New players, attractive tax regime and major divestment drives M&A on the NCS

New players, attractive tax regime and major divestment

Norwegian upstream environment continues to feel the pain of low oil prices, including reduced investments and cost cutting programs. The activity is expected to pick up with new acreage in the Barents sea and several exploration wells. M&A activity is expected to increase with oil majors divesting, growing consensus on price and new market entrants attracted by generous exploration tax regime and desire to grow.

Relatert innhold

Over the last months the oil price has had a good pick up from the rock bottom of around 28 USD/barrel in the beginning of 2016. Currently it seems to have stabilized in the area of 50 – 60 USD barrel, and expected by many to rise a bit over the next few years. Combined with the major cost cutting programs within E&P companies as well as service companies this has improved the financial situation for many E&P companies, and also generated an increasing interest for new investments in the sector by E&P companies, private equity funds and financial investors.   

With respect to Norway, Europe's largest oil and gas producer, the M&A activity was relatively high during 2016, although there was still a gap with respect to price expectations between potential sellers and buyers. For 2017-2018 it is expected that the mentioned bid-ask spread will be reduced. In addition, there is an improved financial position for many companies and several private equity funds with available capital. Further, the oil majors continue to divest producing assets. These factors may lead to an increasing and active M&A market on the Norwegian Continental Shelf going forward.

The major multinationals, such as ExxonMobil, Total, Shell and ConocoPhillips, with large portfolios on the NCS seems to be in the market for selling out some of their Norwegian assets/licenses while some of the national oil companies and/or intermediate E&P companies has been rather active on the acquisition side. Examples are Statoil, AkerBP and DEA. Further, Russian and Asian oil companies are showing an increased interest for the NCS. In this respect on may also mention the “normalized” relation between Norway and China, may lead to increased interest from Chinese oil companies. We have seen that potential buyers includes private equity backed companies that have the financing in place and the desire to grow. In addition, we anticipate that a number of newer E&P companies in Norway are attracted by the rather stable and petroleum tax regime, in particular the exploration refund scheme.

Thus, while the Norway E&P sector has been dominated by large multinational E&P companies  since the very beginning (i.e. from around mid 1960s), this picture is about to change with smaller and often less financial solid companies coming in while the classic oil majors are somewhat reducing their presence to meet divestment targets and reduce costs. Thus, E&P players on the NCS are becoming much more diversified, financially as well as geographically. Statoil is, however, still by far the dominating company on the Norwegian Continental Shelf, and company seems to have high beliefs in the NCS, including the Barents sea. 

The Norwegian Government has also had a rather active license award policy with the 23rd round in 2016, the intermediate round in December 2016, and the upcoming 24th licensing round (coming up during 2017/18). The interest for these licensing rounds has been very good. The 23rd licensing round resulted in the award of ten Arctic licences, including three awards in the Southeast Barents.

The above interest for the NCS is also shown through a relative active exploration drilling program for 2017 (approx. 35 wells), and the expectance of the highest discovery of additional resources for many years.  There are also some current major upgrading projects, as well as some new PDO’s expected to come in.

Apart for an expected stabilization or even growth in the oil price, some other key reasons for the increasing interest for the Norwegian Shelf:  

  • The NCS is still considered to have a strong potential for discovery new resources of good size, including new acreage in the Barents sea
  • Active licensing policy and a very tax effective regime for asset sales and acquisitions
  • Stable political system and also a stable petroleum tax regime. This is quite different from many other E&P regimes. Thus, Norway may be considered as a “safe haven” in an unstable world.
  • Even if the marginal tax rate is on the high side, the petroleum tax system is neutral in the sense that more less all costs are allowed with 78% effective deduction/tax relief without much time value reduction and irrespective of commercial success.
  • Effective and favorable financing for exploration based on mortgage of the cash exploration refund (78%) and generous exploration tax relief
  • There are no signature bonuses or royalties 

With respect to the Government take system, reference is particularly made to the more or less immediate pay out of tax value of exploration losses, uplift allowance for capex, and payout of the unused tax values (carry forward losses) when ceasing the E&P activity in Norway. For a pure exploration company this means an after tax cost of 22% for an exploration well where the 78% “state share” is paid back in cash early November after the income year. This payout is irrespective of whether or not the exploration is successful. In most other regimes a pure exploration company will have to carry 100% of the exploration costs with no state contribution or tax relief if the project fails (some regimes may allow carry forward of losses to be used against any potential future income).

KPMG Deal Advisory is a part of a network of professionals which combines global understanding and deal experience with local knowledge. Our global network allows us to mobilise international teams, who have a sense of regional market conditions and can consider local issues such as taxes and market regulations, in a timely manner.

Contact:

Kjell Magne Kjølsvik, Partner Deal Advisory
Head of Transaction Services
+47 4063 9156

Jan Samuelsen, Partner Tax
+47 4063 9395

Tor Harald Johansen, Partner Valuation, Deal Advisory
+47 4063 9082

Per Daniel Nyberg, Partner Tax
+47 4063 9265

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