Forecasts for the oil industry – facts or scaremongering?

Petter-Osmundsen
04.05.2015
Norwegian prime minister Erna Solberg and her minister of finance, Siv Jensen, have presented figures which show a dramatic decline in demand from the petroleum industry, and conclude that Norway needs to improve the productivity of its mainland economy.
  • Petter Osmundsen, professor of petroleum economics, University of Stavanger.

I have taken a closer look at the basis for these data, which derive from a 2013 Statistics Norway (SSB) report commissioned by the Ministry of Finance on the future downscaling of the petroleum sector. The forecasts turn out to be far less dramatic than they appear to be when presented in summary form. SSB predicts an annual decline of 0.4 per cent as a proportion of mainland GDP. I also have a number of objections to the analysis. The conclusions drawn about a decline derive not from the economic analysis but from the assumptions made. SSB takes no account of a possible price recovery, underestimates the available resources and ignores possible expansion in that part of the supplies industry which delivers to foreign markets. The report is not a best estimate of the future of the Norwegian oil industry, but a downscaling scenario.

Introduction

Some members of the government seem to build their negative predictions of the petroleum industry on information reproduced by the Productivity Commission of 2015, which was based in turn on an SSB report by Cappelen et al (2013) – hereafter referred to as SSB (2013). This contains a figure which appears to show a sharp decline in domestic demand from the petroleum industry after 2015. The ministers concerned seem to believe that SSB was able in 2013 to predict the sharp cyclical downturn now being experienced by the petroleum industry after the growth in costs and the price slump, and that this decline is permanent. However, reading the actual SSB report – entitled The impact of the petroleum sector on the Norwegian economy and pay formation. Future downscaling and sensitivity to oil price shocks – creates a different impression. The conclusion is as follows:

The petroleum industry and the activities which follow in its wake are now substantial, even if production has declined from the peak year almost a decade ago. Demand from the industry is likely to continue to continue growing for some years, while production could remain stable for just under a decade to come. We expect a moderate declining trend in demand from the petroleum to begin about five years from now. In our view, production will first begin to fall in the 2020s and this reduction is likely to continue towards 2040.

 

Finance minister Siv Jensen

Figure 1. Finance minister Siv Jensen addresses the supervisory board of the Confederation of Norwegian Enterprise concerning “Towards the new normal” on 24 February 2015. The subtitle on the overhead is “Demand from the oil and gas industry. Percentage of GDP for mainland Norway”. Source: Tweet from Randi S Øgrey, director general of the Norwegian Media Business Association (MBL).

 

   The figure reproduced by the Productivity Commission and presentations by Solberg and Jensen are based on a price estimate of USD 94 per barrel in 2013 value, which remains flat up to 2040. That is a trend projection of a base scenario, and the report does not address short-term economic fluctuations of the kind being experienced today. Nor does it paint a dramatic picture. Output will stay stable until 2020 before falling gradually. Demand for the Norwegian economy, and specifically for the supplies industry delivering to the Norwegian continental shelf (NCS), is expected to decline by 0.4 per cent per annum as a proportion of mainland GDP. A very different and more dramatic picture has been painted in the Norwegian media. Nor does this conclusion represent a big and dramatic story – the predicted decline is the same as the one which occurred from 1993 to 2002.

   Commissioned by the finance ministry, the SSB report also presents a crisis scenario with a permanent drop in oil prices to USD 63 per barrel in 2015 value. This price assumption is not commonly found in oil analyses – the present price slump is regarded as temporary. Over time, investment cutbacks by the companies are expected to reduce supply while lower prices should boost demand, with price rises as the result. Such low prices far into the future are not discernable in forward markets, implicit in the pricing of oil companies, indicated in analyses from the International Energy Agency and so forth.

