1 Brev av 8. februar 2002 fra Finansdepartementet til EFTAs overvåkingsorgan (ESA)

EFTA Surveillance Authority

Rue de Tréves 74

B-1040 Brussels

State Aid (SAM 020.500.041): Complaint on «Special rate of depreciation for production facilities and pipeline installations for gas connected to large-scale cooling installations (LNG)» - Request for information

Dear Sir/Madam

1 Introduction

Reference is made to the letter of 20 December 2001 from the EFTA Surveillance Authority (the ESA) to the Norwegian Mission to the EU, wherein Norwegian authorities are requested to forward all relevant information on «Special rate of depreciation for production facilities and pipeline installations for gas connected to large-scale cooling installations (LNG)» which may elucidate the relationship to the State Aid provisions of the EEA Agreement. It is further requested that the information submitted should in particular substantiate why the Norwegian authorities find that the amendments to the Petroleum Tax Act are in accordance with the State Aid provisions of the EEA Agreement.

The reply deadline is 8 February 2002.

The following discussion and the attached documentation will show that the amendments to the legislation do not constitute State Aid pursuant to Art. 61 of the EEA Agreement.

2 Documentation

2.1 Relevant correspondence between the Ministry of Finance and Statoil

Attached are submitted copies of relevant correspondence between the Ministry of Finance and Statoil necessary to assess possible State Aid elements in connection with the Snøhvit/LNG project:

The letter of 08.06.2001 from Statoil refers to a letter of 01.06.2001. This date must reflect a clerical error. No letter has been sent from the Ministry to Statoil on the said date.

2.2 Statutory text and preparatory works respecting Section 3, litra b, third sentence of the Petroleum Tax Act

English translations of the following are attached:

Proposition to the Odelsting; Proposition No. 16 to the Odelsting (2001-2002), Annex 11

Recommendation of the Standing Committee on Finance to the Odelsting; Recommendation No. 2 to the Odelsting (2001-2002), Annex 12

The resolution of the Odelsting; Resolution No. 2 of the Odelsting (2001-2002), Annex 13

3 Relevant main features of the Norwegian tax system

3.1 General taxation act

The Act on taxation of wealth and income (the Tax Act) of 26 March 1999 No. 4 provides the legal authority for taxation of individuals and corporations. The Storting determines the rates of taxation on an annual basis. Corporate profits are taxed at a rate of 28 percent. Tangible operating assets are depreciated in accordance with the declining balance method, cf. Section 14-40 onwards of the Tax Act. Upon implementation of the 1992 tax reform it was determined that the rates of depreciation should to the extent possible reflect the actual reduction of the financial value of the operating assets. Operating assets are divided into depreciation groups. The rate of depreciation applicable to 2002 varies from 30 percent of the remaining balance for office equipment down to 2 percent for commercial buildings. The rate of depreciation applicable to plant and equipment is 4 percent of the remaining balance, cf. Section 14-43 of the Tax Act.

3.2 The Petroleum Tax Act

The Petroleum Tax Act sets out a tax regime that is specially adapted to income from extraction and transportation by pipeline on the Norwegian continental shelf, including pipeline systems for bringing petroleum ashore and onshore receiving facilities. This petroleum tax regime differs from the general corporate tax regime in a number of respects, but is based on, and supplemented by, the general provisions of the tax legislation.

Petroleum exploration in the Norwegian sector of the continental shelf commenced in the mid-1960s. The first Petroleum Tax Act was the Act of 11 June 1965 nr. 3. The purpose of the Act was primarily to provide an incentive for promoting exploration activity on the Norwegian continental shelf through reduced rates of taxation, and to ensure Norwegian taxation of foreign corporations involved in petroleum activities within this area.

Upon extraction of petroleum being initiated in the early 1970s, there arose a need for more comprehensive tax regulation of petroleum activities. The potential for exceptional profitability within this industry suggested that the average rate of taxation applicable to extraction of petroleum should be higher than that applicable under the ordinary tax system pursuant to the then Tax Act of 18 August 1911 No. 8 and special acts, in order to access a significant part of the economic rent.

