State’s share of oil too small, report argues

Independent report argues that the government’s share of profits from the North Sea oil should be higher

The government has a fair claim to a greater share of profits from the North Sea oil, a report from independent organisation Det Miljøøokonomiske Råd argued this week.

The report echoed calls from politicians and the think-tank Concito for the government to renegotiate the 2003 deal, which set the their share of North Sea oil profits.

“The state should earn a greater share of the income from the resources than is currently the case with the current rules,” the report states, adding that the oil is owned by the Danish people, who ought to be making a greater profit from the limited resource.

The 2003 deal ignored the recommendations made in 2001 by the ‘hydrocarbon committee’ formed to advise the government on the best method of taxing the North Sea oil.

While they suggested an effective tax rate of 84 percent of profits, the result of the deal means that the state currently takes home 71 percent of the profits – much lower than the Norwegian state’s 85 percent return on its share of North Sea oil.

According to Concito, the state has missed out on 75 billion kroner by not following the committee’s recommendations.

New figures released by Det Miljøøokonomiske Råd reveal that Maersk has made 67 billion kroner in profit from the North Sea oil since 1994.

The report does not indicate how much more money the government could have earned from a higher tax rate, though it does make it clear just how profitable the business is for the three oil companies operating out of the North Sea – Chevron, Shell and Maersk, who work together as the Danish Underground Consortium (DUC) – that negotiated the 2003 deal with the former government.

According to the report, between 2004 and 2010 the DUC companies earned an annual pretax yield of 60 percent of their investment, and 24 percent after tax – triple what average businesses earn.

The report contributes to numbers released last December which showed that the DUC earned 88 billion kroner from a 150 billion turnover in the same period.

Oil companies were profiting much more than was expected after the spectacular rise in the price of oil from 22 dollars a barrel in 2003 to over 120 dollars a barrel today.

Det Miljøøokonomiske Råd finds that while there is a case for renegotiating the 2003 deal, it draws attention to the “problematic” compensation clause in which the DUC companies can demand to be reimbursed from lost earnings if the deal is altered before it runs out in 2042.

The compensation clause has been the focus of some attention, not only because it is unique – no other industry has made such a clause with the government – but because it seems to undermine the state’s inalienable right to demand taxes.

The government has established a committee to examine whether it would be possible to raise the taxes, though Maersk has categorically refused to renegotiate.

“We do not see the basis for renegotiating the North Sea deal,” Maersk’s head of public affairds, Anders Würtzen, told Jyllands-Posten newspaper last December. “The deal lives up to what the parties discussed during negotiations in 2003 – negotiations which were long and thorough.”

According to MP Pernille Rosenkrantz-Theil (Socialdemokraterne), the government is not yet ready to say whether it will demand a renegotiation.

“Our investigation of the deal will be completed by autumn,” she told public broadcaster DR. “Before that is complete we won’t make a decision. We are talking about amounts which are so large that it’s important to turn over every stone instead of making hasty decisions.”