An inverse relationship exists between oil prices and the US dollar exchange rate, with the latter rising when the former falls. That means an oil price of USD 60 per cent barrel at the former rate of exchange corresponds to USD 80 at the present value of the Norwegian krone. It is unclear whether SSB has adjusted for this effect. In any event, the low oil price has a limited impact on SSB’s projections. The difference in output between the two price options is estimated to be about 20 per cent from 2030 to 2040. So the decline in future activity appears to be governed primarily by the assumed scope of petroleum resources. SSB is more conservative than other analysts here. The usual practice is to include an upside scenario in this type of analysis, which would take the form in this case of an oil price above USD 94 per barrel. That is not unrealistic in a perspective up to 2040. But this has been excluded since it was not part of the commission, which concerned a future downscaling of the oil industry. The conclusion that the oil industry in Norway has passed its peak and will contract steadily in the future accordingly derives primarily from the assumptions made with regard to reserves and oil prices, and not from the actual analysis. That helps to weaken the credibility of the report. So does the fact that expansion in the export-oriented part of the supplies industry in response to reduced domestic activity has been excluded. This part of Norway’s petroleum industry is not based on the development of Norwegian resources, and will alter the conclusions drawn concerning trends in demand from the supplies industry.

This is not a best estimate of the oil industry’s future, but a crisis scenario. The credibility of the report is also weakened by its failure to comment on the great uncertainty associated with projections extending 25 years into the future concerning undiscovered resources, reserves, exploration activity, costs and prices, and with the use of models which must necessarily utilise simplified assumptions and incomplete data. Some members of the government appear to regard the report as an accurate description of the industry’s future. Another problem is that the report is not transparent and verifiable. The authors state that they use figures from the Norwegian Petroleum Directorate (NPD) for resources up to 2030 and then utilise their own model to make projections. Their evidently conservative projection for 2030 to 2040 is neither documented nor described in the report. As far as I am aware, moreover, SSB does not have special expertise in this type of analysis. I believe they systematically underestimate undiscovered resources. An indication of this is provided when they comment that SSB (2013) is an update of Cappelen et al (2010):

Public balances now clearly appear more solid than three years ago, and larger oil reserves than earlier assumed have been proven. Demand from the petroleum industry is accordingly expected to remain higher for longer into the future than we assumed in the 2010 study.

This type of underestimate is normal.

 

Figure-2 - Download pdf

Figure 2. Production forecasts for the NCS. Current forecast compared with the long-term development trajectory and the depletion trajectory from a 2002 White Paper. Data source: NPD.

 

The figure shows that production forecasts for the NCS have consistently been too conservative. Among other considerations, they fail to take account of the political response to a decline. Active policies in the form of relicensing of relinquished acreage, admitting new players to the NCS and the tax refund scheme for exploration costs have given a substantial boost to operations.

 

Figure-3 - Download pdf

Figure 3. Production forecasts from the NPD’s resource report.

 

As the figure shows, forecasts are adjusted upwards over time. Building the SSB’s analysis directly on the NPD’s resource report for 2013 means that production will typically be underestimated.

Measures to increase productivity in the mainland economy appear to be the government’s principal commitment. In explaining the motivation for this approach, it refers to a very poor outlook for the petroleum industry. I have reviewed the SSB report to which reference is made, and cannot see that this provides a basis for concluding that prospects for the petroleum sector are dramatically negative. Nor does it accord with other analyses. The government’s commitment to improved productivity in the mainland economy is sensible and stands on its own two feet. So it is unnecessary to paint an inaccurate picture of what ranks as Norway’s largest and most important industry for several decades to come.

 

2. Crisis talk

The government has been criticised by unions, opposition parties and companies for talking down the petroleum industry. Its forecast for this sector is difficult to recognise. The trend described is said to build directly on figures from the NPD in 2013, but it is hard to see how this can be the case. See the graph below from the NPD’s resource report for 2013.

 

Figure-4 - Download pdf

Figure 4. Resource picture in 2013, NPD resource report.

 

I accordingly started to search for the government’s documentation of the oil industry’s obituary.

The basis for the government’s statements was easy to find. I went to the finance ministry’s website, where the headline item was the Productivity Commission (Official Norwegian Reports, NOU 2015:1). This is quite clearly the government’s project. The conclusions in the report also contain formulations which overlap with several of the recent statements from Jensen and Solberg:

The oil industry is no longer an engine for growth, and new industries must take over … The level of activity in the oil industry will decline in the future and play a reduced role in the Norwegian economy.