The current Act on the taxation of sub-sea petroleum deposits was adopted on 13 June 1975 No. 35 (the Petroleum Tax Act). The Petroleum Tax Act contributes to apportioning the «excess profits» of the petroleum industry between the State and the licensees. The Petroleum Tax Act sets out special provisions applicable to an industry that would otherwise be excessively profitable, and as such it contributes to channelling economic rent to the State. The special tax has a central position amongst the special provisions. Income from extraction activities and transportation of petroleum by pipeline is subject to a special tax at a rate of 50 percent in addition to the general corporate tax rate of 28 percent. Furthermore, the Petroleum Tax Act sets out special depreciation provisions and provisions on uplift shielding part of the income from the special tax. The Petroleum Tax Act also contains special provisions on the calculation of income, including the use of norm prices for purposes of tax assessment. The special provisions on the taxation of income are not discussed in the following.

The system of the Petroleum Tax Act is based on overall taxation of the net income of the extraction and pipeline activities of the companies, and not on taxation on a field-by-field basis.

3.2.1 Rates of taxation

Profits from extraction income are subject to corporate tax on ordinary income at a rate of 28 percent and special tax at a rate of 50 percent on net income adjusted for uplift, i.e. a total rate of 78 percent.

3.2.2 Depreciation

Operating assets employed in extraction and pipeline activities do not qualify for depreciation deductions pursuant to Sections 14-30 to 14-48 of the Tax Act. Pursuant to Section 3, litra b, of the Petroleum Tax Act, expenses incurred in acquiring tangible operating assets relating to extraction and pipeline activities may be depreciated at a maximum rate of 16²/₃ percent per annum, with the first year of the depreciation period being the year in which such expense was incurred. The rate of depreciation is considerably higher than would be suggested by the reduction in value of the operating assets. Most installations are constructed to remain operational for a significantly longer period of time.

During the period 1975 - 1986 the first year of the depreciation period was the year in which the operating asset was put into «regular use». As far as production installations with related appurtenances are concerned this was deemed to be the time at which regular petroleum production was commenced. Each production installation was deemed to constitute one operating asset. The starting time was aimed at to some extent preventing depreciation with respect to an installation under construction from being deducted against income from fields involved in active production. As of 1987, operating assets may be depreciated starting the year in which the expense was incurred.

Expenses incurred in petroleum deposit exploration, prior to a development decision being made, do not need to be capitalised and can be charged as expenses on an ongoing basis. Exploration expenses are thus not included in the cost price of operating assets to be depreciated pursuant to Section 3, litra b, of the Petroleum Tax Act.

3.2.2.1 The Ekofisk water injection installation

By way of an interim act supplementing the Petroleum Tax Act, in the form of Act No. 76 of 23 December 1983, a special tax regime was put into place for the implementation of assisted extraction of crude oil. The Act was motivated by a decision to inject water into the Ekofisk reservoir to increase the extraction rate. The supplementary production was expected to increase the extraction rate of the Ekofisk field from approximately 20 to approximately 24 percent. The project required installation of a new platform on the field. Equipment for drilling of injection wells, water treatment installations and pumps for the actual injection were to be installed on the platform. The following is excerpted from the preparatory works relating to the Act; Section 2, page 2, of Proposition No. 7 to the Odelsting (1983-84):

«Amongst the factors contributing to reducing the profitability of the water injection project is that income is generated at a relatively late stage of the lifetime of the project. As the Phillips Group companies already have considerable annual income, it is possible to compensate the late income by permitting the companies to use deductions available in the form of depreciation and uplift at an earlier stage than currently allowed under the Petroleum Tax Act. A reduction of the duration of the depreciation/uplift period and/or a moving forward of the time at which these deductions may be effected will lead to the companies receiving their income somewhat earlier, while the tax payments to the State are somewhat delayed.»

