NORWAY'S RESPONSE TO QUESTIONS ON SVALBARD

C O N F I D E N T I A L OSLO 000612 SIPDIS NOFORN SIPDIS DEPARTMENT FOR EUR/NB AND L/OES SBINIAZ E.O. 12958: DECL: 06/08/2017 TAGS: PREL NO SUBJECT: NORWAY'S RESPONSE TO QUESTIONS ON SVALBARD REF: STATE 28242 Classified By: Deputy Chief of Mission Kevin M. Johnson for reasons 1.4 b ¶1. (SBU) On June 7, the Norwegian Ministry of Foreign Affairs provided answers to our questions regarding future oil and gas activities in the Svalbard Archipelago. The full text of their response is presented in paragraph 3. ¶2. (C/NOFORN) In summary, Norwegians see the Svalbard Archipelago and its territorial waters as subject to the terms of the 1920 Treaty of Spitzbergen. The continental shelf in the maritime areas around Svalbard, beyond the territorial waters, is viewed as part of the Norwegian continental shelf and subject to the resource management, environmental regulation, energy development, and taxation regimes currently applied to the off-shore energy sector in Norwegian coastal areas. ¶3. (C/NOFORN) Begin Text of Norwegian Government Response: Informal background paper Reference is made to questions about Norwegian policies relating to Oil and Gas Activities in and around Svalbard. At the outset, it should be noted that Norway has consistently applied the Treaty of 1920 concerning the archipelago of Spitsbergen in a prudent manner towards all Contracting Parties. This implies, among other things, that nationals of all Contracting Parties have been ensured equal rights with regard to the economic activities stated in the Treaty in the territories of the archipelago and in their territorial waters, subject to the observance of local laws and regulations. Furthermore, in light of the many fragile ecosystems in these Arctic areas, prudent policies have been applied with regard to environmental protection. Over the years, large parts of the archipelago and its territorial waters have been closed to economic activity, also in accordance with the provisions of the Treaty. Successive Norwegian Governments and the Parliament (Storting) have moreover defined the protection of Svalbard's distinctive wilderness character as one of several overriding policy objectives. It is a goal to ensure that Svalbard be one of the world's best managed wilderness areas. In the event of a conflict between environmental targets and other interests, it has also been established that environmental considerations are to prevail. The coast-line and coastal waters around the archipelago are vulnerable in the event of oil spills. On the basis of the current legislation applying specifically to the territory and its territorial waters and established environmental policy objectives, the Government, as previous governments, does not envisage issuing permits to open up for petroleum activities in the territorial waters around the archipelago. Turning to the continental shelf in the maritime areas around Svalbard, beyond the territorial waters, the view of Norway is that this is an integrated part of the Norwegian Continental Shelf. Petroleum activities on the continental shelf started in 1965 in the southern part of the North Sea. Since then, optimal resource management has always been our main aim. It has been our expressed policy to have a step-wise geological mapping of the shelf, to ensure cost effective exploration based on a sound geological knowledge base, in order to promote rational use of valuable petroleum resources. Key goals are also enhancement of stability, energy security and sustainable resource management, in addition to respecting or satisfying all relevant concerns of environmental protection. This policy has proven very successful, to the effect that with our resource base of less than 2 percent of the global total, Norway was in 2005 the third largest exporter of oil and the third largest exporter of gas in the world. Our regime for oil and gas exploitation has always involved active participation by foreign oil companies, as they will contribute capital, the best geological competence and access to the best and most modem technologies. Foreign companies have all been awarded rights in this respect under a system that has been transparent and applied in a just manner to all. Conditions set by the time of award have consistently and without exception been adhered to by the Norwegian State. All companies, including the Norwegian ones, are treated equally when it comes to applications for, and awards of, rights to carry out exploration for and production of oil and gas on the continental shelf. Such rights (production licences) are awarded on a non-discriminatory, objective and transparent basis where the companies best qualified for the area in question are offered participation in the licence. This has resulted in a system where the companies strive to maximise resource extraction - to the benefit of both the State and the industry. Further, our regime is built on a dialogue between the State and the oil companies. This dialogue has always been open and fair. Our petroleum activities have gradually moved further north. Today, around 60 percent of the Norwegian Continental Shelf has been formally opened for petroleum activities. The Southern part of the Barents Sea was opened in 1980. Since then, 71 exploration wells have been drilled and three discoveries have been made (Snohvit gas, Goliat oil, Nucula oil). The Snohvit gas field is presently being developed with an LNG plant. Production will start in October 2007, when Norwegian gas will for the first time be shipped to Cove Point in the US. However, the continental shelf in the Northern part of the Barents Sea, including areas around Svalbard, has not yet been