2 Brev av 19. april 2002 fra Nærings- og handelsdepartementet til EFTAs overvåkingsorgan (ESA)

EFTA Surveillance Authority

Rue de Trèves 74

B-1040 Brussels

Belgium

State aid - Request for further information - «Særskilt avskrivningssats for produksjonsinnretninger og rørledningsanlegg for gass tilknyttet storskala nedkjølingsanlegg»

Dear Sir/Madam,

Reference is made to the Authority's letter of 18 March 2002 requesting information on «Særskilt avskrivningssats for produksjonsinnretninger og rørledningsanlegg for gass tilknyttet storskala nedkjølingsanlegg (LNG)».

1 Introduction

The Norwegian Government wishes to see the gas resources in the Barents Sea developed. This is due to the Norwegian Government's obligation to manage the petroleum resources on the Norwegian Continental Shelf (NCS) to the benefit of the Norwegian society as a whole, thereby realising the values represented by these resources. The Barents Sea is situated a long distance from the markets, and from existing infrastructure in the form of pipelines for transportation of the gas to the export markets. The exploitation of gas resources in the Barents Sea and other similar areas on the NCS therefore require the application of a new technology not yet applied on the NCS or anywhere else in Europe, i.e. the liquefaction of natural gas. In order to allow these gas resources to be developed, the Government has decided to take the necessary measures to ensure that the LNG technology can be developed in Norway.

The general amendment to Section 3 of the Petroleum Taxation Act (PTA) reflects the low profitability of large- scale LNG projects. The amendment was made to ensure the realisation of the substantial values and tax revenues to the State of gas exploitation projects in areas isolated from the market and pipeline infrastructure, and to stimulate the development of such gas fields through the building of large-scale LNG installations. No large-scale LNG- installations have previously been built in Norway.

Norway's policy to stimulate the development of LNG technology and the development of gas resources in the Barents Sea and other similar areas is fully in line with an energy policy that is generally regarded as beneficial to the European Union and, by the same token, to the EEA. As the Commission of the European Communities (Commission) has stated in its Communication on European energy infrastructure, the supply of LNG is expected to increase the flexibility, supply diversity and liquidity of the gas markets. 1 As stressed in the action plan for the Northern Dimension in the external and cross-border policies of the European Union 2 and the preceding Commission Communication on strengthening the Northern Dimension in European Energy supply, 3 one of the areas to be examined is the potential of the gas resources in the Barents Sea. 4 As a part of two EU-Interreg programmes - Northern Periphery and North Sea - the Northern Maritime Corridor is also focusing on exploitation and on a sustainable transport of oil and gas from the Barents region. 5 Furthermore, the Commission has listed LNG supplies from Norway i.e. from the Snøhvit field in the Barents Sea among the key gas supply projects for Europe. 6

The Norwegian Government is of the view that the amendment to the PTA does not contain any element of State aid within the meaning of Article 61 (1) of the EEA Agreement («EEA»).

If the Authority should be of the opinion that the amendment to the PTA contains elements of State aid within the meaning of Article 61(1), the Norwegian Government is of the view that the amendment is compatible with the EEA Agreement due to the derogation in Article 61(3)(c) EEA.

2 The economic consequences of the amendment to the PTA

In its letter of 18 March 2002, the Authority has requested information regarding the economic consequences of the amendments to the Petroleum Tax Act for the Snøhvit project. The Authority has requested information concerning the net present value of the project before taxes and the net present value of the taxes under four different alternatives. These alternatives were:

1. Part of the LNG facility is placed under the onshore tax regime, i.e. the delineation alternative decided upon by the Ministry of Finance in its letter to Statoil of 19 June 2001, and the normal (16²/₃ per cent) depreciation rates under the PTA apply to the part of the facility regulated by the PTA;

2. The Snøhvit project is in its entirety placed under the PTA and the normal (16²/₃ per cent) depreciation rates apply;

3. Part of the LNG facility is placed under the onshore tax regime (as point 1) and the increased (33¹/₃ per cent) depreciation rates under the PTA apply to the part of the facility regulated by the PTA;

4. The Snøhvit project is in its entirty placed under the PTA and the increased (33¹/₃ percent) depreciation rates apply, i.e. the solution decided by the Storting (Parliament).

The Authority furthermore requested a calculation of the alternatives by applying a risk free discount rate, the reference rate used by the Authority of 6,32 per cent and a 10 per cent discount rate.

The Norwegian Interbank Offered Rate (NIBOR) may be used as an indicator of an approximately risk-free interest rate. The 3-month NIBOR rate was 6,32 in January and 6,57 in February while the 12-month rate was 6,24 and 6,69. A reasonable estimate of a nominal risk-free interest rate may therefore be 6,5 per cent (before tax), corresponding to a discount rate of 4,68 per cent after tax. In the calculations below, the before tax rate of 6,5 per cent is used for the net present value of the Snøhvit project before tax, while the after tax rate of 4,68 per cent is used for the net present value of the tax payments. Given the risk in the Snøhvit project a risk free discount rate is clearly unable to give a correct estimate for the value of the project. An approximately risk free discount rate will however be relevant for evaluating the differences in net present value in taxes (and thus net present value after tax) when different depreciation rates apply. The reason for this is that from the time when investments are undertaken, the value of financial depreciation may be viewed as certain in the Norwegian petroleum tax system where, i.a., a financial deficit may be carried forward with interest.

Table 2.1 shows the net present value of the Snøhvit project before tax (including the SDFI 7 share of the project) under the four alternatives requested by the Authority and with alternative nominal discount rates. The net present value before tax will only differ due to various discount rates.