The regime implied that investments in installations involved in the injection project were made deductible in the same tax year as the costs were incurred. On the other hand, the investments only formed the basis for 6²/₃ percent uplift annually for 3 years in respect of the calculation of special tax, as against normally 15 years. Uplift was thus reduced from 100 percent of the investment to 20 percent.

3.2.3 Uplift and production allowance

Pursuant to Section 5, fourth paragraph, of the Petroleum Tax Act, uplift is granted against income liable to special tax. Uplift is a «basic allowance» against the basis for special tax, and thus limits the liability for special tax. Uplift implies that the actual duty to make tax payments takes effect at a later stage respecting the special tax than what is the case with respect to other taxes. Under the current rules, uplift equals 5 percent of the cost price of operating assets involved in extraction activity, and is included in the calculation of income liable to special tax for 6 years, commencing in the year in which depreciation of the said operating asset is initiated.

During the period 1975-1980 uplift amounted to 150 percent (10 percent for 15 years), but it was reduced to 100 percent (6²/₃ percent for 15 years) during the period 1981-1986. During the period 1975 - 1986 uplift, like depreciation, commenced in the year in which the operating asset was put into regular use. In connection with the revision of the system in 1986, the uplift regime was abolished in respect of investments made in 1987 or later years. A new regime was introduced in 1987 in the form of a production allowance for production from «new» fields. Like uplift, the production allowance offered a deduction in the basis for calculating the special tax. The production allowance was calculated as a percentage of the gross production value of petroleum. The basis for the deduction was the volume of extracted petroleum that had yielded the taxable income in the tax year, valued at the price applied in performing the tax assessment.

The provision on production allowance was abolished and replaced by the current provisions on uplift in 1992. The background to the most recent legislative amendment had to do with both incentives and tax administration. The assessment of the Ministry was that some degree of shielding against the special tax remained desirable.

3.2.4 New depreciation provisions for a new large-scale LNG installation

The Norwegian authorities wish to see the gas resources in the Barents Sea developed. Due to long distances from the existing pipeline infrastructure, LNG technology is the only economically feasible method of exploiting gas resources in the Barents Sea. Development of a large-scale LNG installation is significantly more expensive than a development based on transportation by pipeline. The structural and factual circumstances encountered in exploiting gas resources in the Barents Sea has lead to an amendment of the Petroleum Tax Act. It applies to all field developments satisfying the requirements of the Act.

Pursuant to Section 3, litra b, second sentence, of the Petroleum Tax Act, operating assets involved in petroleum activities are subject to depreciation at a rate of 16²/₃ percent per annum, with the first year of the depreciation period being the year in which such expense was incurred. By way of a new third sentence of Section 3, litra b, of the Petroleum Tax Act the rate of depreciation has been modified respecting expenses incurred in acquiring operating assets involved in extraction activity, provided that the purpose, according to an approved plan for development and operation as well as a special licence for the installation and operation pursuant to the Petroleum Act, is production, transportation by pipeline and processing of gas to be liquefied by cooling in a new large-scale cooling installation. The rate of depreciation is 33¹/₃ percent.

The Snøhvit field (herein used as a joint term comprising the Snøhvit, Askeladd and Albatross fields) is located in the Barents Sea, a long distance from the markets, and a long distance from existing infrastructure in the form of pipelines for transportation of the gas to the export markets. For this reason it is planned that the gas be brought ashore at Melkøya, via a pipeline, and cooled in a large-scale cooling installation (LNG installation), wherefrom the gas is transported by ship to the markets. The Snøhvit project comprises development of the said fields, a pipeline ashore, as well as a reception installation, a pre-processing installation and an LNG factory, including appurtentant storage and loading facilities, at Melkøya near Hammerfest. The development is to be effected in several phases:

Phase 1 - 2005 - Snøhvit, with onshore compression in 2010

Phase 2 - 2011 - Askeladd

Phase 3 - 2018 - Albatross

Phase 4 - 2021 - Offshore compression

Amending the provisions on uplift was considered as an alternative to amending the depreciation provisions. Advance approval of the tariffs for processing the gas in the LNG installation was also considered. The assessment of the Ministry of Finance was that the Ministry does not have statutory authority to effect such advance approval.

