassco (2011): Annual Report 2010. Retrieved December 8, 2011, fromhttp://www.gassco.no/wps/wcm/connect/d10f0f00468a308ba168f7fd04ea5a9e/Gassco_aarsrapport_2010_engelsk_Orginal.pdf?MOD=AJPERES

Gassco. (2010). Annual Report 2009. Retrieved December 8, 2011, fromhttp://www.gassco.no/wps/wcm/connect/9ff42f0042174bbea03ee963a6debd44/Gassco_aarsrapport_2009_eng_WEB.pdf?MOD=AJPERES

Gassco. (2009). Annual Report 2008. Retrieved December 8, 2011, fromhttp://www.gassco.no/wps/wcm/connect/815b3f004dc09720bc4fbd80e3f35ee4/GasscoAnnualReport08_en.pdf?MOD=AJPERES

Global Subsidies Initiative (GSI). (2010a, March). Defining fossil-fuel subsidies for the G-20:Which approach is best? Policy brief. Geneva: The Global Subsidies Initiative of the InternationalInstitute for Sustainable Development. Retrieved December 8, 2011, fromhttp://www.globalsubsidies.org/resources/march-2010-defining-fossil-fuel-subsidies-g-20-which-approach-best

http://www.gassco.no/wps/wcm/connect/Gassco-EN/gassco/Home

http://www.gassco.no/wps/wcm/connect/Gassco-EN/gassco/Home



Global Subsidies Initiative (GSI). (2010b). Subsidy estimation: A survey of current practice.Geneva: The Global Subsidies Initiative of the International Institute for SustainableDevelopment. Retrieved December 8, 2011, fromhttp://www.globalsubsidies.org/resources/subsidy-estimation-survey-current-practice

Klima-og forureiningsdirektoratet (Klif). (2011). Oil and gas industry emissions and discharges2010. Retrieved December 8, 2011, from http://www.klif.no/no/english/english/Whats-new/Oil-and-gas-industry-emissions-and-discharges-2010-/?cid=29292

Konkraft. (2009). Konkraft-rapport 7: Ringvirkninger av petroleumsvirksomheten [Effects ofpetroleum activity]. Oslo: Konkraft. Retrieved December 8, 2011, fromhttp://www.konkraft.no/default.asp?id=1007

Lund, D. (2009). Rent taxation for nonrenewable resources. Annual Review of ResourceEconomics, 1, 287–308.

Lund, K., and Henriksen, P. R. (2011, March 1). Ingen Subsidiering av Letevirksomheten [Nosubsidy to exploration activity]. Dagens Næringsliv [Business Today]. Retrieved December 8,2011, fromhttp://www.regjeringen.no/nb/dep/fin/aktuelt/taler_artikler/taler_og_artikler_av_ovrig_politisk_lede/taler-og-artikler-av-statssekretar-kjeti/2011/ingen-subsidiering-av-letevirksomheten.html?id=634874

Menon. (2009). Confidential report to the Minstry of Petroleum. Contact http://menon.no/kontaktfor details.

Ministry of Finance. (2011, October). National budget 2012. Retrieved fromhttp://www.statsbudsjettet.no/Statsbudsjettet-2012/English

Ministry of Finance. (2009, October). National budget 2010. Retrieved fromhttp://www.statsbudsjettet.no/Statsbudsjettet-2010/English

Ministry of Finance. (2005). Veileder i Samfunnsøkonomiske Analyser [Guide to EconomicAnalyses]. Oslo.

Ministry of Finance. (2002, October). National budget 2003. Retrieved fromhttp://www.statsbudsjettet.no/Statsbudsjett-2003/English

Ministry of Petroleum and Energy. (2011). Facts 2011. Oslo.

Ministry of Petroleum and Energy. (2010a) Facts 2010. Oslo.

Ministry of Petroleum and Energy. (2010b). Prop. 1 S (2010–2011). Oslo.

Ministry of Petroleum and Energy. (2009). Prop. 1 S (2009–2010). Oslo.