Petroleum activity is fine in principle, according to the commission:

The oil and gas industry may also have boosted productivity in the remainder of the economy, as the expansion of this industry has triggered higher productivity and more restructuring of industries exposed to international competition. Revenues from the sector have formed the basis for high employment growth in service industries serving the domestic market.

But this is now on the wane: “It must be assumed that demand impulses from the petroleum sector will be diminished in future.” The report then refers to figure 5.

 

Figure-5 - Download pdf

Figure 5. Petroleum sector demand. Percentage of mainland Norway GDP.

Source: Official Norwegian Reports, NOU 2015:1, Productivity – Underpinning Growth and Welfare, taken from Official Norwegian Reports, NOU 2013:13, Wage Formation and Challenges Facing the Norwegian Economy.

 

The graph is not so easy to read from the axes, but gives an impression of a petroleum industry in free fall, and thereby provides a strong motivation for improving mainland productivity. This is the commission’s mandate. It does not appear to be relevant to do anything about the petroleum industry, which seems to be declining in accordance with a deterministic pattern. The commission has not conducted any work of its own on developments in the petroleum sector, but has relied on the Holden III commission (Official Norwegian Reports, NOU 2013:13), which is the source of the graph.

This figure also appears in presentations by Solberg and Jensen. The head of the Bank of Norway also seems to take it as given in his annual address with the message “from special role to restructuring”. Everything seems to rest on this one graph, which is two years old. The Productivity Commission makes reference to a document by Rystad Energy, which deals only with the question of productivity developments in the petroleum sector. Where the commission is concerned, the document says nothing about future activity in the petroleum sector. As far as I am aware, Rystad Energy takes a far more positive view of the future for this industry than the conclusions drawn in the Productivity Commission’s report. In an interview with Stavanger Aftenblad on 31 March 2015, Markus Nævestad from Rystad Energy commented – with reference to the company’s latest quarterly report – that the petroleum industry will be recovering from late 2016. Colleague Anders Eraker characterises the decline as dramatic but emphasises that it has been worse before: “From 1998 to 2000, the market declined by no less than 23 per cent, and the position was much gloomier then than it is now.”

I have read a number of analyses of future activity on the NCS, and do not recognise the claim that the industry is in free fall. As far as I am aware, such a conclusion cannot be found in analyses by the petroleum authorities or by external analysts, such as Ramm (2014):

“It is then important to remember that what we are now experiencing is a downturn of limited duration, which we have experienced many times before, and that the long-term role of oil and gas, both in the world and in Norway, has not changed. It is still the case that the IEA expects the world to need oil and gas production at 95 per cent of today’s level in 2040, and that this will require big investments. It also remains the case that Norway has huge remaining resources, which provide a basis for petroleum operations for many decades to come.”

I accordingly continued my search with great anticipation.

Lessons we learn from the Holden III commission include the following:

Oil and gas are a non-renewable resource. Demand impulses for the mainland economy from the petroleum sector are likely to decline in the decades to come. This could happen suddenly if oil prices fall, or more gradually if resources on the NCS are the source of restrictions on activity. In the latter case, the effects on the Norwegian economy are likely to be limited in the decades to come.

This commission has also done no work of its own in this area, but refers to the SSB (2013) report:

Projections in [this report] assume a persistent but relatively gradual downscaling of activity in the petroleum industry.

I have then finally ended up at the single source which all the above refer to. But we are not given any impression of a free fall for the oil industry. On the contrary, the commission adds:

The consequences for the Norwegian economy would be significantly greater and more dramatic if the decline in activity in the oil sector were to be sudden. That could happen if we were to experience a demand-driven fall in oil prices.

Most observers consider today’s price fall to be driven by the supply side and to be temporary.

In addition to the figure which depicts a free fall in demand from the petroleum sector, the commission also utilises the associated production curve:

Figure-6 - Download pdf

Figure 6. Production of crude oil and natural gas in NOK billions (2010 value).
Source: SSB (2013)

 

The reference is once again to SSB (2013). I am not aware of any other analysis which indicates such a production trend on the NCS, and imagine that this must be based on special assumptions. However, no particular assumptions are presented at the point in the commission’s report where the figure is presented.