Financial implications of the depreciation regime for large-scale LNG installations

3.3.1 General remarks on investment-based deductions within the petroleum taxation system

The Norwegian petroleum taxation system features investment-based deductions in the form of depreciation and uplift. Furthermore, debt interest may be deducted, also against the special tax, within the limitations set out in the provision on «thin capitalisation», cf. Section 3 h of the Petroleum Tax Act. Depreciation for tax purposes is often significantly swifter than would be suggested by the reduction in the value of the operating assets, cf. Section 3.2.2. Taken in isolation, this contributes to a reduction in the net present value of the taxes under the petroleum tax regime relative to those under the onshore tax regime. However, despite the accelerated depreciation the average rate of taxation is significantly higher on the continental shelf than onshore. In other words, accelerated depreciation for tax purposes and other investment-based deductions are not sufficient to counterbalance the effect of the special tax.

A higher average tax burden on the continental shelf must be viewed in light of most projects on the continental shelf generating higher returns than onshore projects of corresponding risk. It is an objective to ensure that the largest possible share of this economic rent accrues to the State through the tax system and SDFI (State Direct Financial Interest), while preventing the tax system from contributing to a reduction in the value added originating from the continental shelf. If profitability on the continental shelf had been significantly lower, it would probably not have been particularly desirable to maintain a special rate of taxation at the current level over time. In such a situation it would also be reasonable to assess the system for investment-based deductions (depreciation and uplift) to achieve, amongst other things, a better match between depreciation for tax purposes and reductions in value.

3.3.2 The value of accelerated financial depreciation

Proposition No. 16 to the Odelsting (2001-2002) discusses the financial implications of a shortened period of depreciation in the following manner:

«The amendment to the period of depreciation will reduce the tax income of the State for the first three years, and increase the tax income correspondingly for the subsequent three years. This implies a loss to the State in terms of net present value, and a corresponding gain to the companies. The amount of such net present value loss depends on the discount rate employed. Based on an almost risk-free discount rate, the net present value loss from the amended depreciation provisions will, if taken in isolation, amount to somewhat in excess of 4 percent of the total investments (measured in net present value terms).»

In the opinion of the Ministry, the discussion of Proposition No. 16 to the Odelsting (2001-2002) correctly reflects the isolated implications of amending the depreciation provisions when the companies in question are fully liable to tax (i.e. are paying both regular tax and special tax). A net present value loss of somewhat in excess of 4 percent of total investments amounts to a net present value loss of approximately NOK 900 million respecting the Snøhvit project.

However, accelerated depreciation does have certain consequences for deductible interest that are of relevance in estimating the overall effects of a shortened period of depreciation for a given implementation of the project. The period of depreciation affects the maximum interest-bearing debt the companies may incur within the scope of Section 3 h of the Petroleum Tax Act (the provision on thin capitalisation). Accelerated depreciation for tax purposes leads to an increased differential between depreciation for accounting purposes and for tax purposes, and thus to increased deferred tax on the liability side of the balance sheet. Increased deferred tax is regarded as debt in relation to the provisions of Section 3 h, and thus reduces the scope for the companies of incurring interest-bearing debt without being subject to a scaling down of their deductible interest expenditure. A reduction in the deductible interest applicable to income liable to special tax will increase the tax revenue of the State, and will thus to some extent counterbalance the net present value loss resulting from shortened periods of depreciation. The magnitude of this effect will to some extent depend on the balance sheets of the companies in question and how these have adapted to Section 3 h, as well as other assumptions that will have to be made in making the calculation. The combined consequences of a shortened period of depreciation and a reduction in deductible interest can under assumptions deemed by the Ministry to be reasonable be estimated as resulting in an overall net present value loss to the State of approximately 1 percent of overall total investments. The overall effects of a shortened period of depreciation will thus be significantly less than suggested by the analysis performed in isolation.

