Statoil’s Castberg oil project undermined by Norway tax increase

Statoil ASA (STL), Norway’s biggest energy company, said its plans for the Johan Castberg oilfield in the Barents Sea are being undermined by unexpected regulatory changes that threaten to limit development in the far north.

Castberg, consisting of the twin Skrugard and Havis discoveries, will now “be a bit more challenging,” Oeystein Michelsen, executive vice president for development and production in Norway, said in an interview in Bergen yesterday. The project, located about 240 kilometers (150 miles) off the coast of Hammerfest in northern Norway, needs new infrastructure and was already a challenge in terms of costs, he said.

Norway, Western Europe’s largest oil and gas producer, is trying to boost oil and gas production by expanding off its northern coast as output falls from maturing fields in the North Sea. The government has drawn criticism from energy producers, including Statoil, ConocoPhillips (COP) and Exxon Mobil Corp. (XOM), after announcing a surprise increase in taxes on companies.

“Everything is becoming a bit more challenging, a bit more difficult to bring onwards,” Michelsen said. The tax increase “will definitely stop the most marginal projects,” he said.

Norway will limit the tax-deductible component of petroleum income so that a so-called uplift on cash flow is cut to 22 percent from 30 percent, the government said on May 5. It will also raise its special petroleum tax to 51 percent from 50 percent, keeping a top tax rate of 78 percent. The increase will raise total oil industry taxes by about 3 billion kroner ($520 million) a year, it said.

Rekindle Interest

That decision has been criticised by Statoil CEO Helge Lund, who said a stable political and regulatory environment has been Norway’s “most important competitive advantage” during the past 20 years.

The changes will cut Statoil’s operating cash flow by less than 500 million kroner this year and increase to “full effect” after four to five years. It will also reduce tax deductions by 38 million kroner for 1 billion kroner invested, the Stavanger-based company has said.

Statoil, which operates about 80 percent of Norway’s oil and natural gas production, has said it will spend more than 80 billion kroner ($13.8 billion) with Petoro AS and Eni SpA to develop the Skrugard and Havis fields. Plans include a 280-kilometer pipeline and the region’s first oil terminal at Veidned, which will be able to handle additional volumes.

The Castberg project, which may hold as much as 600 million barrels of recoverable crude, has helped rekindle interest in the Barents Sea after a decade of disappointing results.

Less Attractive

At least 12 wells will be drilled there this year, the same number as the previous two years combined, as explorers seek to unlock an estimated 6 billion barrels of oil equivalent thought to be contained beneath its seabed.

Statoil, which operates about 80 percent of Norway’s oil and gas production, is leading the charge into the Barents, and has said it plans to drill nine wells in there in the space of about 12 months.

Whether Norway’s tax plans will reduce the attractiveness of the Barents Sea, already “a very high cost region,” will depend on oil prices and the success of future exploration there, Michelsen said.

Statoil, based in Stavanger, is Castberg’s operator with a 50 percent stake. Italy’s Eni SpA (ENI) has 30 percent, and Petoro AS, which manages Norway’s direct stakes in its oil and gas fields, has 20 percent. Statoil plans to submit a plan for development and operation to the government for approval next year before starting production in 2018.