A subsequent section introduces a negative scenario derived from SSB (2013):

A negative international demand shock would also reduce demand for petroleum, and oil prices would fall. The calculation assumes that oil prices measured in USD fall sharply at the beginning of 2015 and then stabilise from 2016 at just over USD 60 per barrel in 2015 value, down from USD 94 in the reference trajectory.

After all this, I go now directly to the source.

 

3. The underlying report

SSB report 59/2013 (cited as Cappelen et al (2013)) is called The impact of the petroleum industry on the Norwegian economy and wage formation. Future downscaling and sensitivity to price shocks. It can be noted at once that it deals with future rather than present downscaling. Financed by the finance ministry, the report was produced for the Holden III commission.

The assignment was to study the effects of a permanent negative oil-price shock. On the basis of the projections made, the Modag macromodel has been used. The analysis was intended to cast light on how large the size of the economic segment exposed to competition should be, and how far the Norwegian economy can be said to be on a balanced trajectory in the long term.

Attention in the SSB report is focused on the decline in oil output since 2001. It could be worth noting that oil prices, even after a substantial drop, are much higher than they were then. The value of Norwegian oil production has accordingly risen.

Generally speaking, the normal procedure when making projections is to have a base price, and supplement it with a low price and a high price. But only the downside scenario is considered here: “We analyse the effects of a decline in international demand from 2015, which leads quickly to a permanent reduction in the oil price from USD 94 per barrel to USD 63 at 2015 value.”

The report does not explain how the price assumptions it contains have been arrived at, other than saying “… we have assumed an oil price which is clearly lower than today’s, but a real price of USD 94 per barrel in 2015 value”. Oil prices were high in 2013, when the report was written, and lay in the USD 110-120 per barrel interval. I am not aware of price analyses which suggest a permanent decline in oil prices, so the realism of the low-price scenario is questionable.

SSB must be given credit for at least presenting the reference trajectory for its projections:

The petroleum sector and the activity which follows in its wake are now substantial, even if production has declined from its peak year almost a decade ago. Demand from the industry is likely to continue to grow over several years, while production could remain stable for just under a decade to come. Around five years from now, we expect a moderate declining trend in demand from the petroleum sector to begin. We believe production will first start to fall in the 2020s, and this reduction is expected to continue towards 2040.

However, the assignment is to describe crisis: “A large and steep drop in demand from the petroleum sector would mean much greater challenges for the economy than those presented by the reference trajectory”.

It is not possible to read the report in a way which suggests the authors regard the crisis scenario as something to be expected. On the contrary, they write as follows:

Demand from the petroleum sector looks likely to continue growing for the next few years. SSB’s most recent business trend report, published in May 2013 … assumes continued growth in investment in the petroleum sector up to 2016, although at a slower rate than in the two preceding years. Oil prices were forecast in that report to decline slightly up to 2015 and then remain unchanged in real terms measured in USD. When growth in the international economic is also expected to increase in the time to come, a continued rise in Norwegian prosperity should be highly likely.

The figures in the SSB report are somewhat less dramatic than those found in the published studies based on the report. Actual demand is also illustrated here, and not just demand as a percentage of mainland GDP.

 

Figure-7 - Download pdf

Figure 7. Demand from the petroleum sector. NOK billion in 2010 value.
Source: SSB (2013)

Adding an expansion in the export-oriented part of Norway’s petroleum sector in response to lower domestic activity – which is excluded from the SSB’s analysis but which obviously forms part of a Norwegian macroeconomic context – means that the picture is not quite so frightening. Opting to treat demand as a percentage of GDP for mainland Norway naturally means that matters appear less promising:

 

Figure-8 - Download pdf

Figure 8. Demand from the petroleum sector. Percentage of mainland Norway GDP.
Source: SSB (2013)

 

However, they look nothing like as bad as depicted in the Holden III commission’s figure (see figure 5 above). The picture here has been made to seem much more dramatic, a virtually free fall, by compressing the figure – the length of the X axis has been reduced. Figure 2.4 in the SSB report also paints a relatively dramatic picture because the intervals along the X axis advance five years at a time. People looking at these figures are unlikely to convert this in their heads to an annual decline of 0.4 per cent.