3.3.3 Total tax payments under different tax regimes

The Ministry of Finance has carried out calculations showing that the overall tax burden applicable to the Snøhvit project is clearly higher under the proposed tax system (the petroleum tax system with a three year period of depreciation), than had the onshore tax system based on ordinary depreciation provisions been applied to the project in its entirety. Based on a nominal discount rate of 10 percent net of tax, the net present value of the tax payments from the Snøhvit project are in the region of NOK 3.3 billion based on petroleum tax and NOK 2.7 billion based on onshore tax. It may be argued that the discount rate should be somewhat lower, particularly under the alternative based on petroleum tax where the risk-free investment-based deductions constitute a larger share than under the alternative based on onshore tax. This would have the effect of increasing the differential between the net present values of tax payments under the two alternatives.

4 Delineation between the offshore tax regime and the onshore tax regime

4.1 Introduction

The Bellona Foundation has in its complaint emphasised that the LNG installation being assigned to the petroleum tax regime by way of an administrative decision may allegedly constitute an illegal benefit. Bellona argues that: ...«Also practice with respect to the gas treatment plants at Kollsnes and Kårstø, that are located onshore, would suggest that the Snøhvit LNG installation should be taxed outside the scope of the Petroleum Tax Act.»

Section 1, first paragraph, litra d, of the Petroleum Tax Act is worded as follows:

«This Act pertains to taxation of exploration for or extraction of sub-sea petroleum deposits and activities and work related thereto, including transportation by pipeline of extracted petroleum

...

d) within the realm as far as transportation of petroleum by pipeline from areas mentioned under a), b), or c) are concerned, as well as other activities at reception and loading installations as part of extraction and transportation by pipeline of such petroleum.»

Section 1, third paragraph of the Petroleum Tax Act is worded as follows:

«The Ministry may determine that certain types of activity or work should fall outside the scope of the Act, and may make decisions on more detailed delineation of the tax liability pursuant to the first paragraph, litra d).»

Delineation between the offshore tax regime and the onshore tax regime is effected either by way of an interpretation of Section 1, first paragraph, litra d of the Petroleum Tax Act, or by way of the Ministry of Finance making a decision pursuant to Section 1, third paragraph.

The term pipeline is defined in more detail in the Regulations of 30 April 1993 No. 316 on the taxation of income resulting from extraction and transportation by pipeline of petroleum (the Petroleum Tax Regulations). Section 8 is worded/reads as follows:

«A pipeline within the meaning of the Petroleum Tax Act is an installation for transportation of petroleum from a production installation on the Norwegian continental shelf to shore.

A pipeline also includes onshore receiving facilities, as well as loading installations in connection with the reception. Installations for further processing of petroleum, including refining, are not deemed to constitute part of the pipeline.

The interface between the pipeline and other onshore installations is the measuring station that petroleum passes through after having been subjected to cleaning, stabilisation and temporary storage.»

4.2 The Kårstø installation

In connection with the construction of the pipeline for transporting rich gas from the Statfjord field to Kårstø in Rogaland, the scope of the Petroleum Tax Act was expanded in order that the gas pipeline, including significant parts of the onshore terminal installation, fall within the scope of the Petroleum Tax Act and thus within the special tax regime.

