Norwegian tax break prompts oil rush that could leave UK's North Sea behind

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The Independent Online

Norwegian tax law is enough to send most people to sleep, but recent changes have got executives in the UK oil and gas industry talking excitedly of a Norwegian gold rush.

Tax experts are even warning that the more lenient regime in Norway could see oil companies desert the British sector of the North Sea and head north-east to explore for oil instead.

The Norwegian government changed the way it taxes the oil industry in April 2004. From 1 January this year, oil companies need to pay the 78 per cent tax rate only if they are successful in drilling for oil.

In the past, companies had to pay the tax on their exploration costs even if they found no oil at all.

The next round of licences for unexplored areas - which are put out to tender every two years - takes place in November. Only three companies have pre-qualified for licences since the changes came into effect. They are the London Stock Exchange-listed Premier Oil, Norway's Altinex Oil and the Japanese firm Marubeni.

But analysts are predicting a rush of interest among other oil companies, particularly those that might otherwise have been more interested in exploring in UK waters. One accountant for a major US oil company said: "Following these changes, there is no doubt that Norway is more attractive than the UK."

Alan McCrae, a tax partner at Ernst & Young, said: "Oil companies look at Norway in a different light with the changes to the tax regime. It is now very attractive for exploration. There is a risk that oil companies could neglect the UK part of the North Sea."

The new tax regime, designed to boost flagging production in the Norwegian North Sea, Norwegian Sea and Barents Sea, were in sharp contrast to the situation in the UK, he said. In 2002, the Chancellor, Gordon Brown, increased the rate of corporation tax from 30 per cent to 40 per cent, prompting some oil firms to announce that they would cut future investment in the UK oil industry.

"The Norwegian government has sent out the signal that they welcome new oil exploration," Mr McCrae said. "The opposite is the case in the UK, where the Chancellor has been looking for more and more revenue."

In a report titled The Norwegian Petroleum Industry at the Crossroads, the Norwegian Oil Industry Association outlined two scenarios for the country's oil industry: gradual decline or long-term development. In the former scenario, it warned that oil operations would virtually disappear after 2020. The tax changes were the result of lobbying by the industry to encourage more exploration, and develop Norway's remaining reserves.

In 2002, oil-related activities made up 19 per cent of Norway's GDP, but the industry has been held back by a lack of new companies entering the market, according to energy consultancy Wood Mackenzie. The Norwegian oil industry is dominated by the two companies, Statoil and Norsk Hydro, which have relatively little interest in operating the smaller mature fields common in the North Sea.

In the UK, however, smaller and medium-sized companies account for most of the oil and gas produced in the North Sea. These companies are better suited to operating smaller fields.

Wood Mackenzie estimates that before the tax changes, the rate of return that oil companies could make under the Norwegian regime was lower than in most other countries, including the UK. The measure of rate of return is important because City analysts use it as a benchmark to assess oil companies' performance.

But tax experts added that Norway's 78 per cent rate for those companies whose operations proved successful was still higher than in the UK.