Bayerngas threatens to end North Sea oil investments

Smaller investors the most affected by the government’s harmonisation of tax rules for North Sea oil companies

A German oil company is considering pulling out its investment in developing oil fields in the North Sea after the Danish government increased taxes on oil companies.

Arne Westeng, managing director for Bayerngas in Denmark, told financial daily Børsen that the changes forced the company to reconsider its investments.

“Denmark no longer appears attractive,” Westeng said. “We have stopped all preparations for bidding in the next licencing round because it no longer makes sense.”

Westeng added that there was undoubtedly new oil to be found in Denmark’s sector of the North Sea, but that the changing conditions meant that he could no longer recommend to the board of Bayerngas to invest more money.

Bayerngas is responding to changes to the taxation of North Sea oil companies that were decided earlier this month. Oil companies used to operate under a variety of different tax arrangements but these will now be harmonised so that all companies operate under the same conditions.

The changes arrive after the government completed a year-long investigation into a deal the former government made with the DUC, a consortium of four oil companies, in 2003. The goal was to renegotiate an arrangement that lasts until 2042 in order to give the government a larger share of the profits.

The government ultimately abandoned its ambition of raising taxes on the DUC, however, after it realised it was impossible without activating costly compensation clauses in the contract.

Instead, the government took the tax rules that the DUC operates under and applied them to the rest of the oil companies operating in the Danish North Sea, in a move that is expected to raise an additional 27.5 billion kroner that will be earmarked specifically for renovating Denmark’s rail network.

This revenue is dependent on oil companies continuing their operations in the North Sea, however, so it would be counterproductive if the rules lead to companies such as Bayerngas withdrawing their investments.

The climate, energy and buildings minister, Martin Lidegaard (Radikale) argued, however, that the new rules would actually benefit oil producers.

“By harmonising the North Sea tax rules, the conditions for hydrocarbon development are standardised,” Lidegaard told Børsen. “The recently completed [government commission into DUC’s tax arrangement] concluded that standardised taxation would create better investment incentives for businesses.”

The new tax rules only affect three companies – Bayerngas, Dong and Hess – which today account for about ten percent of the oil production in the North Sea.

Bayerngas has so far invested two billion kroner developing new oil fields together with Dong Energy. The German oil company is now suggesting that the government’s oil company, Nordsøfunden, which owns 20 percent of the DUC, purchase their activities in Danish waters.

According to Børsen, oil companies have earned 184 billion kroner from North Sea oil between 1972 and 2011, while the Danish government has raked in 287 billion kroner over the same period.