The SSB report contains three appendices intended to document the analysis methods and data used. Appendix B deals with the modelling of the petroleum industry’s factor demand in the Modag macroeconomic model. This comprises 4 000 equations and is, by its nature, not transparent to or verifiable by external researchers. The model is primarily based on data and concepts from the national accounts. It comprises input-output correlations between different industries. The description of player behaviour is based on economic theory, combined with statistical analysis of historical data. Appendices B and C in the report provide relatively extensive descriptions of the macroeconomic modelling. The analysis concentrates first and foremost on trends in the petroleum sector far ahead in time, and pays little attention to issues related to cyclical developments.

Nevertheless, it is impossible to penetrate what is done in the model. Looking at the decline in demand indicated by it, I wonder if the following considerations have been taken into account.

  1. The share of imports is reduced during a downturn
  2. Large removal costs are incurred when the activity eventually comes to be phased out.

It is also worth noting the following formulations on page 12:

A significant consideration is the opportunity for the companies to modify production. As long as the downscaling in Norway is not part of a global trend, opportunities for deliveries to other areas – in other words, exports – will be an important factor. These deliveries could involve physical establishment in other countries or the export of services and equipment from the Norwegian supplies industry. Such activity is already taking place to a considerable extent. According to Econ Pöyry (2010), exports from what it describes as the service and supplies industry accounted for 40 per cent of a total turnover of NOK 330 billion for these enterprises in 2008. Companies and industries which have a labour force with a high level of specific expertise may perhaps be able to replace reduced deliveries to the Norwegian petroleum sector with increased exports.

I interpret this to mean that the report does not capture the expansion of the export sector as a response to the projected decline in domestic activity. That explains why the Norwegian resource base becomes so significant for the estimates. These exports are very high and growing. According to Rystad Energy, international turnover for Norwegian suppliers totalled NOK 206 billion in 2013. This represents a substantial segment of the supplies industry, and oil companies in Norway also have considerable activities related to projects in other countries. The report’s reference trajectory therefore would become more positive if it allowed for the possibility that reduced activity at home could be partly offset by expanding operations abroad.

Taking due account of the dynamics in the industry presents a challenge when making projections over a period as long as 25 years. I would imagine that a number of factors in the analysis are held constant or within certain intervals, which thereby distorts reality. Investment correlations in the industry are based on econometric estimates of historical data for the NCS. A period of expansion and stabilisation has occurred. Assuming a downscaling scenario to be correct, the activity picture would fall outside most of the base data available from the period utilised for making estimates. A factor which has been fairly stable during the historical analysis period is the tax system. That cannot be assumed to continue in the event of a downscaling, regardless of the official line being promulgated by the finance ministry today. Mature areas will enjoy more differentiated taxation and eventually lower taxes tailored to a reduced resource rent. Remaining resources will be socio-economically profitable to produce, but will not necessarily yield a sufficient return to oil companies which ration capital between different producer countries with the aid of decision criteria such as a net present value index. See Osmundsen et al (2001) and Kemp et al (2014). Lower taxation, which reflects a decline in the resource rent, will encourage a higher level of activity than in SSB’s projections. The UK, for example, which has a considerably more mature continental shelf than Norway, expects production to rise in the wake of recently introduced tax reliefs. See HM Treasury (2015). Placing an emphasis on positive tax-related depreciation, including an uplift of 62.5 per cent, is a response to growing rationing of capital by the companies. Such adjustments to operating parameters are not included in SSB’s forecasting model and analysis. A lasting decline in the industry would also create spare capacity in the supplies industry and reduce costs compared with a period of expansion and variable capacity utilisation.

Appendix A on future petroleum production stands out negatively with regard to documentation. That is unfortunate, given that the conclusions in the report build to a very great extent on assumptions related to future production trends. Reference is made to a model for petroleum output, but this is neither presented nor described. Ambiguities also exist in relation to data:

The Norwegian Petroleum Directorate (see NPD 2013) has produced forecasts for overall Norwegian petroleum production up to 2030. Our production estimates build directly on these forecasts … The resource estimates include only resources from those areas which had been opened by 31 December 2012. In other words, large parts of the Barents Sea are excluded from the resource estimates … We are not supported by figures from the NPD for the period from 2030-40.