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Norwegian Bank Investment Management. (n.d.) Market Value. Retrieved October 30, 2011,from http://www.nbim.no/en/Investments/Market-Value

Norwegian Petroleum Directorate (NPD). (2010, July 5). The petroleum sector: Norway’s largestindustry. Retrieved on December 8, 2011 from http://www.npd.no/en/Publications/Facts/Facts-2010/Chapter-1

Norwegian Petroleum Directorate (NPD) (n.d.) Database. Retrieved fromhttp://factpages.npd.no/factpages/Default.aspx?culture=no

Osmundsen, P. (2000). Nøytralitet under ulike bibetingelser [Neutrality under differentconditions]. Appendix 3 in Norwegian Oil Industry Association, Taxation of petroleum operations.Oslo: University of Stavanger/Norwegian School of Economics.

Sawyer, D., and Stiebert, S. (2010). Fossil fuels – At what cost? Government support forupstream oil activities in three Canadian provinces: Alberta, Saskatchewan, and Newfoundlandand Labrador. Geneva: The Global Subsidies Initiative of the International Institute forSustainable Development. Retrieved December 8, 2011, fromhttp://www.globalsubsidies.org/files/assets/ffs_awc_3canprovinces.pdf

Statistics Norway. (2011). Statistics ordered by subject. Retrieved fromhttp://www.ssb.no/english/subjects

Statistics Norway. (n.d.). 10.06 Mining and extraction, incl. oil and gas. Online database.Retrieved December 8, 2011, from http://www.ssb.no/english/subjects

Vatne, E. (2007). Regional fordeling av sysselsetting i norsk petroleumsrelatert leverandørindustri[Regional distribution of employment in Norwegian petroleum-related supply industry]. SNF-project no. 2455. Bergen: Samfunns- og næringslivsforskning AS.

Wood Mackenzie. (2011, August). Global economic model. Edinburgh: Wood Mackenzie.



8. FURTHER READING

Boadway, R., and Bruce, N. (1984). A general proposition on the design of a neutral businesstax. Journal of Public Economics, 24, 231–239.

Brown, E. C. (1948). Business income, taxation, and investment incentives. In L. A. Metzler(ed.), Income, employment and public policy: Essays in honor of Alvin H. Hansen (300–316).New York: Norton.

Fane, G. (1987). Neutral taxation under uncertainty. Journal of Public Economics, 33, 95–105.

Garnaut, R., and Clunies Ross, A. (1975). Uncertainty, risk aversion and the taxing of naturalresource projects. The Economic Journal, 85(338), 272–287.

Hagen, K. P., and Åvitsland, G. (2000). Grunnrenteskatt, kapitalbeskatning og usikkerhet[Resource rent, capital tax and uncertainty]. In Skattlegging av petroleumsaktivitet” [Taxation ofpetroleum activity], NOU 2000:18, 2000, appendix 2.

Lund, D. (2002). Petroleum tax reform proposals in Norway and Denmark. Energy Journal,23(4), 37–56.



APPENDIX A: VALUE OF SUBSIDIES

Subsidies have different economic characteristics. Based on the economic character of the subsidy, we splitthe subsidies in three subgroups: transfers, government organizations with a non-profit orientation andinvestment subsidies. This third group of subsidies is peculiar for its time-critical perspective. By this, wemean that the value of the subsidy depends on the value the economic decision-makers believe they cancreate with their real capital.

A.1 GOVERNMENT TRANSFERS AND PUBLIC PROVISION OF GOODS AND SERVICESAT BELOW-MARKET PRICES

When the Norwegian government provides transfers in cash or offers in-kind benefits to the petroleum industryat below-market prices, it is seen as a subsidy. Examples of such subsidies include R&D financing and seismicinvestigations that the NPD conducts at the expense of the Norwegian government.

The value of the transfers is the sum of any transfers in a given year. In this report, we present numbers for2005 through 2010, but we chose the year 2009 for the summary to enable comparison with the explorationsubsidy. See section 4 for the value of the subsidies and further discussion about them.

