Tax Increase Hampers Statoil ASA(ADR) (STO)

Page 1 of 2

Tax reform can be a powerful incentive for energy companies to increase spending on capital projects. For instance, BP plc (ADR) (NYSE:BP) recently decided to ramp up spending on oil and gas projects in Alaska mainly because of new and favorable tax regulations in that state.

But of course, the flip side is when lawmakers decide to raise taxes on the energy industry. If the tax increase is large enough, it can prompt companies to drastically change their capital spending plans and, in some cases, even delay or abandon certain projects altogether. Statoil ASA(ADR) (NYSE:STO)‘s experience is instructive.

Statoil ASA (ADR) (NYSE:STO)

Statoil gets a rude awakening from Oslo
Last month, Norway’s government unexpectedly announced that it would raise taxes on oil and gas companies operating in the country. On May 5, it proposed limiting the tax-deductible component of petroleum income, slashing exemptions on free cash flow from 30% to 22%.

It also plans to increase its special petroleum tax from 50% to 51%, while maintaining a top tax rate of 78%. The combined effect of these measures would be a 3 billion kroner ($517 million) annual increase in oil industry taxes.

Though the decision hasn’t yet been signed into law, it has already affected capital decisions at Statoil ASA(ADR) (NYSE:STO), the largest Norwegian oil and gas producer by output. The spike in taxes, which lowers the profitability of certain projects, has prompted the company to delay developing its Johan Castberg oilfield in the Barents Sea.

Statoil ASA(ADR) (NYSE:STO), which is majority-owned by the Norwegian government, said last week that the unexpected fiscal move by Oslo would add about $7 per barrel to the project’s breakeven cost of development. Even before the impact of the tax increase, the project’s breakeven rate was higher than Statoil’s group breakeven rate of around $50 a barrel.

The company had previously warned that the economics of the Castberg project, which includes the Skrugard and Havis discoveries, had become “more challenging.” The oilfield, estimated to hold some 400 million to 600 million barrels of oil equivalent, has been in dire need of new infrastructure — an issue compounded by the tax increase.

Challenges of drilling in the Arctic
As Statoil ASA(ADR) (NYSE:STO)’s experience highlights, tax increases can exacerbate some of the challenges companies drilling in the Arctic already face, such as harsh weather and the lack of infrastructure. Consider Royal Dutch Shell plc (ADR) (NYSE:RDS.B)‘s Alaska drilling campaign, for instance, which has been beset by hurdles including regulatory uncertainty, environmental opposition, and equipment failures.

After having invested some $5 billion into its Alaska operations, the Hague-based company recently decided to halt all exploration and drilling activity in the region this year. Similarly, ConocoPhillips (NYSE:COP) recently announced that it’s suspending plans to drill in Alaskan waters in 2014 because of regulatory and other uncertainties.

Page 1 of 2

Biotech Insider Alert - $6 Stock To Hit $40

$200 Million Dollar Healthcare Hedge Fund's #1 Best Idea Right Now

The best healthcare hedge fund out there right now is one of the largest shareholders in this biotech stock. The fund returned more than 20% in each of the last 2 years with a virtually fully hedged portfolio, and it's sending out a BUY signal on this biotech stock. Get your FREE REPORT today (retail value of $300)

This is a FREE report from Insider Monkey. Credit Card is NOT required.
Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

The Most Wanted Drug Lords

The Oldest Money Managers

The Greatest Directors in the World

Largest Animals in the World

World’s Most Expensive Desserts

Best Selling Comic Books of All Time

A-list Actors who Sabotaged Their Career

Rappers With a College Degree

The Best Jazz Albums of all Time

The Most Influential Jazz Musicians

The World’s Most Famous Photographers

The Best Oscar-Winning Songs

Most Influential Choreographers Ever

Most Expensive Department Stores in the World

The Most Expensive Stolen Paintings in the World

The World’s Most Expensive Teas

Top Oscar Record Holders

The Most Expensive Flowers in the World

Countries With a Booming Film Industry

Most Expensive Cupcakes in the World

Uncommon European Escapes

The Most Stolen Artists in History

Best Travel Destinations in Australia

World’s Most Expensive Musical Instruments

World’s Most Famous Animals

Most Expensive Cakes in the World

Most Expensive Kosher Champagne in the World

Most Expensive Kosher Wine in the World

The Most Surprisingly Dark Fairy Tales

Most Popular Travel Destinations in Asia

The 10 Most Expensive Dresses Ever Worn to the Oscars

World’s Most Visited Art Museums

Best Countries for Photographers to Work in

Best Paid Jobs in the Film Industry

The Most Renowned Recovered Paintings Ever

Child Stars That Turned out Just Fine

Books That Were Banned in the Past Century

World’s Richest Dancers

Best Remedies against Bad Breath

Foods That Improve Your Skin Texture

Best-Selling Children’s Books of all Time

Foods That Boost Your Libido

Best-Selling Books of all Time

The Most Expensive Academy Awards Jewelry in History

Most Expensive Japanese Restaurant In New York City

The Best B-Boy Movies

Most Awesome Hip Hop Documentaries

Foods That Stain Your Teeth

Richest Doctors in the World

The Best Movie Sountracks Ever

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 129% in 2.5 years!! Wondering How?

Download a complete edition of our newsletter for free!