opened for petroleum activities. On 1 December 2006, the Norwegian Government issued a strategy for the High North. The key words are activity, presence and knowledge. This strategy was established in part in response to the increasing global expectations as to major petroleum resources in Arctic and Sub-Arctic areas. The strategy implies that petroleum activities could, in the future, also be carried out in those parts of the Norwegian Continental Shelf that have not yet formally been opened for such activities. All qualified companies will in such event be awarded rights to exploit petroleum resources in a non-discriminatory manner under the well-established and well-known Norwegian petroleum regime. The following questions address issues concerning the continental shelf in areas around Svalbard. Q: What are Norway's plans for development in these areas, especially in regard to a time frame for opening the region to exploration and development? A: No specific plans have been laid as yet. However, the ecosystems in the High North are vulnerable. To address the environmental challenges, the Norwegian Government presented an Integrated Management Plan for the area from Lofoten to the Barents Sea to the Storting in March 2006. The plan was adopted by the Storting in June 2006. It constitutes a pioneering effort to achieve an ecosystem-based management of the oceans surrounding Norway. In the process leading to the finalisation of the Integrated Management Plan, all influences on the eco-system in the Lofoten - Barents Sea area were evaluated within the larger context. The conclusion was that the Barents Sea environment is in a satisfactory state. The Government intends to maintain this satisfactory state also in the future. Consequently, some restrictions have been agreed on petroleum activities in the management plan area: * Zero-discharge from activities is a prerequisite for all petroleum activities in the Norwegian part of the Barents Sea. * No petroleum activities will be initiated in areas in proximity of coasts, whether on the Norwegian mainland or other coasts, and in areas of particular fisheries and environmental importance. * No petroleum activities will be initiated outside the islands of Lofoten and Vestenllen during the current parliamentary period. * No petroleum activities will currently be initiated in or near the marginal ice zone and within the polar front. The Management Plan is based on a dynamic process and is to be revised in 2010. Until the time of revision, the Government has decided to carry out extensive research and mapping to strengthen our knowledge about the area. The plan also provides a sound basis for planning of future petroleum activities in the Barents Sea. Q: What are Norway's intentions regarding the process that will be used to open the area to oil/gas exploration and exploitation, including the criteria, such as environmental standards, that would be used in examining and approving licence applications for companies wishing to participate in the development of the continental shelf? A: Any petroleum activity on the Norwegian Continental Shelf is subject to the Storting (Parliament) having priorly made a specific decision to open the area in question for petroleum activities. According to the Petroleum Act, such decisions must be based on an impact assessment of the area intended for opening. Such impact assessment is to be carried out by the Ministry of Petroleum and Energy and shall contribute to visualising the consequences of opening the area for petroleum activities in relation to commercial activities and environmental aspects, including the possibility of pollution and expected economic and social effects. The impact assessment shall describe the presumed impacts of opening of the area for petroleum activities, the relevant development solutions and the impact of any future petroleum activities in these areas. To the extent necessary, the impact assessment shall include, i.a.: a) A description of the area(s) to be opened for petroleum activities; b) A decription of the relationship to national plans relevant for the area to be opened for petroleum activities, and of relevant environmental goals/standards laid down through national guidelines, national environmental goals, white papers La., and how these are reflected in the impact assessment; c) A description of the assumed impact on employment and on commercial activities, as well as on expected economic and social effects of such petroleum activities; d) A description of important environmental issues and natural resources, including an overview of the mapping that has been carried out; e) A description of the impact of opening the area for petroleum activities i.a. in relation to: living conditions for animals and plants, the sea bed, water, air, climate, landscape, emergency preparedness and risks, and the interface between them; f) A short summary of the database and methods used to describe such impacts, and any professional and technical problems in relation to the collection and use of the data and methods; g) A description pursuant to litra d) above of the possible transboundary effects of the opening; h) An assessment of the need for, and any proposals in relation to further investigation before the execution of the opening; i) An assessment of the need for, and any proposals in relation to investigations and measures to monitor and show the actual impacts of the opening and the potential measures to reduce and compensate any adverse effects of importance; j) A description of measures available to prevent or compensate for any possible damage and disadvantage. No decision has been taken by the Government to require the Ministry of