A.2 NON-PROFIT COMPANY

When the Norwegian government offers services without receiving any profits, the government provides aservice at below-market prices. Hence, a state-provided non-profit company such as Gassco is a subsidy. Thecompany is a wholly owned government company and conducts an important administration and managementjob for the gas production companies.

Calculating the value of such a subsidy is done by deciding a government profit share of the operating costsof the company. As we discussed in section 2, the government is likely to apply a higher real discount ratethan usual due to the higher systemic risk for the Norwegian government when dealing with the oil and gasindustry. The 6 per cent real discount rate constitutes a good approach to a possible return on the Gasscobusiness. The sensitivity of this choice is investigated by also applying 8 per cent (high estimate) as well as4 per cent (low estimate) rates.

A.3 SUBSIDIES WITH A CRITICAL TIME PERSPECTIVE: AN NPV APPROACH

Several of the subsidies concern investments. We have defined three such investment subsidies: the Snøhvit,exploration and partial investment subsidies. Here we discuss the methodology for calculating the value ofthe subsidies. The presentation of the subsidies and their value are presented in section 4.

With every investment decision, the time perspective is critical. An enterprise invests in capital and then canharvest the return on the investment over a number of years into the future. Thus, with investment subsidies,it is important to conduct an NPV analysis to understand the value of the subsidies. In fact, the investmentsubsidies are only profitable for the industry in an NPV perspective.



It is important to understand the logic behind applying an NPV methodology. An NPV analysis takes intoaccount the time perspective of initial investments versus future profits (profits = revenues less costs andtaxes). Profits today have a higher value than the same profits in the future due to the fact that if the profitsappear today, they can be used for alternative purposes to create a return. The NPV method is a proxy forthese lost alternative returns. The investment that creates the highest NPV (the best alternative future returnon an investment) should be chosen if funds for investing are restricted.

In a more theoretical terminology: economic theory says that a company would only invest to the extent thatan economic opportunity has a higher expected return than the closest alternative opportunity, assuming itcan only invest in one of the opportunities. To the extent that a company has funds available to undertakeseveral (but not all) investments, it is quite common in the oil and gas industry to establish a ProfitabilityIndex ranking, where the economic opportunities available for the company are ranked against each other. Ifa company has more funds available than opportunities, it is quite common to set a threshold for undertakingan investment. All the investments that meet the threshold will be undertaken, possibly phasing theinvestments in order to avoid bottlenecks in funding and use of critical resources. For many oil and gascompanies, these two approaches have blended into a minimum NPV threshold. The value of a project is theNPV of the sum of the expenditures, Et, and the revenues, Rt:

In this report, an NPV calculation offers us an approach for taking into account the time perspective of thesubsidies for the government and the petroleum industry. We use three discount factors in this study (seesection 2). For the government, we have chosen to use a 6 per cent return on investments. This is inaccordance with the manual for cost-benefit analyses from the Ministry of Finance (2005). In this manual,the Ministry of Finance states that a 2 per cent real return is the risk-free return. Investments in petroleumactivities are not risk-free. While analyses for ordinary infrastructure projects usually apply a 4 to 5 per centreal return, we use a 6 per cent real discount rate. There are arguments that the return should be set evenhigher, for example up to 7 or 8 per cent.

As discussed in section 2, we apply two different discount factors, 9 per cent and 12 per cent, for petroleumcompanies. We do this to capture the different discount factors that are used across the petroleum industryin Norway and globally. Some companies make use of an even higher discount rate, if they expect a higherreturn on their capital investments due to increased risk in the projects or if the discount rate is used as athreshold for investments. Our results (section 5) show the effects of discount factors on economiccalculations. In section 5 we also discuss variations to the above methodologies for specific subsidies.

A.4 QUANTIFYING THE EXPLORATION REIMBURSEMENT

One of the subsidies offered the petroleum industry in Norway is the exploration cash reimbursement toexploration companies. We explain below how we calculated the value of this exploration reimbursement.