Table 2.2 shows the net present value of taxes for the Snøhvit project under the four alternatives requested by the Authority and with alternative discount rates. In alternatives 1 and 3 where part of the LNG facility is placed under the onshore tax regime, the present value of taxes is critically dependent on the choice of tariffs for the LNG facility. The calculations are based on Statoil»s requested tariffs which would imply a higher surplus in the onshore regime than in the offshore regime and thus lower taxes than in alternatives 2 and 4. It is however uncertain whether these tariffs would have been accepted for tax purposes by the tax authorities. It may also be noted that a lower tariff would tend to equalise the value of taxes independent of the choice of tax regime for the LNG facility. (Reducing the tariffs with approximately 23 per cent would e.g. equalise the net present value of taxes with a discount rate of 9 per cent).

The Authority has also requested information about the net present value of total investments of the Snøhvit project. Table 2.3 shows the net present value of total investments in the Snøhvit project.

3 The motivation for bringing the large scale LNG facility under the PTA and for the undertakings to request this

According to the decision of 19 June 2001 by the Ministry of Finance the terminal installation at Melkøya would for taxation purposes be deemed to fall partly within the scope of the PTA, and partly within the general provisions of the General Taxation Act (GTA) of 1999.

With the LNG installation partly within the scope of the PTA and partly within in the scope of GTA, there could be a potential for tax disputes regarding the pricing of the functions performed at the LNG facility.

Advance approval of the tariffs for processing gas in the LNG installation at Melkøya was considered at the request of Statoil. The Ministry of Finance however considered that it does not have statutory authority to give such advance approval.

In its letter of 13 September 2001 to the oil companies the Ministry of Finance proposed as an alternative solution to bring the LNG facility under the PTA. The Ministry's motivation for this was to avoid the uncertainties and potential for future tax disputes regarding the LNG tariffs. In the same letter the Ministry also put forward the proposal to accelerate the depreciation rate for installations required for large scale LNG based gas field developments. Since an alternative where the large scale LNG facilities would fall under the PTA would also broaden the depreciation base, the depreciation rate could be at a lower level than was otherwise contemplated for such gas projects.

The letter of 18 March 2002 from the Authority has been forwarded by the Ministry of Trade and Industry to Statoil to comment upon the motivation of the companies to request bringing the LNG facility under the PTA. By letter of 5 April 2002, Statoil has answered as follows:

«Greenfield LNG projects are comprehensive projects with high up-front investments and thereafter a long production/income generating period of 25 years or more. Such large, long lasting projects are obviously connected with significant risk. One major identified risk element is the fiscal frame conditions. The partners motivation for the request to bring the LNG terminal under the Petroleum Taxation Act was to get predictable frame conditions for the project. This would reduce the significant investment risk of the project.

An integrated project with activities in both the onshore and the offshore tax regime requires principles for allocation of income and deductions in the two regimes. This has been accomplished by fixing tariffs which are charged between the two regimes. However, such a tariff system involves uncertainties and has resulted in major tax disputes with the tax authorities. One such dispute concerning the tax treatment of onshore parts of the Statpipe transportation system has recently been appealed to the Supreme Court.

Thus, a basic condition for the Snøhvit partnership to embark on the project was long term and predictable fiscal frame conditions, particularly with regard to transfer pricing between offshore and onshore parts of the project.

The Ministry of Finance 13 September 2001 presented two alternative amendments to the Petroleum Tax Act to the Oil Industry Association (OLF), the Petroleum Taxation Office and Statoil. The parties were asked to give their comments and recommend one of the alternatives.

One proposal entailed that the LNG terminal would be treated as an onshore activity, and that there would be given a general regulation for a tariff system which would be binding for the taxation. The details of this system were, however, not described. An element in this proposal was that the depreciation rate on the offshore part of the project would be 50 % annually. Even if the Ministry stated that the tariff system would take into account the particular technical and commercial risks of the investments in the LNG terminal, the Snøhvit partners did not find that this proposal gave necessary predictability in respect of the future taxation of the large investments. The Ministry had at an earlier stage stated that it would not be possible for the Ministry to approve a tariff structure with effect for the future taxation of a project.

The other alternative eliminated the risk of disputes on allocation of taxable income between the two tax regimes by including the LNG terminal in the offshore regime. This solution would require a separate resolution on the treatment of the LNG terminal. This resolution was adopted by the Ministry in January 2002. The other element of this alternative was the depreciation rate on the LNG terminal with 33¹/₃ % annually. The benefit of this solution to the parties was that they would avoid any major tax disputes in the future on the project.

The outcome of the hearing was that the Ministry proposed alternative ii) to the Storting. This proposal involved an annual rate of depreciation of 33¹/₃ % for large scale LNG facilities. It also implied a revision of a former decision from 19 June 2001 stating that the LNG terminal wax taxed under the General Tax Act. The Ministry of Finance states in Ot. prp. nr. 16 (2001-2002) that it assumes that the Snøhvit-partners will request such revised decision. This is supported by the Storting when approving the change in the Petroleum Tax Act. In November 2001 the Snøhvit partners requested a revised decision on the tax treatment of the LNG terminal and in January 2002 the Ministry of Finance made the revised decision that the whole of the Snøhvit project should be taxed under the Petroleum Tax Act. Said revision fulfilled the partnerships requirement with regard to predictable fiscal conditions by removing the exposure of transfer pricing between two taxregimes as an issue.»

4 The amendment to the PTA does not involve State aid within the meaning of Article 61(1) EEA

4.1 Introduction

In its letter of 18 March 2002, the Authority expresses the view that it may be in line with the general principles of the PTA (i.e. within the logic of the system) to place large-scale LNG facilities within the PTA, and that this consequently would not involve State aid. We agree with the Authority's view. The question does arise whether the amendment to the PTA should at all be regarded as State aid within the meaning of Article 61(1) EEA.

Based on a preliminary view, the Authority seems to be of the opinion that the amendment to the PTA - i.e. the depreciation rates applicable to new large-scale LNG facilities - may contain State aid within the meaning of Article 61(1) EEA.

The Government disagrees with the Authority»s preliminary assessment in this regard. Thus, the Government maintains that no State aid within the meaning of Article 61(1) EEA can be found in the amendment to the PTA at issue.

