Norwegian Oil Ministry Denies Shohvit Subsidy Claim

The Norwegian Oil and Energy Ministry denied that the high depreciation rate awarded to developers of the Snohvit gas field in the Barents Sea is in actuality a government subsidy.

A group of companies led by Statoil plans to extract natural gas and condensate from the Snohvit field and pipe it to a plant in northern Norway . There it will be converted into liquefied natural gas and shipped to customers. In a 22-page response to an inquiry by the European Free Trade Association Surveillance Authority, which is questioning the tax scheme, the ministry said the 33.3% depreciation rate is necessary to promote exploitation of the natural gas reserves in the Barents Sea.

Development of the far-northern region's gas reserves will require tremendous investments in large-scale LNG projects, said the ministry in its response. These have a low profitability and the tax scheme was devised to reflect that, it said. The Snohvit project is expected to cost over 40 billion kroner, excluding the cost of LNG carriers.

Environmental groups have opposed the government's decision to move forward with development of the Barents Sea, and had filed a complaint with EFTA about the tax scheme. The ministry also said the higher depreciation rate will be applied to all future, large-scale LNG projects. The normal depreciation rate is 16.7%. "The difference between the net present value of the two depreciation rates is fairly low, estimated at NOK250 million, about 1.4% of the companies' investment, but just sufficient to trigger the initial investment," the government said.

Statoil holds a 22.29% interest in the Snohvit field. Its partners are Petoro with 30%, TotalFinaElf with 18.4%, Gaz de France with 12%, Norsk Hydro with 10%, Amerada Hess with 3.26%, RWE-DEA with 2.81%, and Svenska Petroleum with 1.24%.