As explained in section 4, the exploration subsidy is the ability to receive a reimbursement the following yearinstead of writing off the expenditures in the future when the company has reached a taxable position. Thevalue of the subsidy is thus a function of how long it takes for companies to reach a taxable position, or indeedwhether they ever do. The dynamics of the development from an exploration company to a production companyin a taxable position are fairly complex:

Et Rt(A.1) NPV = –EO – Σn

t =1 (1+r)t + Σnt =1 (1+r)t



1. The exploration companies established themselves in Norway on different dates.

2. The companies spend different amounts on exploration and asset development.

3. Some companies have bought producing or under-development assets through acquisitions.

4. The companies do not have control over which licences they receive in the licencing round.

To calculate the value of the exploration reimbursement, information on the duration of the period from whenexploration expenditures are made to when a tax position is reached is therefore necessary. Such informationabout the future is, however, not available.

Instead, we calculated the exploration subsidy value by assuming an average time for reaching a taxableposition for a company receiving an exploration subsidy in 2009. To decide the average time, we haveindicated a timeline for how long it may take a company to reach a taxable position from the establishmentof an office in Norway. Table A.1 shows the estimated time for the development steps from start-up toreaching a taxable position.

TABLE A.1: SCHEME FOR ESTIMATION OF TIME FROM START-UP TO REACHING TAXABLE POSITIONACTIVITY ESTIMATED TIME

Establish office 1 year

Apply for licensee status 1 year

Receive production licence 1 year

Explore to make a discovery 2–4 years

Conduct planning period 1 year

Submit plan for development and operation to the Norwegian government 1 year

Develop field 2–4 years

Produce to enter taxable position 3-4 years

Estimated time from start-up to taxable position 13–17 years

This is an optimistic timeline, and there are examples from the early history of Norway that companies thatinvested continuously in new fields took more than 20 years to reach a taxable position (the explorationreimbursement and loss carry-forward with interest were not in place at that time). The exploration subsidywas introduced in 2005. Most of the receiving companies arrived in Norway between 2004 and 2009. Sinceinformation about the future does not exist, we have made three scenarios for how long it might take for theexploration companies to achieve a taxable position. Table A.2 shows the assumptions for these scenarios.

TABLE A.2: ASSUMPTIONS REGARDING THE TIME AN EXPLORATION COMPANY TAKES TO REACHTAXABLE POSITION, BEGINNING IN 2009

Scenario Years before establishment of tax position

Low 5

Middle 10

High 15



The Norwegian government promises the exploration companies an ability to write off expenditures in thefuture or receive the expenditures if the companies end business in Norway (this subsidy is discussed insection 4). The government’s debt to the companies acquired during a period without a taxable income isincreased annually with a risk-free interest rate. Since these expenditure write-offs are guaranteed, thegovernment believes a risk-free interest rate makes economic sense. We have used the following equations inour calculations:

,

where Valuery, the value of the exploration subsidy, is dependent on how many years (shown in table 5.2), y,it takes to reach a taxable position, and the discount factor of the company, r (shown in section 2). rf is therisk-free interest rate that the government uses for other not-yet-claimed expenditures in the oil and gasindustry. E0 refers to the value that the government owes the companies, the reimbursement, in year 2009,but in 2011 NOK. The first part of the equation refers to the reimbursement rules: in year 1, the governmentpays back the investment conducted in year 0. Thus, the reimbursement is increased with the risk-free interestrate but decreased in value due to the fact that the companies are not able to invest this money before theyreceive it. The second part of the equation shows the tax system without exploration reimbursement. Thispart is less than the first part because the year, y, is larger than 1 year.

A company operating in a risky business like exploration activity may receive even higher benefits from beingpaid back the government share fast. For instance, even though the companies are guaranteed to be able towrite off the expenditures in the future or to be paid back by the government in the case of bankruptcy, theinterest rate on debt is high. This is due to the lack of perfect competition in the financial markets and thelack of a free float of capital. In this study, we have only taken into account the direct NPV of the fast payback.The subsidy may have a larger value for the companies than what is taken into consideration here; in otherwords, this is a conservative estimate.