By way of introduction, it must be underlined that the Authority erroneously suggests that the amendment is, in effect, an alleviation of the tax burden of the Snøhvit licensees. Both the terms applied in the Act and the object and purpose of the amendments, clearly show that the amendment introduces a rule of general application, which is applicable to all economic operators that fulfil the criteria set out therein. Furthermore, the rule is not limited in time, i.e. it is not a provisional tax arrangement.

The applicable criteria in the amended PTA Section 3 litra b are objective, and the rule does not leave room for discretionary decisions by the administration as regards future large-scale LNG facilities. Moreover, Norwegian administrative law requires that decisions be made with due consideration of the principles of non-discrimination, objectivity, proportionality and transparency. This limits severely any leeway for discretion in future decisions.

The Authority correctly points out that the amendments to the PTA will not be applicable to field developments involving the construction of LNG installations on a smaller scale. However, LNG installations on a smaller scale do not involve the same infrastructure and are therefore less capital intensive and less technically complex than the large scale LNG facilities.

All the above factors underpin the conclusion that the amendment - even if it was triggered by the Snøhvit project - is of a general nature, i.e. a general measure. Consequently, it does not favour certain undertakings or the production of certain goods within the meaning of Article 61(1) EEA. In this regard, reference is made to the Government's letter of 8 February 2002.

4.2 The amendment to the PTA does not involve State aid

Even assuming that the amendment to the PTA is an exception to the general tax system, and, in effect, an alleviation of the tax burden for a particular sector, the Government submits that no State aid is involved. The Government»s assessment is based on four lines of arguments. All of these are based on well-established case law.

In order to assess whether the measure involves State aid, the following issues must be considered:

1. Whether any aid is granted through State resources;

2. Whether the measure distorts or threatens to distort competition;

3. Whether the measure may be justified by the nature and general scheme of the system, and;

4. Whether the measure may be justified by rational and acceptable reasons.

These issues, which to a certain extent are inter-related and thus must be read in conjunction, will be addressed in turn in the present submission.

1 Whether any aid is granted through State resources

As a starting point it must be recalled that, according to the case law of the ECJ, a pecuniary advantage is accepted in cases where the Stat's measure amounts to - and is limited to an, in economic terms, rational response to e.g. competition within the market. For instance, when the state as a supplier of energy is acting as an economic operator, and does not forfeit any profit which would normally be earned, a preferential tariff does not involve Sate aid. In Case C-143/99//i Adria Wien-Pipeline GmbH v. Finanzlandesdirektion für Kärnten (not yet reported) (hereinafter//i Adria Wien ) the European Court of Justice («ECJ») states:

«(...) that a tariff charged to a category of undertakings for a source of energy at a lower level than that which would normally have been applied may be regarded as State aid if that tariff, adopted by a body subject to the control and direction of public authorities, is attributable to the Member State concerned and that State, unlike an ordinary economic operator, uses its powers to confer a pecuniary advantage on energy consumers by foregoing the profit which it could normally realise (see, to that effect, Joined Cases 67/85, 68/85 and 70/85 Van der Kooy and Others v Commission [1988] ECR 219, paragraph 28).»(recital 39, emphasis added). 8

It follows mutis mutandis that no State aid is involved provided that the measure at issue is confined to fulfilling the State's rational economic interests qua owner of the natural resources and qua the one to manage the natural resources to the benefit of the Norwegian society as a whole. ⁸See also Case C-56/93 Belgium v. Commission[1996] ECR I-723, at para 10.

Obviously, it is of utmost importance for the State to develop its natural resources, based on sound economic principles. Only through the exploitation of the natural resources will the State be able to ensure high value creation for the Norwegian society as a whole. This is also reflected in the elected taxation system in Norway. A very significant feature of the system is the link between the State»s ownership of the resources and the special tax for the petroleum and gas sector. This is clearly emphasised by the legislator when passing the PTA in 1975, see Ot.prp. nr 26 (1975-75) page 11:

«When assessing the share of the production result which should accrue to the Government, it is natural to consider the fact that the petroleum on the Continental Shelf is an exploitation of natural resources belonging to the Norwegian State. As to the question of the exploitation and utilisation of these resources as well as to the forming of a taxation system, one must act in accordance with this fact.»

And, on page 26:

«It is the Government»s view that a larger part of such extra income than what is stated in current tax regulations should accrue to the Norwegian society. An element in this respect is that income from the exploitation of natural resources belonging to the State is at issue.»

The Standing Committee in the Parliament was of the same opinion; see Innst O nr 60 (1974-75), page 15:

«The majority refers to the fact that the petroleum resources on the Norwegian Continental Shelf are the joint property of the Norwegian people. It is therefore, according to the majority, not unreasonable that Norway wishes to secure a considerable share of the values created on the Continental Shelf. The major part of the «national income» created on the Norwegian Continental Shelf should, like the «national income» in general, be applied for the benefit of the Norwegian people. According to the majority, it is therefore not unreasonable to implement special measures in order to secure for our country a larger share of the values being created.»

Accordingly, sound resource management requires the State to ensure that non-renewable resources are managed properly in the interest of the Norwegian society as a whole. This requires that resources to be depleted to the fullest extent possible and in the most cost-effective manner with due regard to the environment.

To facilitate exploitation of the resources and to secure for the owner, i.e. for the State, the best part of the values created on the Continental Shelf, have at all times been central objectives of the Norwegian petroleum tax legislation. Thus, the history of the Norwegian petroleum tax legislation shows that considerations related to necessary investment incentives and the «government take» have been of great importance.

It is a fact that offshore exploitation of petroleum is extremely capital intensive. Moreover, it is an indisputable fact that exploitation of LNG is even more capital intensive than exploitation of oil, and the transportation of gas through pipelines. This is due to the fact that the transportation of LNG is limited to ships and requires plants to liquefy the gas at the point of departure and terminals to re-gasify at the delivery points.