The following is excerpted from Section B of Proposition No. 42 to the Odelsting (1981-82):

«The gas is transported by pipeline from the Statfjord field to Kallstø on Karmøy. The pipeline then runs partly in a ditch, partly over land and partly under water to Kårstø. There the gas is firstly channelled into a reception installation, a plug receptor wherein exudation is effected. The gas is subsequently channelled into a pre-processing unit consisting of a CO2 removal unit, a drying unit and a separation unit. Wet gas (NGL) is separated from dry gas in the separation unit. The wet gas is sent on for fractionation in an NGL installation where the products are ethane, propane, butane and naphtha. These are shipped on. Whether some of the dry gas should be allocated to industrial production is still being evaluated. The remainder will be passed on to Ekofisk on the continental shelf by pipeline, and from there on to Emden. Pre-processing and separation units are required for purposes of the throughput of the gas to be returned to the continental shelf. These parts of the installation should fall within the scope of the Petroleum Tax Act. Those parts of the installation effecting the further processing of the wet gas (by way of fractionation thereof), are not required for purposes of throughput and will have to fall outside such scope.»

Proposition No. 102 to the Storting (1980-81) describes the delineation of the term pipeline as follows:

«Applied to the pipeline planned to Kårstø and then back to Ekofisk, this implies that all installations that are required for the throughput of gas to Ekofisk will fall within the scope of the Petroleum Tax Act. These will include plug receptor, pre-processing and separation units, pumping or compression installations required for pipeline transportation as well as intervening, outgoing and incoming pipelines. Wet gas installations and any other installations in connection with the bringing ashore of gas will be subject to the regular tax provisions applicable to onshore activities in Norway.»

The delineation of the documentation presented to the Storting between the offshore and onshore tax regimes is based on interpretation of the Act as worded following the amendments to the legislation. The wet gas installation (the fractionation activities) are not regarded as transportation of petroleum or other activities at the reception and loading installation, but as further processing, and is subject to the onshore tax regime.

4.3 The Kollsnes installation

The reception installation at Kollsnes, which amongst other things processes the gas from the Troll field falls in its entirety within the scope of the Petroleum Tax Act, and is thus subject to special tax.

The following is excerpted from Section 8.4.1 of Proposition No. 12 to the Odelsting (1991-92):

«The reception installation at Kollsnes for the gas from the Troll field will in the main serve the same functions as the reception installation at Kårstø. The main difference is that the gas flow from the Troll field is brought ashore without pre-processing, implying that all exudation has to take place at the onshore terminal. There will be no separate processing and fractionation installation for wet gas.

Pursuant to the approved revised plan for development and operation of Troll phase I, the field is to be developed with an offshore well head platform and an onshore processing installation. The production flow is to be passed on unprocessed to Kollsnes in Øygarden by way of two polyphase pipelines, where a processing installation for processing of the gas and separation of natural gas liquids and dry gas as well as a compression installation for export of gas are being constructed.

In the onshore processing unit gas from Troll will be dehydrated in order to extract water and other fluids. The heavier components will be extracted in the form of liquids. The dry gas is subsequently compressed for transportation to the Continent through the pipeline system. Natural gas liquids will be extracted and transported to the purchaser via pipeline or ship. Transportation to the purchaser via pipeline or through a separate installation is being considered.

Consequently, the processing may in the main be said to comprise the extraction of dry gas and natural gas liquids from the gas, as well as the sending of dry gas that is ready to be sold on to the pipeline system on the continental shelf and the delivery of natural gas liquids for onward transportation and use. On this background it is the opinion of the Ministry that there is a basis for considering the onshore processing installation for such a reception installation connected to a pipeline for bringing ashore gas as falling within the scope of the Petroleum Tax Act pursuant to the Petroleum Tax Act and the regulations appended thereto. If required, the King may pursuant to Section 1, second paragraph of the Petroleum Tax Act, pass more detailed resolutions confirming this. However, the Ministry considers the most appropriate solution to be the expansion of the actual wording of Section 1, first paragraph, litra d, in order that it more explicitly include onshore reception and processing installation constructed as part of the extraction and transportation of petroleum brought ashore from the continental shelf.»