(A.2) Valuery = (– (EO) + (1+r)1 ) – (EO) + (1+r)y ),EO*(1+rf)1 EO*(1+rf) y



APPENDIX B: IMPACT ASSESSMENT OF A REMOVAL OF POTENTIAL INVESTMENTSUBSIDIES

Many factors involved affect a petroleum company’s decisions. These factors range from macroeconomicconditions (oil price, global demand, interest rates, etc.) and government regulations (tax policies, securitypolicies, labour market policies, etc.) to specific business and geological situations.

A definite value for the impacts is highly uncertain, considering the large variability in how the enterprisesand industry could change their behaviour facing a removal of the subsidies.

Due to the large uncertainty in the calculations, we develop scenarios for the impact assessment. In thesescenarios, we change the basic assumptions underlying the calculations.

When larger institutions conduct analyses of the macroeconomic impact of exogenous shocks, such as politicaldecisions, they often make use of general equilibrium models. Statistics Norway runs their MODAG (basedon yearly inputs) and KVARTS (based on quarterly inputs) models to estimate the future of the Norwegianeconomy (economic activity, investments, wages, unemployment rates, etc.). The Statistics Norwaymacroeconomic group and MODAG are two of the most important contributors to the Ministry of Finance intheir economic planning. Also, MODAG and KVARTS receive broad public legitimacy. The impact-assessmentapproach outlined below is thus an alternative way to measure the effects of subsidies. We present the mainresults from the KVARTS model in section 5 to enable a comparison between our results and the results froma macroeconomic general equilibrium model.

We make use of general activity numbers from the industry as well as more specific data on the outcome ofpetroleum activity. We provide assessments of how the potential subsidies affect the Norwegian economy interms of employment, economic activity and government revenue. The results show what a removal of thepotential subsidy regime will involve ceteris paribus, that is, if everything else stays the same. However, in adynamic and fast-changing world, such a condition will never be experienced. In addition, one needs toconsider the relationship with the marginal tax rate.

It is important to state that the results are only indications of what the consequences of subsidy removalto the petroleum industry and the Norwegian economy might be. An attempt to forecast the future oridentify how the present would have been with an alternative policy framework is always characterized bysignificant uncertainty.

B.1 DATA

To assess the effects of the subsidies, we use both general petroleum industry data and more specific datafor outcomes of the petroleum activities. Here, we define three general levels of data that we use to indicatethe importance of the subsidies to the Norwegian economy and society. These data concern petroleumproduction, petroleum investments, government revenue and employment. These four macroeconomic dataare used for calculating factors for the effect assessment. It is thus important to translate subsidy removalsover to petroleum production and investment. This translation is explained in the paragraphs below.

Related to these macroeconomic data are employment in the petroleum industry and emissions of carbondioxide and nitrous oxides. These effects are treated separately below. First, we show the data used in theeffect assessment. Then, we establish the impact on government revenue, employment and the environmentby the reduction of production and investments.



B.1.1 PRODUCTION DATATo get a grip on the activity level, the production of petroleum is a good proxy. Production data illustrates theactivity level on the NCS. The total production of hydrocarbons, P, equals the production of each of the typesof hydrocarbon (t), oil (o), gas (g), NGL (n) and condensate (c), on each of the fields (f), from field 1 to q, onthe NCS:

(B.1) PT = Σct =oΣ

qf =1Pft

The data was provided by the NPD.

B.1.2 INVESTMENT DATATo enable future production, the industry is required to invest in platforms, subsea installations, processingfacilities, terminals, drilling and so forth. These investments have an impact on both future production andemployment in the petroleum and supply industries. Due to the resources on the NCS, a large supply industryhas developed in Norway. This industry is currently able to supply the petroleum industry with a wide rangeof products. Total investments in a given year (I) are defined by:

(B.2) IT = Σza=1Ia,

where Ia represents the investments conducted in categories a to z. Thus, total investments are the sum ofinvestments in each category. The numbers are available from Statistics Norway (2011).