SSB notes that Rystad Energy (2013) has produced forecasts extending further ahead in time, which estimate that substantial resources exist in the recently opened areas of the Barents Sea. However, SSB choses to ignore this since “the methodology underlying these estimates is not presented in the report, so that the uncertainty appears very great”. I must add here that SSB itself says nothing at all about the methodology underlying its own production projections, which include the prediction of a substantial contraction in exploration activity at an oil price of USD 94 per barrel, and that it makes no mention of the uncertainty related to its own forecasts. I interpret the report such that it completely ignores additional resources from newly opened areas of the Barents Sea:

Our reference scenario assumes that petroleum production declines gradually between 2030 and 2040. A price estimate of USD 90 per barrel, measured in 2013 prices, will help to ensure modest profitability for fields in Arctic areas, and can in itself contribute to reducing the industry’s desire to expand towards the far north.”

Reserves and production are quite simply not attributed by SSB to areas which the oil companies have been eager to have opened. Does it know something other people do not? As far as I am aware, SSB does not possess sub-surface expertise. The petroleum industry has gradually moved northwards. SSB positions itself within a tradition of sceptics who predict that activities further to the north will not be profitable, and who time and again have been proven wrong. It is easy to underestimate technological progress. This provides greater opportunities to understand reservoirs and can yield new and cheaper development solutions. Establishing a basic infrastructure in the area – to handle gas exports, for example – would also reduce the cost of tying in new developments.

 

4. Conclusion

SSB, and the finance ministry, predict a lasting decline for the oil industry. This contraction – or “the new normal”, as it has also been called – builds on an SSB report from 2013. As I read this document, and have had confirmed by its authors, it builds on a number of powerful assumptions which are not clearly specified. It does not account for growing exports of petroleum services as a response to modelled reductions in domestic demand. Predictions of this type build on a very large number of assumptions, which are open to question, as well as on simplifications in modelling and problems with poor and inadequate data. When projections are also being made 25 years into the future, it goes without saying that the level of uncertainty is very high. This is not communicated. A principal trajectory is provided, rather than a range of outcomes. Many will interpret this as a set of exact numbers, which is by no means the case – particularly considering that other analyses are far more positive. A downside scenario with low oil prices is outlined, but not the upside alternative normally provided in such cases. The commission from the finance ministry was crisis in the oil industry. The report looks only at resources opened in 2012, which means that much of the Barents Sea is excluded and the estimate for undiscovered resources is hence too low.

The government wants a reorientation from the oil sector to mainland industries. That appears to rest on overall macroeconomic considerations, rather than on industrial analysis. More than half of Norway’s petroleum resources remain to be recovered, and the country has been in the top 10 list of the world’s biggest discoveries for several years in a row. An extensive infrastructure has been built up in transport and processing of oil and gas, which must be exploited while it remains intact. Substantial resources remain in mature fields, and recovering these is time-critical. Fields on the NCS continue to provide an extraordinary pre-tax return and can yield big revenues for the government. A continued commitment should accordingly be devoted to this industry, and efforts made to avoid a deep downturn which causes the loss of jobs and expertise before the next recovery.

In choosing to exploit a contrived crisis in the oil industry, the government is presumably seeking to emphasise the need for reforms in mainland Norway. That requirement stands on its own two feet – talking down the oil industry is unnecessary. The problem with presenting graphs which show Norwegian oil activity to be in free fall lies in the adverse signal this sends about the industry’s future. It has a harmful effect on educational choices by young people, oil companies considering investment, and suppliers thinking of making a commitment in Norway. The contrast with the UK is sharp. When the British government presented its 2015 budget, increased oil production was identified as a target. Does this reflect a better resource base? Quite the contrary, the geology favours Norway. On the other hand, it says something about ambitions and a willingness to commit.

