Wood Mackenzie: Danish Fiscal System Changes to Affect Bayerngas the Most

November 1, 2013

Wood Mackenzie’s analysis of the changes to the Danish fiscal system announced in September 2013, including the reduction in the rate of hydrocarbon tax and the size of hydrocarbon tax allowances, concludes that the changes would result in an increase in government take of US$ 1.15bn.

The changes are based on the conclusions by an inter-ministerial committee, set up in 2012. It concluded that the state can gain increased revenue and more efficient allocation of the economic resources in the North Sea. In order to achieve this, it is proposed that older licences should be brought in-line with more recent licence terms. A draft bill is expected to be passed in Parliament by mid-November 2013 and take effect from 1st January 2014.

The primary impact of the proposed changes would be the reduction in both the hydrocarbon tax rate and the hydrocarbon tax allowances. All else being equal, a reduction in the marginal rate of tax from 70% to 52% is of course positive for the companies. However, in some circumstances the reduction in the tax rate is more than offset by the reduction in the allowances.

Under the current terms, licensees are able to offset 25% of capital expenditure (CAPEX) against hydrocarbon tax, for a total of 10 years. This allows companies to reclaim up to 250% of the initial investment. The new terms would only allow 5% of CAPEX to be offset for six years, a total of 30% of the initial investment. As a result, companies with significant recent or future CAPEX commitments would incur far higher hydrocarbon tax bills, while some mid to late life assets with little or no CAPEX, increase in value due to the lower rate of hydrocarbon tax.

Fields in production or under development by 1st January 2014 will be eligible for transitional terms. This varies slightly from the changes proposed in March 2013 which only offered transitional terms to fields in production. Some notable changes in remaining field value are shown below.

Hejre: value is reduced by US$ 1bn (-30%)
South Arne: value is reduced by US$ 607m (-24%)
Lulita: value is increased by US$ 5m (+37%)
Nini: value is increased by US$ 11m (+47%)

Bayerngas affected the most

Companies in a tax paying position are able to offset a portion of pre-2014 losses against overall tax liability. This means that the increase in government take is lower than the total reduction in the value of the fields affected.

The overall impact of the changes is a significant increase in government take from the commercial fields affected.

“We estimate the increase in government take and subsequent net reduction in remaining IOC portfolio value to be US$1.15 billion, all of which is accounted for by two assets, Hejre and South Arne,” Wood Mackenzie said.

From a corporate perspective, those companies with single asset portfolios, such as Hess and Bayerngas, are most exposed to the impact of the proposals. Bayerngas is the most affected company due to its sole interest in Hejre, and not having a tax paying position.

About Wood Mackenzie’s Methodology

All values above have been calculated using Wood Mackenzie’s future oil and gas price assumptions, and discounted at 10% from 1 January 2014. Field value has been calculated on a stand-alone basis using Wood Mackenzie’s Global Economic Model (GEM). It does not reflect corporate synergies. Corporate synergies are included in company valuations, which in turn are used to calculate the Government take. The Government take calculation therefore accounts for companies utilising losses to reduce overall Hydrocarbon tax. Government take does not include income gained from their interest in DONG Energy.

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Press Release, November 01, 2013