B.1.3 GOVERNMENT REVENUE DATAGovernment revenue data are available from, among others, Statistics Norway. The revenues are available onan annual basis and are separated into different types of income, p: state direct financial investment, taxes,taxes on carbon and nitrous oxides, and Statoil dividends:

(B.3) GT = Σ4p=1Gpy

B.1.4 PETROLEUM-RELATED EMPLOYMENTPetroleum activity has four direct employment effects:

1. Petroleum industry employment due to production, s1.

2. Petroleum industry employment due to investments, s2.

3. Supply industry employment due to investments, s3.

4. Supply industry employment due to production, s4.

From Vatne (2007), we find that the number of people working in the supply industry is approximately 85,000.We have produced estimates that increase this number to 100,000 (Econ Pöyry, 2010). In this study, we willuse the publicly available Vatne numbers. The different estimates give a fair indication that employmenteffects can be different (higher) than the effect assessment here.

The petroleum supply industry delivers goods and services to both the petroleum industry’s investments andthe current production. Examples of provision of goods and services by the supply industry are platforms,subsea facilities and processing equipment. The supply of production-related goods and services includesproduction well drilling, consultant work, accounting and catering. Eika et al (2010) state that the supplyindustry delivers almost as much to the current production as to the petroleum industry’s capital investments.



In this study, we have thus applied a rule of thumb that 45 per cent of the supply industry is employed inparts of the industry that deliver for the production of petroleum, while 55 per cent is employed to servepetroleum investments.

Statistics Norway estimates the number of people working with petroleum production at up to 40,000, withan additional 20,000 employed in refineries, petrochemicals and plastics (Konkraft 2009, p. 6). We havetoo little information on how many are employed because of investments and how many because of production.We assume that 30 per cent are employed from investment (exploration, development, acquisition), whereasmost (70 per cent) are assumed to be employed from petroleum production.

Both Vatne and Statistics Norway numbers are from 2007. Thus, when we calculate the effect of productionand investments on employment levels, we use 2007 data. It is reasonable to assume that the relation betweenemployment and production and investment levels are stable over time. It is also reasonable to assume thatthe difference in this group between Vatne (2007) and Econ Pöyry (2010) can be substantially attributed tolarger-than-anticipated exports from the Norwegian supply industry, as shown by the difference in exportsbetween Pöyry (2009) and a report to the Ministry of Petroleum and Energy by Menon (2009) on exportsfrom the Norwegian service and supply industry.

Taken together, the direct employment in the petroleum and supply industries constitutes the totalemployment:

(B.4) s = Σ4k=1sk,

where sk refers to the four different employment effects shown above.

The petroleum industry has a large need for goods and services both for investments and daily operations.The petroleum supply industry in Norway rose in response to demand from the Norwegian petroleum industry.Now, the Norwegian supply industry is market competitive in many areas, but still the NCS constitutes themost important demand. In the figure below we outline the state of the supply industry as per the Pöyry studyin 2009. It is important to include effects on employment in the petroleum supply industry in the case of asubsidy removal.

There is an issue that the employment figures do not take into account nationality among the workers. Thismeans that we may also count foreign labour in the employment figures. Norway experiences an influx ofworkers from surrounding countries, such as Sweden, but Middle and Eastern Europeans also come to Norwayto find employment. From a national perspective, these migrants should not count as resources to theNorwegian society that would be absorbed in other sectors if they did not work in the petroleum sector.



FIGURE B.1: THE STRUCTURE OF THE NORWEGIAN SUPPLY INDUSTRY

Source: Reprinted with permission from Econ Pöyry (2009).

B.1.5 ENVIRONMENT DATAFrom the Ministry of Petroleum and Energy’s Facts 2010, we know that the general level of carbon dioxideemissions is approximately 51 kilograms per Sm3 (2010). We use these equations to calculate the carbondioxide emissions per produced unit of petroleum:

where F2009 is the total emissions in 2009.

The emissions of nitrous oxides are given by this equation:

where G2009 is the total emissions in 2009.

The emissions of mnVOC are given by this equation:

where H2009 is the total emissions in 2009.

We assume here that the emission factors stay constant over time.