It is also an indisputable fact that offshore petroleum exploitation in areas located outside areas where pipeline infrastructure can be established under economically justifiable conditions, is both more capital intensive and technically more complex than traditional offshore exploitation of petroleum. In its Green Paper; «Towards a European strategy for the securing of energy supply» 9, the Commission thus states on page 45:

«In the long run the growth in demand and the increase in intra-Community trade produced by the internal market will generate a greater need for transport infrastructure (intra- and trans-European networks, port infrastructure for liquefied natural gas (LNG), for which financing needs to be found. It should be said that the cost of transporting gas differs according to whether it is transported by pipelines or ship (LNG). The transport of gas requires infrastructure that is very difficult to build in both cases. The profitability of these two types of transport depends primarily on distance.»

Being situated far away from the markets, LNG technology is the only way to commercialise the exploitation of gas resources in the Barents Sea region and other similar regions. The amendment to the PTA has been introduced to make the development and exploitation of the gas resources in such areas possible. Thus, the amendment has been triggered by the need to embark on a new phase in the exploitation of the natural resources on the Norwegian Continental Shelf. It was clear that on average the taxability of LNG projects was lower than what is the case for existing projects.

That the different depreciation rates are a consequence of the different burdens of investment is reflected in the Proposition to the Storting for the amendment to the PTA. Ot.prp. nr. 16 (2001-2002), Section 4.1, reads:

«A development of Snøhvit will open the Barents Sea to petroleum activities. The development will make it possible to increase the exploitation of the gas resources in the Barents Sea area. It will have regional effects with regard to jobs, infrastructure and business activities.

Large-scale LNG installations have not previously been built in Norway. The Ministry assumes that large-scale LNG technology will be most relevant to the development of fields which are situated far from the markets and far from already established gas pipelines.» (All emphasis added).

The report of the meeting 22 November 2001 of the relevant chamber of the Parliament (Odelstinget) states:

Torbjørn Hansen (The Conservatives, Committee chairperson):

«The Barents Sea and the Snøhvit field are situated far away from the European gas market. The field is also situated far away from any existing infrastructure (...) LNG is the only realistic way of exploiting the gas resources far north. Even if the enterprise falls within the Petroleum Taxation Act, this is a radically different way of producing gas than what we already have in the North Sea today (...)

The burden of investments as a consequence of the distance to the market and the lack of infrastructure nevertheless have as a consequence that the taxability is lower than the existing enterprises governed by the general legislation in the Petroleum Taxation Act». (Emphasis added).

The licensees' commercial assessments in the present case also illustrates the importance of the amendment to the PTA. In a letter from Statoil on behalf of the licensees to the Ministry of Trade and Industry, dated 17 April 2002, the licensees underline that the accelerated deprecation scheme is of crucial importance for the realisation of the Snøhvit project. It follows from the letter that the licensees state that if the LNG terminal had been included in the traditional offshore tax regime, with a maximum depreciation rate of 16²/₃ percent per annum, this would have resulted in an effective rate of return of 8,5 percent. This is, according to the licensees, substantially below the demanded profit, and would have resulted in abandonment of the project. The new depreciation provisions for large-scale LNG installations are calculated by the licensee's to result in a possible rate of return of 10,5 percent. According to the licensees, the project is still considered to be of low return, but is under this regime economically feasible. It is «just above the minimum requirement». According to the companies usually require a minimum rate of return at 10 - 14 percent after tax, due to risks involved, long term duration, alternative employment of capital, human resources etc.

Consequently, the amendment to the PTA was thus a necessity to render possible planned exploitation of the gas resources in the Barents Sea area. In this respect, the amendment to the PTA amounts - in economic terms - to nothing more than a rational measure by the State as owner of the resources and within the frames of sound resource management, in order to promote the realisation of projects rendering substantial tax revenues to the State. In addition, the State did not forego any profit as a result of the amendment.

On this basis, the Government submits that the amendment to the PTA - i.e. the introduction of an accelerated depreciation scheme - amounts to nothing more than an «investment» that must be juxtaposed with an investor»s decision to make an investment under normal market conditions. Accordingly, no aid is granted through State resources.

2 Whether the measure distorts or threatens to distort competition

Article 61(1) only applies to aid that «distorts or threatens to distort competition». In order to asses whether that criterion is fulfilled, it is necessary for the Authority to specify the situation in the relevant market. In general, the relevant market for the purposes of establishing that an aid distorts competition contrary to Article 61(1) includes the goods and services supplied or demanded by the favoured undertakings or industries, the goods which derive from these goods and services, and those which compete with them as substitutes.

The Government questions whether the measure taken in this respect distorts or threatens to distort competition. In the Commission»s Statement of Objections («SO») in Case COMP/36.072 (GFU), the Commission held that «Although transportation in the form of LNG offers somewhat more flexibility, it is at present basically limited to ships, and requires liquefaction plants at the point of departure and regasification terminals at the point of arrival, both of which are relatively costly. Therefore, pipeline natural gas and LNGs are in this case not considered to be part of the same product market» (para 1, underlined here) 10

It follows from the Commission»s statement that pipeline natural gas and LNG are two different product markets. As the Commission points out, the LNG market consists of (1) liquefaction plants at the point of departure and (2) re-gasification plants at terminals. The Snøhvit field is the only large-scale LNG facility that exists in the EEA. Thus, it seems that the measure does not distort or threaten to distort competition within the relevant market.

3 Whether the measure may be justified by the nature and general scheme of the system

The amendment of the PTA is, furthermore, acceptable on the basis of the general rule recognised by the ECJ and the Authority in its Guidelines on State Aid; the selective nature of a measure may be justified by «the nature or general scheme of the [tax] system.» 11 If so, the measure is not considered to be aid within the meaning of Article 61(1) EEA. In Italy v. Commission, the ECJ held:

The partial reduction of social charges pertaining to family allowances devolving upon employers in the textile sector is a measure intended partially to exempt undertakings of a particular industrial sector from the financial charges arising from the normal application of the general social security system, without there being any justification for this exemption on the basis of the nature or general scheme of this system.» 12 (emphasis added).