The downscaling of the petroleum sector appears to be deterministic in the government’s analysis, and to provide arguments for encouraging mainland productivity. It is important to remember that making provision for increased value creation on the NCS will also be possible – activity is a function of existing and anticipated operating parameters. A quote from SSB (2013) could be pertinent here:

Petroleum activities are important for the Norwegian economy. The gross product in the petroleum sector, defined in the national accounts as the production and pipeline transport industries, accounted in 2012 for almost 25 per cent of GDP. However, the bulk of this, 67 per cent, is value added to the input factors, which in principle comprise that part of the gross product which exceeds normal factor earnings. This is what is known as the petroleum rent. The government’s revenues from petroleum operations have corresponded to about 90-95 per cent of the petroleum rent in recent years.

A very sharp contrast can also be seen with actual policies for the oil industry. That is problematic at a time when producer countries are competing to attract scarce funds from oil companies which are cutting costs and rationing investment spending.

The British have now announced a big easing in the fiscal burden, with the marginal tax rate for new fields being reduced to 50 per cent. Favourable deductions for investment mean that the effective rate is actually lower than this. The UK already allows direct expensing of investments, a more beneficial solution for the companies than Norway’s depreciation system. That is now being supplemented by an uplift of no less than 62.5 per cent, which replaces several earlier targeted exemptions. Since the latter had an upper limit, the introduction of uplift will mean a substantial tax relief in most cases.

The overall impression provided by the Norwegian oil industry, on the other hand, is a deterioration in operating parameters.

Taxation was tightened in 2013 by a reduction in tax-related depreciation, in part with reference to a high level of activity. When the latter falls, the tax changes should be reversed. But there is no sign of that happening.

When the tax increase was implemented, the previous government talked a lot about studying tax reliefs for land-based facilities in northern Norway. This remains an open issue.

The current coalition’s political declaration states that measures for mature fields will be studied. This appears to have been shelved.

Measures to improve operating parameters for the mainland industry are sound. At the same time, it is important to take care of the oil industry. The approach should be industry-neutral – and fact-based.

 

Sources

Cappelen, Å, Eika, T, and Prestmo, J B (2010), Nedbyggingen av petroleumsvirksomheten – Hvor store blir virkningene for norsk økonomi?, Statistics Norway (SSB), Reports 46/2010, commissioned by the Ministry of Finance.

Cappelen, Å, Eika, T, and Prestmo, J B (2013), Petroleumsvirksomhetens virkning på norsk økonomi og lønnsdannelse. Framtidig nedbygging og følsomhet for oljeprissjokk, SSB, Reports 59/2013, commissioned by the Ministry of Finance, study carried out for the Holden III Commission.

Econ Pöyry (2010): Næringsmessige konsekvenser av redusert petroleumsaktivitet, Reports 2010-029.

HM Treasury (2015), Fiscal reform of the UK continental shelf:
response to the consultation on an investment allowance
, March 2015.

Kemp, A, Stephen, L, and Kasim, S (2014), The Economics of IOR/EOR in the UKCS, University of Aberdeen.

Official Norwegian Reports, NOU 2015:1, Produktivitet – grunnlag for vekst og velferd, Produktivitetskommisjonens første rapport, Report from a commission appointed by the Solberg government, 7 February 2014. Submitted to the Ministry of Finance, 10 February 2015. Chaired by Professor Jørn Rattsø, Norwegian University of Science and Technology (NTNU).

Official Norwegian Reports, NOU 2013:16, Lønnsdannelsen og utfordringer for norsk økonomi (Holden III), Report from a commission appointed by the Stoltenberg II government, 14 December 2012, submitted to the Ministry of Finance 3 December 2013. Chaired by Professor Steinar Holden, University of Oslo (UiO).

Norwegian Petroleum Directorate (2013): Petroleum resources on the Norwegian continental shelf, 2013.

Osmundsen, P, Emhjellen, K, and Halleraker, M (2001), “Investeringsallokering og valg av strategisk kjerne – Teori og praksis”, Beta, Tidsskrift for Bedriftsøkonomi, 2, 1-12.

Ramm, H H (2014), “Kort og lang sikt”, article, Offshore.no, published 09.09 12 December 2014,

http://www.offshore.no/sak/62825_kort_og_lang_sikt

Rystad Energy (2013): Petroleum production under the two degree scenario