F2009(B.5) CO2/boe=P2009

,

G2009(B.6) NOx/boe=P2009

,

H2009(B.7) mnVOC/boe=P2009

,



B.2 METHODOLOGY FOR CALCULATING THE EFFECTS OF INVESTMENT SUBSIDYREMOVAL

In this section, we show the methodology for calculating the effects of investment subsidy removal. As weshowed in section 2, the exploration subsidy has slightly different characteristics than the other investmentsubsidies. The reason is that the exploration subsidy increases the exploration activity, a step that occursbefore investment in production.

As the figures in section 2 show, we take two independent variables into account in the calculation:investments and production. Investments impact the level of production and employment. Production impactsgovernment revenue, employment and the environment. These five impacts are explained below.

B.2.1 INVESTMENT IMPACTS ON PRODUCTIONInvestments in production facilities enable companies to extract petroleum resources from reservoirs on theNCS. Investments are long term. Thus, the impact on production of an investment must be seen in a reservoirlifetime perspective. From Facts 2011 (Ministry of Petroleum and Energy, 2011), we can acquire data onboth historical and forecasted investments in all producing fields as well as the estimated resource base forthese fields. Hence, we can assume that the relationship between investments and production will proceedinto the future:

This assumption is fairly general. The accuracy of P/I is given by the ability of the companies to consistentlyachieve the same rate of production per investment through time.

By multiplying (B.8) by the reduction in investments, we get the reduction in production:

(B.9) ΔP=P/I*ΔI

B.2.2 INVESTMENT IMPACTS ON EMPLOYMENTPersonnel are required to produce and install petroleum production equipment, drill wellbores, place subseainstallations on the sea bottom and so on. Employment in the petroleum industry is affected by investmentlevels. The effect is equal to:

(B.10 a) Δs2=α2 x ΔIT

where α2 is defined as the employee per investment in sector 2:

Above we stated that the investment part of the supply industry has the largest market share. The effect onthe investment-related employment in the supply industry is calculated as:

(B.11 a) Δs3= (1 – β3) x α3 x ΔIT

where is defined as the number of employees per invested NOK:

and β3 is defined by investment goods and services offered by domestic companies, ID:

Σ2011

(B.8) P/l= ,y=1970Py

Σ2011y=1970Iy

s2IT(B.10 b) α2= ,

s3IT(B.11 b) α3= ,

IDIT(B.11 c) β3= ,



Σ2011

(B.12) G/P= ,y=1980GTy

PT

s1PT

(B.13 b) α1= ,

s3PT

(B.14 b) α4= ,

From Eika et al. (2010, p. 5), we know that the import factor is 0.42 when it comes to the supply of goodsand services for petroleum investments.

B.2.3 PRODUCTION’S IMPACT ON GOVERNMENT REVENUEThe impact of production on government revenue is given by total government revenue summed over the yearswith surpluses on the budgets:

B.2.4 PRODUCTION’S IMPACT ON EMPLOYMENTProduction of oil and gas requires employees. We have shown above the impact of investments on employment.Below, we show the calculation of the impact on employment from a change in the production level.

The effect on production-related employment levels in the petroleum industry is equal to:

(B.13 a) Δs1 = α1 x ΔPT,

where α1 is defined as the employees per produced Sm3 in sector 1:

The supply industry also serves the petroleum industry in their daily operations with goods and services. Thisindustry experiences minor competition from international enterprises. Thus, the calculation does not includethe import factor, as it does with the investment supply industry employment:

(B.14 a) Δs4 = α4 x ΔIPT,

where α2 is defined as the number of employees per invested NOK:

In table B.1, we present the investment and production factors that we used to evaluate the effect of subsidyremoval on employment in the four defined sectors.

TABLE B.1: EFFECT FACTORS OF PRODUCTION AND INVESTMENTEmployment Effect factor Term Value

Petroleum production �α1 Empl./million Sm3oe 191

Petroleum investment �α2 Empl./billion NOK investment 171

Supply industry investment �α3 Empl./billion NOK investment 172

Supply industry production �α4 Empl./million Sm3oe 160

Data sources: Vatne (2007), Statistics Norway (2011), Eika et al (2010).