The general rule is reiterated in recital 42 in Adria Wien:

«According to the case-law of the Court, a measure which, although conferring an advantage on its recipient , is justified by the nature of or general scheme of the system of which it is part does not fulfil that condition of selectivity.» (emphasis added).

As a starting point, the Government notes that the Guidelines accept that differences in depreciation rates may be justified as a consequence of «the nature or general scheme of the system». According to the Guidelines 17b.3.4(2), «Differentiation of calculation of asset depreciation (...) methods may be inherent in the tax systems to which they belong.»

Thus, if the Authority concludes that the accelerated depreciation arrangement should be seen as an alleviation of the special tax burden that applies to the Norwegian offshore sector, the Government submits that the arrangement is inherent in the logic of the general taxation system.

As mentioned above, facilitating exploitation of the resources and securing for the Norwegian society as a whole the best part of the values created on the Continental Shelf, have at all times been central objectives of the petroleum tax legislation. A brief recapitulation of the history of Norwegian petroleum taxation shows that e.g. the depreciation rates are fixed on the basis of the particular requirements of the petroleum sector:

The possibility of recovering petroleum on the Norwegian Continental Shelf led to the Parliament's adoption of a special Petroleum Tax Act on 11 June 1965. In contrast for instance to Great Britain, the legislators decided to let the general provisions governing taxation continue to apply, but with a reduction of up to 9% in certain rates of taxation. The reason the legislators gave for the reduction was that players on the Shelf would also be charged a 10% royalty, in order to secure for the State a share of the gross value of the petroleum recovered. It was therefore necessary to lower the income tax so as to attract investor interest to the Continental Shelf.

In the 1970s, it became clear that it was possible to undertake socio-economically profitable petroleum recovery on the Norwegian Shelf, and in 1975 the Government submitted Proposition no. 26 (1974-75) to the Odelsting, seeking the adoption of a new Petroleum Tax Act. The bill was prompted by the sharp increase in petroleum prices, and the resulting wish on the Government's part to adopt special measures aimed at channelling a larger proportion of the values realised to Norwegian society. The introduction was accordingly proposed of an additional tax on income, on top of the standard income tax. On the other hand, it was a major consideration for the Parliament that petroleum recovery in the North Sea is risky. Drilling in unknown structures costs large sums which are total losses if no commercial finds are made. A development decision places significantly larger amounts at risk. The risks involved in such investments are often considerably higher than risks associated with most other investments in other industries. There is moreover a unique price risk, because the global price level is not related to the level of costs of petroleum recovery in the Middle East or other major producing countries. For these reasons, the tax system would have to allow the players reasonable rewards. In that connection, special rules were adopted providing a depreciation rate of 16²/₃ % from and including the year in which the capital equipment was first put to regular use. The depreciation rate was intended to stimulate the initiation of recovery projects on the Shelf. The reason specifically given for the special depreciation rules was according to Ot. prp. no. 26, 1974-75 page 20:

«In view of the large investments, the special forms of funding, and the large risk connected with petroleum recovery in the North Sea, the Ministry considers it reasonable to allow the enterprises more rapid depreciation than would be indicated by the rules governing ordinary depreciation according to the general tax laws.»

In the mid-1980s, however, in the light of oil price trends, cost developments, and the possibilities of making finds on the Norwegian Shelf, a need became apparent to amend the Petroleum Tax Act. The Government therefore submitted Proposition no. 3 (1986-87) to the Odelsting, the main purpose of which was to propose amendments « to stimulate exploration and development activities on the Norwegian continental shelf», see Ot. prp. no. 3 1986-87 page. 4. The main focus was on the depreciation rules, to which amendments were proposed to allow depreciation to begin in the first year of investment. This was designed to improve oil-field finances, especially for fields with long investment periods. The proposal was adopted by the Parliament in Act no. 73 of 19 December 1986.

Summing up, the high depreciation rates in the PTA must be seen in relation to the high tax rates that apply in the sector (the special tax). Furthermore, the depreciation arrangements have been changed historically depending on the perceived profitability of investments.

As mentioned above, the exploitation of natural gas in the Barents Sea region utilising the large-scale LNG technology, is even more capital intensive than exploitation of oil, and of gas shipped through pipelines, because the transportation of LNG is limited to ships and requires plants to liquefy the gas at the point of departure and re-gasification terminals at the reception points. Further, offshore exploitation of oil and gas in areas located outside the range of where the establishment of pipeline infrastructure is economically feasible, is more capital intensive and technologically complex than the traditional offshore exploitation of petroleum. 13 It was thus clear that the taxability of the LNG enterprises was lower than for existing projects.

Thus, it was in line with the logic of the system to apply different depreciation rates to the enterprises utilising the LNG technology.

4. Whether the measure may be justified by rational and acceptable reasons

The difference in treatment between LNG projects and pipeline gas projects does not in itself constitute an advantage according to Article 61(1). It follows from a recent judgement 22 November 2001 of the ECJ (Case C-53/00, Ferring SA v. Agence centrale des organismes de sécurité sociale (not yet reported) - a case concerning tax measures:

«Nevertheless, the fact that undertakings are treated differently does not automatically imply the existence of an advantage for the purposes of Article 92(1) [Article 87(1)] of the Treaty. There is no such advantage where the difference in treatment is justified by reasons relating to the logic of the system.» (recital 17).

