Wood Mackenzie: Proposed Changes to Danish Tax System Could Hurt IOCs

Wood Mackenzie has assessed the proposed changes to the Danish fiscal system. The analysis by Wood Mackenzie’s European Upstream team concludes that the reduction in the rate of hydrocarbon tax and the size of hydrocarbon tax allowances would result in a decrease in value of IOC portfolios of US$ 1.47bn (DKK 8.69bn).

The proposed changes are based on the findings of 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.

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 involved. However, 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 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.

The overall impact of the changes would be a significant increase in government take from the commercial fields affected. Wood Mackenzie estimates the net reduction in IOC value is US$1.47 billion (DKr8.69 billion), all of which is accounted for by two assets, Hejre and South Arne.

South Arne will benefit from some transitional elements of the proposals, as it is already onstream. As Hejre is under development it will not be able to take advantage of these transitional terms, and suffers the largest decrease in value.

• Hejre: Government take increases from 29% to 50%, reducing value by US$ 995m (43%)

• South Arne: Government take, post-2014, increases from 28% to 47%, reducing value by US$ 530m (21%)

From a corporate point of view, companies with single asset portfolios, such as Hess and Bayerngas, are most exposed to the impact of the proposals. Where companies are able to use losses throughout a portfolio, there is potential to mitigate the downside, or even increase value in some cases.