Geoff Winestock investigates for this morning's Financial Review
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Oil sector loves high-tax Norway
Outrage over the federal government's plans for a 40 per cent tax on resource profits has shaken Australian politics for the past two months. BHP Billiton, Rio Tinto and other big companies might be grateful they're not in Norway, which taxes profits from its main natural resource, oil, at up to 78 per cent.
Tax experts say one reason the mining industry is fighting the super profits tax so ferociously is a concern Australia could trigger a worldwide move to introduce more resource rent taxes.
In Norway, which has had a resource rent tax since the early 1970s, the tax has hit company profits. But it hasn't hurt investment, according to Norwegian government officials and oil companies.
"No, it's definitely not too small a return," says Roar Tessem, the chief executive of Spring Energy, interviewed by telephone from his office in Oslo. "Obviously we would like to have a lower tax rate. But the upside is that we know the Norwegian continental shelf. We think that [the system] is working very well. We see that the potential here is quite high."
The Norwegian petroleum tax is an example of how profits-based resources taxes, even very high ones, don't necessarily discourage investment. If the taxes are well designed they can generate big returns for taxpayers and allow resource companies to make enough profit to cover their costs of capital, many economists say.
Spring Energy has invested $200 million drilling in the icy waters of the North Sea around Norway and recently pumped its first barrel of crude. Statoil, majority Norwegian-government owned, accounts for almost two-thirds of Norwegian oil production. But BP, Shell, ConcoPhillips and ExxonMobil have also invested heavily there.
Total investment in Norway's oil extraction and pipelines in 2008 was 120 billion kroner ($17 billion). Oil production has soared since the tax was introduced and the tax has paid for a $500 billion sovereign wealth fund.
Treasury secretary Ken Henry has argued that, if a rent-based tax was structured correctly, the top rate could be close to 100 per cent and wouldn't stop investment. The key is that the state shoulders a share of the cost if a project fails, reducing risk.
Before the Rudd government proposed its resource tax, the Minerals Council of Australia backed a profits-based resource tax as an improvement on state royalties. Royalties levied on the quantity of minerals produced – Australia's current system – can force marginally profitable mines to close because the royalties don't fall when prices do.
A spokesman for the Minerals Council didn't return a call or email.
Rune Ohmdahl, an oil and gas partner for Norwegian law firm Advokatfirmaet Haavind, says the 78 per cent tax is not a major obstacle to investment but can be difficult to explain.
Australia will have a harder time adopting the tax than Norway because its resources industry is more developed than Norway's was in the 1970s, he says. "The major problem may not be the tax itself. It's the signal that the Australian government is sending. It's a marketing issue. You are saying that it is more expensive to invest," he says.
Spring Energy's Tessem says he considers the 78 per cent tax a return to the Norwegian government of its equity contribution to the project. He was formerly a top executive with Elf Aquitaine and Shell in Norway.
"Well, 22 per cent is a fairly small return [for Spring Energy] but you invest only 22 per cent also," he says...
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