Delineation of the scope of the offshore tax regime as applicable to the Kollsnes installation is thus based on an interpretation of the Act following the amendments to the legislation, cf. Proposition No. 12 to the Odelsting (1991-92).

4.4 The Installation at Melkøya

On 19 June 2001 the Ministry of Finance made a decision on the delineation of the scope for taxation pursuant to the Petroleum Tax Act, cf. copy of the letter of the Ministry, Annex 7. According to the decision the terminal installation at Melkøya would for purposes of taxation be deemed to fall partly within the scope of the Petroleum Tax Acts. The following activities were not to be deemed to fall within the scope of the provisions of the Petroleum Tax Act, but would in all respects be dealt with pursuant to the general provisions of the Tax Act of 26 March 1999 No. 4:

• Removal of CO₂, mercury and water

• Cooling of the gas stream into LNG, including the extraction of LPG

• Storage and loading of prepared LNG and LPG.

In Section 4.2 of Proposition No. 16 to the Odelsting (2001-2002), the Ministry assumed that the licensees would request that said decision be amended, in order that the operating assets in question would fall within the scope of the Petroleum Tax Act by way of being classified amongst the operating assets dedicated to extraction and pipeline transportation. The majority of the Standing Committee on Finance endorsed the assessment of the Ministry of Finance as well as the proposal set out in the Proposition, cf. Section 2 of Recommendation No. 2 to the Odelsting (2001-2002).

Statoil has in a letter of 1 November 2001 on behalf of the Snøhvit field licensees requested that the Ministry make a new decision pursuant to Section 1, third paragraph of the Petroleum Tax Act, whereby it is confirmed that the activities and operating assets relating to the terminal installation at Melkøya, as described in the Plan for Development and Operation/Plan for Installation and Operation submitted to the authorities (the Ministry of Petroleum and Energy) on 25 September 2001, in their entirety fall within the scope of the provisions of the Petroleum Tax Act. Such a decision has been made by way of a letter to Statoil dated 31 January 2002. The amended decision implies that the LNG-installation is deemed to constitute part of the pipeline transportation system, cf. the delineation of the term pipeline in Section 1, first paragraph, litra d, of the Petroleum Tax Act and Section 8 of the Petroleum Tax Regulations, cf. also the delineation as applied to the Kårstø and Kollsnes installations. The gas is liquefied by cooling, but it remains the same product and no further processing of the gas takes place.

No fractionation of wet gas will take place at the reception installation at Melkøya corresponding to the further processing and production of various heavier gas products as is taking place at Kårstø and being taxed under the onshore tax regime.

In the view of the Ministry of Finance there is nothing extraordinary about the LNG installation being dealt with as forming part of the pipeline in terms of taxation. The Petroleum Tax Act must be deemed to allow both for a solution whereby a decision is made pursuant to Section 1, third paragraph of the Petroleum Tax Act to the effect that the mentioned installation should fall within the scope of the Act, as well as a solution whereby the LNG installation is deemed to fall outside such scope. In any case, taxation of the LNG-installation under the offshore regime represents no deviation from the ongoing tax treatment of the receiving facilities at Kollsnes and Kårstø, as suggested by the letter from Bellona. The background for the Ministry, in connection with the proposal to amend the period of depreciation applicable to production installations and pipeline systems connected to a large-scale LNG installation, proposing a solution whereby the LNG installation at the request of the licensees could fall within the scope of the petroleum tax regime by way of a new decision, was a desire to avoid uncertainty and doubt respecting the tax treatment of the tariffs applicable to the service functions to be performed under the LNG process.

Under the amended decision the income from this part of the activities will also be subject to offshore tax at a rate of 78 percent. The amended decision implies that determination of the processing tariffs applicable to the LNG installation will be of no relevance in terms of taxation, as the entire value chain remains within the scope of the offshore tax regime. The Ministry of Finance is unable to see that a delineation of the scope of the Petroleum Tax Act in respect of the Snøhvit installations which implies that the LNG installations fall within the scope of the special tax regime under the Petroleum Tax Act, should amount to any form of financial benefit suggesting that State Aid is being granted.