In the Adria Wien-case, the ECJ held that there was no reason that could explain why only undertakings producing goods and not undertakings delivering services benefited from a system of which the energy tax was motivated by ecological considerations, and the rebate of the energy tax was meant to reduce the burden of the tax for energy intensive businesses. The ECJ held that also undertakings supplying services could be major consumers of energy. Furthermore, the ecological considerations could not justify the selective measure since «the ecological considerations underlying the national legislation at issue do not justify treating the consumption of natural gas or electricity by undertakings supplying services differently than the consumption of such energy by undertakings manufacturing goods. Energy consumption by each of those sectors is equally damaging to the environment». Since the reasons behind the measure at issue could not justify the differential treatment, the measure could not be justified by «the nature or general scheme of the taxation system». In the Adria Wien-case, the ECJ formulates the following test:

«The only question to be determined is whether, under a particular statutory scheme, a State measure is such as to favour «certain undertakings or the production of certain goods» within the meaning of Article 92(1) of the Treaty in comparison with other undertakings which are in a legal and factual situation that is comparable in the light of the objective pursued by the measures in question.» (Recital 41, emphasis added.)

In the opinion of the Government, the amendment of the PTA must be seen as a logical and necessary response to distinct disadvantages pertaining to the LNG based exploitation of natural gas. The amendment did not exceed what was necessary in order to remedy an imbalance between the economic operators, with the effect of promoting competition on the gas market in general. It is clear that undertakings in the LNG sector are in a very different position as compared to other undertakings in the petroleum industry, cf the test formulated in the Adria Wien-case.

Large-scale LNG facilities are in a different legal position as compared to the original installations in the petroleum sector for which the PTA was designed. This follows from the fact that such facilities are constructed and operated in a way that place them, for tax purposes, in the borderline between the petroleum tax regime and the ordinary tax regime and is illustrated by the facts of the present case. At the outset, the large-scale LNG facility was regarded as falling outside the scope of the petroleum tax regime. This represented a great uncertainty regarding the allocation of income between the different regimes. By the decision to apply the PTA also to large-scale LNG facilities a greater certainty was achieved.

Furthermore, the great distance from the markets and the need to utilise large scale LNG technology clearly place these projects in a very different factual situation. As stated above, the large scale LNG technology requires additional technical measures as compared to traditional offshore exploitation. Depending on the distance of the gas field from the relevant market, it may not be economically feasible to transport the gas through pipelines. Thus, in addition to the normal offshore investments, the production of LNG requires additional investments by the licensees: Firstly, the LNG plant must be constructed for the cleansing and cooling of the gas to minus 163 degrees Celsius. Secondly, the production of LNG requires a much higher degree of purity/cleansing of CO2 than pipeline gas due to the freezing process. Finally, a disembarkation terminal and specialised storage tanks must be built. Thus, these projects are clearly in an economically disadvantaged position as compared to their competitors in the gas market.

Consequently, these particular circumstances called for special measures in order to create a level playing field. The acceptability of such a measure is mutis mutandis recognised in case C-53/00, Ferring SA v. Agence centrale des organismes de sécurité sociale (ACOSS) (judgment of 22 November 2001, not yet reported):

«It is important to note that there are two directly competing medicine distribution channels in France, that of the wholesale distributors and that of the pharmaceutical laboratories which sell directly to pharmacies. Furthermore, it is common ground that a particular objective of the tax on direct sales is to restore the balance of competition between the two medicine distribution channels, which, according to the French legislature, had been distorted by the imposition of public service obligations on wholesale distributors alone (...)» (recital 19, emphasis added).

It follows from the judgement that the ECJ was prepared to accept that:

«provided that the tax on direct sales imposed on pharmaceutical laboratories corresponds to the additional costs actually incurred by wholesale distributors in discharging their public service obligations, not assessing wholesale distributors to the tax may be regarded as compensation for the services they provide and hence not State aid within the meaning of Article 92 of the Treaty.» Moreover, provided there is the necessary equivalence between the exemption and the additional costs incurred, wholesale distributors will not be enjoying any real advantage for the purposes of Article 92(1) of the Treaty because the only effect of the tax will be to put distributors and laboratories on an equal competitive footing.» (recital 27, emphasis added). 14

It must be underlined that the amendment of the PTA does not distort competition, see point 2 above. On the contrary, the accelerated depreciation scheme was necessary in order to enhance the competition in the gas market (i.e. an increased volume delivered) in compliance with Community objectives, by making it at all possible to exploit the nature gas resources in the Barents Sea region as planned. 15 In point 5 below, the Government will in more detail discuss the impact of the amendment to the PTA in an EEA context.

It follows from the foregoing that the amendment to the PTA reflects the distinct different characteristics between ordinary gas production and LNG based exploitation. In the view of the Government, it must be accepted that, under such circumstances, particular - and clearly limited - measures are adopted in order to create a level playing field and thus put the operators on an equal competitive footing.

4.3 Conclusion

Based on the above, the Government concludes that the amendment to the PTA does not constitute aid within the meaning of Article 61(1) of the EEA Agreement. Firstly, it has been established that there has been no transfer of aid through State resources. Secondly, the Government has questioned whether the measure distorts or threatens to distort competition. Thirdly, the depreciation rate at issue must be deemed to be justified by the nature and general scheme of the system. Finally, the amendment is justified by the fact that it applies to undertakings being in a distinct different legal and factual situation as compared to their competitors in the gas market, and, furthermore, that the amendment facilitates competition in compliance with Community objectives by creating a level playing field.

5 The amendment to the PTA is compatible with the Article 61(3)(c) of the EEA Agreement

5.1 Introduction

In its letter of 18 March 2002, the Authority points out that if the amendment of the PTA is regarded to contain elements of State aid this does not necessarily mean that the amendment to the PTA is incompatible with the EEA agreement. Thus, if the Authority deems the amendment to the PTA to constitute aid within the meaning of Article 61(1) EEA, it can nevertheless qualify for one of the derogations from the principle of incompatibility with the functioning of the Agreement provided for in Article 61(3) EEA.