Petroleum and Energy to carry out such an impact assessment of the said area. After formal opening for petroleum activities companies may apply for a production licence. This is an authorization to explore for and produce petroleum in a defined area, normally consisting of one or two blocks, or approximately 500 square km. They will be considered in relation to the criteria described in the following. To promote an optimal resource management and rapid as well as efficient exploration for and production of petroleum on the Norwegian Continental Shelf, including the composition of licence groups to ensure these aims, the following criteria shall apply to the award of participating interests in production licences and to the appointment of operator: a) The relevant technical expertise of the applicant, including expertise related to development work, research, safety and the environment, and how this expertise may actively contribute to cost effective exploration and, as appropriate, the production of petroleum from the geographical area in question. b) That the applicant has the satisfactory financial capacity to carry out exploration for and, as appropriate, production of petroleum in the geographical area in question. c) The applicant's geological understanding of the geographical area in question, and how the licensees propose to perform efficient exploration for petroleum. d) The applicant's experience on the Norwegian Continental Shelf or equivalent relevant experience from other areas. e) Experience regarding the applicant's activities. f) Where applicants apply as part of a group, the composition of the group, the operator recommended and the collective competence of the group will be taken into account. These criteria are in accordance with all the rules contained in the ED licencing Directive of 1994, which Norway decided to apply to all petroleum activities on the continental shelf, with effect as of 1 September 1995. These criteria are to be applied in a non-discriminatory, objective and fully transparent manner. A formal requirement under the Petroleum Act is furthermore that a company must be registered within the European Economic Area (EEA),to be awarded a production licence. Q: Will the licensing process for managing energy exploration be the same as that employed in developing the oil and gas sector in the North Sea, if not, how will it differ? A: Although this has not specifically been decided as yet, there is currently no reason why our well established licensing process should - in time - not be applied also to continental shelf areas around Svalbard. Q: Will there be non-discriminatory treatment for all companies wishing to participate? If not, on what basis will decisions be made? A: In accordance with the established system in Norway for the award of production licences, the award process will be based on the basic principles of non-discrimination, objectivity and transparency. Q: Does Norway intend to provide transparency for stakeholders, such as making any licensing criteria public? A: Norwegian petroleum legislation requires that all conditions and criteria for the award of production licences be made public. Thus, all potential applicants are to be given at least 90 days to prepare their applications. The invitations to submit applications will be sent to all existing licensees on the Norwegian Continental Shelf. The same applies to any oil companies that have been pre-qualified as licensees. In addition, such invitation is published in the Norwegian official Gazette and in the European Journal. Q: What type of taxation regime does Norway envision for petroleum development in the shelf areas beyond the territorial waters of Svalbard? How would it compare to the taxation regime in other Norwegian offshore areas? A: The normal Norwegian petroleum taxation regime would be applied to petroleum activities in the continental shelf areas around Svalbard. Tax rules for upstream activities are based on the ordinary Norwegian corporation tax system, with some special deviations and features, and the addition of a special tax for upstream activities. Both the corporation tax and the special tax are based on the net profits which the petroleum companies derive from the relevant petroleum activities. Even though the Norwegian petroleum tax system is applied with a relatively high marginal tax rate, it has a number of favourable features. - There are no signature bonuses, and all relevant expenses for the activities on the NCS are tax deductible. This concerns not only operating expenditure, but also exploration costs, shutdown and decommissioning costs, and research and development expenditures. Investments are favoured by a high depreciation rate, and deductions may start immediately after the investment has been made. For special tax, the company can also deduct an uplift of 30 percent of investments. Financial costs may be deducted against both the corporation tax and the special tax. - All income and expenses from upstream activities are consolidated at company level as there is no ring fencing between licences. There is a ring fence at the company level between petroleum extraction and other activities, such as other industrial activities or results from foreign investments. - The Norwegian petroleum tax system is favourable for marginally profitable projects because the uplift allowance will shelter profits from the special tax. In general, the system performs well with regard to net present value per dollar invested, break-even prices and required probability of discovery, as all expenses are tax deductible. - Since the beginning in 1965, the system has been adapted and improved to meet the challenges of an evolving