5 Summary on the relationship between the amendments to the legislation and the EEA Agreement - the State Aid provisions

The main rule is that the tax systems of the nation states do not fall within the scope of the EEA Agreement. Each State may design its tax system on the basis of a balancing of the tax policy considerations of the State itself. Norway has elected a general tax system whereby corporate profits are subject to a rate of taxation of 28 percent. Furthermore, Norway has elected a tax regime that on average imposes a heavier tax burden on income accruing from the extraction and transportation by pipeline of petroleum, including onshore receiving facilities that may be deemed to constitute part of pipelines for bringing petroleum ashore, whereby the companies in addition to corporation tax are subjected to a special tax to be paid to the State at a rate of 50 percent. The high rate of taxation within the petroleum sector is to some extent counterbalanced by swifter depreciation and uplift relating to the special tax, cf. Section 3.3.1. The amendment to the depreciation provisions with respect to field developments requiring that the extraction of gas be based on large LNG installations constitutes a modification of the petroleum tax regime as far as such qualified installations are concerned. The amendment to Section 3 b of the Petroleum Tax Act is both formally and de facto of a general nature, and will be applied to all field developments satisfying the requirements of the Act. As far as the Snøhvit project currently being considered is concerned, the overall tax burden will, despite the amended depreciation provisions, be significantly heavier than had the onshore tax regime been applied to the entire project, cf. Section 3.3.3.

The amendments to the legislation make it more feasible to develop gas deposits on the Norwegian continental shelf that are situated a long distance from other infrastructure and a long distance from the markets. In the assessment of the Ministry, such a tax regime applicable to the development of the field and the overall income generated thereby cannot constitute State Aid. It is not desirable to maintain an average level of taxation for such developments that is on par with that applied within the remainder of the petroleum tax regime. An obvious way to address this would be to apply a reduced rate of taxation combined with depreciation that to a greater extent reflected reductions in financial value, cf. Section 3.3.1. The tax treatment of large-scale LNG installations would in such case be more similar to the regular onshore tax provisions. However, such an amendment is difficult to implement within the Norwegian petroleum tax system, which is not field specific, cf. Section 3.2. The taxation framework applicable to developments based on large-scale LNG-installations have thus been amended through a reduction in the period of depreciation, down to three years, while maintaining the high rate of taxation. The fact that it has been decided that the LNG installation, as part of the pipeline system, falls within the scope of the Petroleum Tax Act, and that it is thus subject to the special tax regime, is in keeping with the system of the Petroleum Tax Act. The delineation thereby resulting between the onshore and offshore tax regimes does in the opinion of the Ministry not constitute any element of financial aid, but offers obvious advantages to both the State and the companies in terms of the technicalities of tax assessments, inasmuch as it removes the considerable uncertainty that could otherwise have arisen respecting the tax treatment of the processing charges applicable to the LNG installation.

It will follow from the above that there is a logical tax policy reason for the amendment to Section 3 b of the Petroleum Tax Act, based on the aim of achieving the desired development of the gas resources on the Norwegian continental shelf, in this case through development of the Snøhvit gas field, that will ensure a significant increase in the Norwegian production of gas. This measure will yield higher tax income to the State than if such development had not taken place. Furthermore, the scope of the reduced tax burden is limited (approximately 1 percent of the amount of investment, cf. Section 3.3.2), and the value of the tax payments is significantly higher than had been the case if taxation had taken place pursuant to the regular onshore tax provisions (cf. Section 3.3.3).

On the above basis the amendments have been assessed and found to be in compliance with the State Aid provisions of the EEA Agreement, cf. Section 4.1 of Proposition No. 16 to the Odelsting (2001-2002).

Yours faithfully

Stig Sollund, pp

Director General

Anna Lie

Senior Adviser