The Authority has requested information demonstrating that the amendment to the PTA is compatible with the EEA Agreement. As demonstrated in section 4 above, the amendment to the PTA does not contain any element of State aid. The following discussion, however, will show that if the Authority deems that the amendment of the PTA amounts to State aid within the meaning of Article 61(1) EEA, it is in any case compatible with EEA Agreement due to the derogation in Article 61(3)(c) EEA.

Article 61(3)(c) EEA states that aid to facilitate the development of certain economic activities or of certain economic areas, where such aid does not adversely affect trading conditions to an extent contrary to the common interest, may be considered to be compatible with the functioning of the EEA Agreement.

The amendment to the PTA will both facilitate the development of certain economic activities and the development of certain economic regions. These issues will be addressed in turn in the present submission.

5.2 Development of certain economic activities

The amendment to the PTA promotes an activity in line with EEA/EU policies. The Commission has stressed that the issue of security of supply will be to ensure that the necessary economic incentives prevail for investments in production and transportation infrastructure to bring the gas to the EU market. 16 The Commission has underscored the importance of investments incentives:

«Although gas will have to come from increasingly distant sources, Europe is in a relatively comfortable situation with more than 80 % of the word's total proven gas reserves within reasonable distance. The security of supply will therefore not be one of availability of reserves. The issue will be to ensure that the necessary economic incentives prevail for investments in production and transportation infrastructure to bring the gas to the EU markets.» 17

Indeed, the supply of LNG will increase the flexibility, supply diversity and liquidity of the gas markets. 18

The Commission has shown a distinct willingness to apply this exemption to state measures that promote economic activities in line with an articulated Community policy that considers these activities as important to the Community. For instance, in Decision 95/452/EC 19 the Commission had to consider the application of Article 87(3)(c) of the EC Treaty 20 to Italian tax concessions for financial undertakings generating profits on business conducted with Eastern Europe. The measure was approved by the Commission:

«Turning tothe provision in point (c) of Article 92 (3) [ex-Article 87(3) of the EC Treaty] which allows the exemption of aid to develop a particular economic activity of interest to the Community, it has to be recognised that the development of a capital market in the countries of eastern Europe through the mobilisation of private capital is indeed of vital importance to the Community: in fact the Community and its Member States have been sparing no financial effort to provide public funds to make up for the lack of private initiative. A measure which expressly stimulates private investment is thus very much in line with an important aspect of external relations policy.»21 (emphasis added)

As regards special depreciation schemes in particular, the Commission has authorised pursuant to Article 87(3)(c) EC schemes that were in line with a more general policy of modernisation, maintenance of a strategic capacity and employment within the Community. 22

The significance of the development of LNG and of the Barents Sea for the European energy supply is discussed further in point 1 above and point 5.4 below.

This clearly shows that the amendment to the PTA promotes the development of an activity in line with EEA policies.

5.3 Development of certain economic areas

The amendment to the PTA promotes the development of certain economic areas. The Barents Sea is situated a long distance from the markets and from the existing infrastructure in the form of pipelines for transportation of the gas to the export markets. This could be illustrated with the LNG project in the case at hand. The gas from Snøhvit is brought ashore at Melkøya, Hammerfest located in Finnmark. (Zone A in the regional aid area) The alleged aid element in the Amendment to the PTA would therefore as a starting point promote the economic development of an area eligible for regional aid.

As stated in the Authority's Guidelines, State aid intended to promote the economic development of particular areas must be in proportion to, and targeted at, the aims sought to be compatible with the functioning of the EEA Agreement. 23 The Authority has stressed that the relevant measures must contribute to the regional development and relate to activities having a local impact. The measure must also relate to real regional handicaps.

5.3.1 Local impact

The alleged aid should contribute to regional development and relate to activities having a local impact. 24 Normally, the establishment of offshore activities does not, to the extent that their effects on the local economy are low, provide satisfactory support for the local economy 25. In the present Snøhvit project, however, the regional impact is high.

Most of the cost-intensive investment is located onshore, at Melkøya, Hammerfest located in Finnmark. When the large scale LNG facility is built, all activities connected to the plant would be located onshore. Thus, the construction and use of the facility would have a huge regional impact both in the development stage and in the operational stage.

Development stage

The regional employment effect in West Finnmark during stage one is likely to be 1245 man-labour years distributed through the period 2002-2006. According to the report Samfunsmessige konsekvenser 2001, 26 825 of these are likely to be directly employed in production for local suppliers, 65 in production for subcontractors and 355 in activity coming from regional consumption effects.

Operational stage

The operational service of the plant is likely to generate 220 man-labour years, mostly from the local population. Of these 180 are likely to be at the large scale LNG plant at Melkøya, 20 in transport, 18 on the towing vessels and two on the base. In addition 12-15 man-labour years will be needed in plant maintenance, commercial services, catering etc. Another 100 - 200 man-labour years will be needed by contractors and subcontractors and half of these are likely to be employed locally. Other consumption effects are likely to generate 100-150 man-labour years, mostly in the local population.

All in all the Snøhvit project will probably increase the level of employment in Hammerfest with 350 - 400 jobs during the operation of the plant.

It is important to stimulate the establishment of more enterprises that are future-oriented and competence intensive, increasing the supply of competence jobs. The Snøhvit project will be an important contribution to developing the local and regional job market, especially when it comes to offering job opportunities for well-educated and highly skilled young people.

The regional impact of Snøhvit and the large scale LNG-facility regarding direct and indirect job creation is thus considerable. The difference between the net present value of investments where the whole of Snøhvit is under the PTA (16²/₃ depreciation rate) and where the whole of Snøhvit is under the PTA (33¹/₃ depreciation rate), using a discount rate of 4,68 per cent, is fairly low (estimated to 250 mill NOK, about 1,4 % of the companies' investment), but just enough to trigger off the initial investment.

5.3.2 Regional handicaps

The objective of the Norwegian regional policy is to maintain the main features of the population settlement pattern and to have equal standards of living throughout the country.