B.2.5 IMPACT OF PRODUCTION ON THE ENVIRONMENTSince we have already established the contribution of petroleum production per kilogram to carbon dioxide,nitrous oxide and volatile organic carbon emissions, as well as chemicals released into the sea, it is an easytask to generalize the total reduction in these emissions (M), achieved by subsidy removal:

(B.15) ΔMw = factorw x ΔPT,

where w refers to the different types of emissions.



ABOUT THE AUTHORS

Econ Pöyry is the Norwegian part of Pöyry Management Consulting, with offices in Oslo and Stavanger. Theyoffer insight and understanding into the complex interaction among markets, technology and policy. Theyoffer services in market analysis, market design, and strategy and business consulting. Their three corecompetency areas are energy, economics, and environment and climate.

Pöyry Management Consulting has about 500 consultants in Europe, North America and Asia Pacific,including Australia. Their main focus area is consultancy for large clients in the energy sector and industry,plus the financial sector, public authorities and international organizations. Services range from traditionalstrategic advice via market analysis and market design to process consultation and process optimization.

Pöyry is a global consulting and engineering company dedicated to balanced sustainability. They offer theirclients integrated management consulting, total solutions for complex projects, and efficient, best-in-classdesign and supervision. Their in-depth expertise extends to the fields of industry, energy, urban design andmobility, and water and environment. Pöyry has 7,000 experts operating in about 50 countries.


THE GLOBAL SUBSIDIES INITIATIVE (GSI) OF THE INTERNATIONAL INSTITUTE FOR SUSTAINABLE DEVELOPMENT (IISD)

The International Institute for Sustainable Development (IISD) launched the Global Subsidies Initiative (GSI)in December 2005 to put a spotlight on subsidies – transfers of public money to private interests – and howthey undermine efforts to put the world economy on a path toward sustainable development.

Subsidies are powerful instruments. They can play a legitimate role in securing public goods that wouldotherwise remain beyond reach. But they can also be easily subverted. The interests of lobbyists and theelectoral ambitions of officeholders can hijack public policy. Therefore, the GSI starts from the premise thatfull transparency and public accountability for the stated aims of public expenditure must be the cornerstonesof any subsidy program.

But the case for scrutiny goes further. Even when subsidies are legitimate instruments of public policy, theirefficacy – their fitness for purpose – must still be demonstrated. All too often, the unintended and unforeseenconsequences of poorly designed subsidies overwhelm the benefits claimed for these programs. Meanwhile,the citizens who foot the bills remain in the dark.

When subsidies are the principal cause of the perpetuation of a fundamentally unfair trading system, and lieat the root of serious environmental degradation, the questions have to be asked: Is this how taxpayers wanttheir money spent? And should they, through their taxes, support such counterproductive outcomes?

Eliminating harmful subsidies would free up scarce funds to support more worthy causes. The GSI’s challengeto those who advocate creating or maintaining particular subsidies is that they should be able to demonstratethat the subsidies are environmentally, socially and economically sustainable – and that they do not underminethe development chances of some of the poorest producers in the world.

To encourage this, the GSI, in cooperation with a growing international network of research and media partners,seeks to lay bare just what good or harm public subsidies are doing; to encourage public debate and awarenessof the options that are available; and to help provide policy-makers with the tools they need to secure sustainableoutcomes for our societies and our planet


The GSI is an initiative of the International Institute for Sustainable Development (IISD). Established in 1990,the IISD is a Canadian-based not-for-profit organization with a diverse team of more than 150 people locatedin more than 30 countries. The GSI is headquartered in Geneva, Switzerland and works with partners locatedaround the world. Its principal funders have included the governments of Denmark, the Netherlands, NewZealand, Norway, Sweden and the United Kingdom. The William and Flora Hewlett Foundation have alsocontributed to funding GSI research and communications activities.

FURTHER DETAILS AND CONTACT INFORMATION

For further information contact Ms. Kerryn Lang at: [email protected] or [email protected] or +41.22.917.8920.

GSI ProgrammeInternational Institute for Sustainable Development9 chemin de Balexert, 1219, Geneva, SwitzerlandFax: +41.22.917.8054

Fossil Fuels â€“ At What Cost?

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