industry. - From 1 January 2005, new amendments to the petroleum tax legislation were implemented. These amendments will increase fiscal certainty for new companies and improve the profitability of investments in i.e. tail-end production and improved oil recovery. The tax provisions are laid down in the Petroleum Tax Act of 13 June 1975, with later amendments. Profit tax is to be paid by all companies earning revenue from the conduct of petroleum activities in Norway, irrespective of their country of registration. As mentioned above, however, all licensees on the Continental Shelf must be companies registered within the EEA. All licensees on the Continental Shelf are subject to taxation in Norway. Thus, the taxation system is so structured that there is full consolidation of income and expenses (no ring fencing). There are no signature bonuses, no royalties, and all relevant expenses for the activities on the Norwegian Continental Shelf are tax deductible. This concerns not only operating expenditure, but also exploration costs, shutdown and decommissioning costs, and research and development expenditures. Investments are favoured by a high depreciation rate (6 years),and financial costs may be deducted against both the corporation tax and the special petroleum tax. The special petroleum tax is to be paid when companies earn their income from the petroleum activities. Licensees are allowed an uplift against the special petroleum tax, implying that they may deduct 30 of the investment (7.5 each year over 4 years). If uplift exceeds the income subject to special tax, excess uplift may be deducted in subsequent years. The purpose of the uplift is to ensure that normal returns are not subject to special tax. Losses may be carried forward with a risk free interest, which is reimbursed if activities cease. As mentioned, exploration costs may be charged as an expense and deducted immediately. Alternatively they may be capitalised. Exploration costs are not eligible for uplift. A recently implemented addition to our tax regime on the Norwegian Continental Shelf concerns companies which, due to losses, are not in tax position. They may each year claim reimbursement of the tax value of exploration costs from the Government. This addition has been welcomed by the petroleum industry. It has proved very attractive to new companies on the Norwegian Continental Shelf, in particular to those with no current production and revenues. Apart from the tax system described above, petroleum companies on the Norwegian Continental Shelf are obliged to pay a CO2-tax. The fee is currently NOK 340 per tonne gas or per litre of oil. Stakeholders in a production licence are also obliged to pay an area fee in inactive parts of a production licence after the expiry of the initial period. The area fee system has been revised to promote rapid and efficient exploration. No royalty fees are paid on the Norwegian Continental Shelf. In sum, the Norwegian petroleum taxation system is well suited for exploration activities in frontier areas such as these Arctic areas, because the Norwegian State covers such large parts of exploration costs for all petroleum companies. Q: Does Norway intend to use tax incentives or other measures to encourage investment in the sector within these areas? We feel that our system for government take is already very well suited to promote exploration in frontier areas. These include: no cash payment up front, no ring fencing, reimbursements of the tax value of explorations costs for companies in a no-tax-paying position. Thus, no plans for using further tax incentives on the Norwegian Continental Shelf currently exist. Q: Can Norway share results of any measures, such as seismic research, to determine what petroleum resources may be present in the waters surrounding Svalbard? Will any future research be done by private companies or under government sponsorship? A: Before a part of the Norwegian Continental Shelf has been formally opened for petroleum activities, as stated in the Petroleum Act, only the Norwegian State may carry out petroleum activities. Apart from marine scientific research, which is governed by other rules, geologic research or gathering of geologic data for petroleum purposes is defined as part of petroleum activities in the Petroleum Act. Normally, in areas not opened for petroleum activities, the Norwegian State gathers seismic data and when the area has been formally opened, packages of the seismic data in question are made available for sale to interested oil companies. Normally, it is also a condition for the award of production licences in newly opened areas that the applicant has aquired such a seismic data package from the Norwegian Petroleum Directorate for the area covered by the application. When the area is formally opened for petroleum activities, seismic companies and oil companies may apply to the Petroleum Directorate for a reconnaissance - or exploration licence. This licence is non-exclusive, is normally given for a duration of three years, may cover a fairly large area and gives the holder the right to gather seismic data. The exploration licence does not give the holder any right to drill exploration wells, nor any preferential right when production licences are awarded. Seismic data may also be gathered by oil companies as licensees to a production licence, as it is normally a condition for the award of such licence that the licensee gathers a defined set of seismic data as part of the work obligation he accepts as a condition for the award of the licence. The State does not normally sponsor any gathering of seismic data after an area has been formally opened for petroleum activities. End text. Whitney