Northern Norway in general and the regions of Finnmark and Northern Troms in particular, are characterised by very sparse population settlement, long distances, a harsh climate, a high level of dependence on the public sector and a narrow industrial base. This is why Finnmark and Northern Troms are given the highest priority in the distribution of regional policy measures - i.e. zone A in the regional aid area.

The regional disadvantages of target zone A, i.e. the zone with highest regional priority, are partly explained by its location in the extreme northern periphery of Norway. Compared to the rest of Europe, the northernmost part of Norway is in an exceptional position because of (the extent of) depopulation, long distances both to the markets and within the region, and very low population density. In addition and, by extension, the region has a worrying age structure, worrying business structure, recruitment problems and high transport costs.

According to the Nordregio Report Regional Development in the Nordic Countries 2002,no administrative county in the Nordic Countries has a higher depopulation ratio than Finnmark. 27 For the period 1995-2000 Finmark's population decreased by 12.3%. Among the ten municipalities with the highest population decrease during the period 1995-2000, four where in the area surrounding Hammerfest (Måsøy - 24.1%, Nordkapp - 21.6%, Kvalsund - 21.3%, Hasvik - 20,5%). The report points out that population settlements, employment, commercial activity and innovation is increasingly concentrated in a few towns and cities, while large parts of the Nordic Countries, and mostly in the Northernmost regions, are excluded from this development.

Finnmark is the largest county of Norway, but has the lowest population figure. The population density in Finnmark county is only 1,5 persons per square kilometre. For zone A, also including Northern Troms, the population density is 1,7 persons per square kilometre, while the average for Norway is 14,5 persons per square kilometre.

Relating to the present project, Snøhvit/Melkøya is located a long distance from the markets, and from existing infrastructure in the form of pipelines for transportation of the gas to the export markets. As the Commission, in the Green Paper on security of energy supply, rightly points out, the profitability depends primarily on the distance to the markets. 28

5.4 The EEA context

According to Article 61(3)(c) EEA, aid to facilitate the development of certain economic activities or of certain economic areas is considered to be compatible with the functioning of the Agreement where such aid does not adversely affect trading conditions to an extent contrary to the common interest.

The measure has to be examined in an EEA context. The Authority must in this respect take account of any negative effects which such measures may have on trade between Contracting Parties. In this context, the energy situation in Europe as such has to be reviewed.

In an EEA context, the Government stresses that the Commission has noted the importance of developing the resources in the Barents Sea:

«In 1999, Norway had 1.77 trillion cubic metres of proven gas reserves which at current production rates will last 23 years, proven oil reserves at around 11 bn barrels are over half Europe's reserves but at current production rates will last 10 years. However, there are substantial reserves of oil and gas to be exploited in the Barents Sea. If investment were to pick up, this might also help relieve the prevailing pessimistic outlook.»29 (emphasis added).

As stressed in the action plan 30 and the preceding Commission Communication on strengthening the Northern Dimension in European Energy supply 31, one of the areas to be examined is the potential of the gas resources in the Barents Sea. It should also be noted that the Northern Maritime Corridor is focusing on exploitation and on a sustainable transport of oil and gas from the Barents region. The Northern Maritime Corridor is a Norwegian initiative with direct relevance to the European Union's Northern Dimension initiative. 32 In addition, the Commission has listed LNG supplies from Norway i.e. from the Snøhvit field in the Barents Sea among the key gas supply projects for Europe. 33

As regards the effect of the measure on competition, there are today no other large scale LNG production facilities planned or in operation within the EEA. As stated by the Commission the development of LNG could have a positive effect in an EEA perspective:

«As regards gas supply, the European Union is geographically well placed, thanks to the existence of gas pipelines, in relation to the export centres of Norway, Russia and Algeria. LNG supply completes and diversifies the supply of natural gas (...)» 34 (emphasis added)

As the Commission has stated in the Communication on European energy infrastructure, the supply of LNG is expected to increase the flexibility, supply diversity and liquidity of the gas markets. 35 It is a Community policy to promote the exploitation of gas and to reduce excessive dependency of the EEA on external sources for the supply of gas. 36

Furthermore, in an environmental perspective the LNG could contribute to reducing the emission of greenhouse gases.

«Moreover, rising energy consumption leads to higher CO2 emissions. Between 1990 and 2010- the base year of the Kyoto protocol and the middle of its target period (2008-2012), CO2 emissions in the community are projected to grow by 5%, This is much lower than the growth of energy demand due to high shares of natural gas, nuclear and renewables by 2010. Fuel switching from coal to natural gas is expected to continue after 2010 helping to contain CO2 emission.» 37

The amendment of the PTA is designed to make gas exploration possible in remote areas and thereby bring activity to areas suffering from unemployment and economic stagnation. The amendment of the depreciation rates implies small reductions in tax revenue, as compared to the total costs of the project, and results in a high number of jobs and activities in general to the region.

As stated above, the difference between the net present value of the two depreciation rates is fairly low, estimated to 250 mill NOK, about 1,4 % of the companies' investment, but just sufficient to trigger off the initial investment. By this approach, the Norwegian Government has ensured that the necessary economic incentives prevail for investment in production and transportation infrastructure to bring the gas to the EU markets, in accordance with the stated community policy. 38 The Norwegian Government recalls that the Regulation No 2236/1995 of the European Parliament and the Council, amended by Regulation No 1655/1999 allows a maximum level of possible Community co- financing by 10% of the total investment costs to projects of common interest. 39 The ceiling is proposed raised to 20 %. 40

6 Conclusion

As demonstrated above, the amendment to the PTA does not contain any element of State aid. If the amendment of the PTA is deemed by the Authority to be within the definition of State aid in article 61(1) EEA, the amendment is considered to meet all the relevant criteria under Article 61 (3)(c) EEA. It is therefore considered to be compatible with the functioning of the EEA Agreement.

Yours sincerely,

Pål Hellesylt

Deputy Director General

Bjørnar Alterskjær

Senior Executive Officer