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
blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

10 Best States To Practice Medicine

The 10 Best States to Have a Business

The 12 Most Expensive Apple (AAPL) Apps in the Market

The 10 Richest Billionaires in the World

10 Biggest Kickstarter Failures

The 10 Best Places to Work At

The Top 10 of Google Inc (GOOGL)’s Most Expensive Acquisitions

13 Best Cities to Visit in South America

10 Most Expensive Works of Art of All Time

The 10 Richest Banks in the World

The 10 Best-Paying Jobs in America (2014)

7 Most Expensive Foods in the World

The World’s Top 10 Earning Authors

Five Wicked and Very Expensive Items (and Other “Stuff”) Sold on eBay

10 Biggest Celebrity Bankruptcies

The Top 10 Highest Paid CEOs in 2014

The 10 Most Expensive Real Estate Cities in America

10 Most Expensive States To Live In America

The 10 Best Airlines in the World

The 10 Best-Selling Cars in 2014

The 10 Best Industries to Invest In

The 10 Most Expensive States to Own a Car In

Top 10 Business Schools in US: 2014 Rankings

Top 20 Female Billionaires in 2014

6 Movies That You Should Watch to Better Understand The Cold War

Top 15 Best Paying Jobs for Women in 2014

Top 6 Things Rich People Do Differently Every Day

5 Retirement Mistakes To Avoid (and Einstein’s Famous Quote)

11 Smartest People in the World

6 Films About the Financial World You Need To Watch (While “The Wolf” is Not Around)

Warren Buffett and Billionaires Are Crazy About These 7 Stocks

The Top 10 States With Fastest Internet Speeds

10 Best Places to Visit in USA in August

Top 10 Cities to Visit Before You Die

Top 10 Genetically Modified Food In the US

15 Highest Grossing Movies Opening Weekend

5 Best Poker Books For Beginners

10 Strategies Hedge Funds Use to Make Huge Returns

Top 10 Fast Food Franchises to Buy

10 Best Places to Visit in Canada

Best Summer Jobs for Teachers

10 Youngest Hedge Fund Billionaires

Top 10 One Hit Wonders of the 90s

Fastest Growing Cities In America

Top 10 U.S. Cities for Freelancers

Top 9 Most Popular Free iPhone Apps

Top 10 Least Expensive Private Business Schools in the US

Top 15 Most Expensive Countries in the World – 2014

Top 6 Tax Scams and How to Protect Yourself

Top Businesses to Invest In

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 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!