Energy resources and market structure
Norway is the third-leading exporter of natural gas in the world, after the Russian Federation (hereafter “Russia”) and Qatar in 2021. Norway saw a four-fold increase in oil production between 1980 and 1997, with declining oil output being offset by rising gas production since then. In 2022, only one coal mine was still operational, Mine 7 in the Arctic Archipelago of Svalbard, and the owner-operator company, Store Norske, communicated in 2021 that it planned to close it in 2023. Norway is also involved in significant electricity trade with its neighbours, the magnitude of which depends on precipitation and water inflows to the water reservoirs powering the nation’s numerous hydroelectric plants.
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Source: IEA (2022), "World energy statistics",IEA World Energy Statistics and Balances(database).
Given the importance of oil and natural gas to the wider Norwegian economy, the state is a major actor in the sector. The state holds one-third of Norway’s proven oil and gas reserves. The state-owned shares in exploration and production licences are organised under a portfolio called State’s Direct Financial Interest (SDFI), which is managed by the state-owned company, Petoro. The Government decides on the SDFI’s share of participation when production licences are awarded. Equinor ASA, an international company, is the biggest player in the upstream market, operating four-fifths of the total production on the Norwegian continental shelf. The state owns 67% of the company. Equinor, in addition to its own petroleum, is responsible for marketing petroleum owned by SDFI. Gassco, wholly owned by the state, is the operator of the integrated gas transportation system from the Norwegian Continental Shelf to other European countries.
The Ministry of Trade and Industry owns 100 % of the shares in Norske Spitsbergen Kulkompani AS (SNSK), the parent company of Store Norske Spitsbergen Grubekompani AS (SNSG), which carries out coal-mining operations on the main island of Svalbard.
The Norwegian electricity market is fully open for all producers1 and consumers. All end-users are free to choose electricity suppliers. Hydropower is the source of virtually all electricity generated in Norway. Some 90% of the generating capacity is in public ownership. State-owned Statkraft AS is the largest generator. Statnett, a state enterprise, is the system operator in the Norwegian electricity system, and there are more than 160, mostly publicly owned, small distribution system operators (DSOs). By 2008, 70% of Nordic electrical energy market in the Nordic (elspot, covering Sweden Norway, Finland and Denmark) were traded through Nord Pool AS.
All retail energy prices in Norway are determined in the market. The Norwegian Water Resources and Energy Directorate (NVE), an agency under the Ministry of Petroleum and Energy, is responsible for regulating electricity network charges. A uniform 25% VAT is applied to all energy consumption, except household use of electricity and energy from alternative energy sources in Northern Norway. Excise taxes are levied on mineral products and electricity. There is a CO2-tax levied on mineral products (petrol, mineral oil (diesel), natural gas and LPG). There is a road usage tax on fuels used in road transport (petrol, mineral oil (diesel), bioethanol, biodiesel, natural gas and LPG) and a basic tax on mineral oil for mineral oil used outside road transport. In addition, there is also an electricity consumption tax. Some industries are exempt from or charged a reduced rate for various excise taxes on energy products.
The Norwegian petroleum tax system is designed to capture a large part of the excess return (resource rent) from the sector. In addition to the ordinary business tax of 22%, petroleum companies on the nation’s continental shelf are liable to a special tax rate of 71.8% (as of 2022). The marginal tax rate for petroleum is 78%. In the National Budget for 2023, the earnings from Norway’s petroleum sector are forecasted to have represented from 20.8% in 2021 to 49.2% of government revenues in 2022 (or NOK 1388 billion) as a consequence of rising gas and oil prices and countries differentiating their energy suppliers in order to reduce import dependencies on Russia.2
Recent developments and trends in support
Exemptions and reduced rates of energy taxes are reported as tax expenditures and could comprise consumer support. The Basic Tax on Mineral Oil was introduced in 2000 to avoid a switch from electricity to mineral oil for heating purposes due to increased electricity tax. Many activities, where electricity is still not a viable option, including shipping and aviation, were thus exempted from the tax.
When calculating tax expenditures for petroleum, the Petroleum tax system is compared to a neutral tax. The investment-based deductions in the Norwegian petroleum tax system are higher than in a neutral resource rent tax. This is reported as tax expenditure in the annual National Budgets. These estimates measure the effects of deviations from a neutral tax system and, in the view of the Norwegian Ministry of Finance, are not an estimate of fossil fuel support. These tax expenditures are thus not included in the figures.
COVID-19 brought major upheaval in the fossil fuel markets with record falls in oil prices and slump in energy consumption brought by pandemic mobility restrictions. In the wake of the pandemic, a number of measures have been announced or implemented in Norway, with measures announced for domestic fossil fuel producers. In April 2020, the parliament, in its efforts to mitigate the effects of the collapse in oil prices, adopted temporary tax relief for domestic oil firms by allowing a more accelerated writing-off of new capital investments as well as tax payment deferrals until later years. Under this measure, the 78% headline tax rate on oil profits is maintained but the measure provides increased rate of deductions on new investments, thereby reducing future taxable profits relative to the normal rate of depreciation. In late 2021 and throughout 2022 there have been extraordinary measures put forward by the government in order to respond to high electricity prices targeting mostly the residential sector, with a much smaller portion of the support designed to provide financial assistance on electricity bills to industries, agricultural businesses and volunteering organizations, However, as the totality of the country’s electricity mix is produced from renewable sources (chiefly hydro), the portion of this support benefitting fossil-fuels will be very equal to 0.
The fiscal cost of support measures for fossil fuels in Norway was estimated at NOK 3.43 billion in 2022 (Table 1). Twenty-two per cent (22%) was directed at end user beneficiaries, as opposed to 77% directed to firms. Support was mainly given out in the form of tax expenditures (NOK 2.55 billion) accounting for 74% of the total fiscal cost of support measures. Direct transfers amounted to NOK 0.88 billion.
The fiscal cost of support measures for fossil fuels has decreased by 7% since 2017. Since last year, tax expenditures have increased by 4%, from NOK 2.46 billion to NOK 2.55 billion and direct transfers increased by 21%, from NOK 0.74 billion to NOK 0.88 billion. All growth rate percentages above are expressed in terms of nominal national currency amounts.
Table 2 highlights a selection of support measures associated with a large fiscal cost. A description of these measures is provided in Table 3.
Description of selected support measures for fossil fuels | |
|---|---|
Exemption on Basic Tax on Mineral Oil - Offshore Petroleum Sector portion | A base tax on mineral oil (grunnavgift på mineralolje) applied between 2000 and 2022, in addition to the CO2 tax on mineral oil. Mineral oil used in offshore petroleum facilities and installations as well as ships commissioned for this activity, was exempted, which was regarded as a tax expenditure. The tax base tax on mineral oil was abolished from 2023. |
Exemption on Basic Tax on Mineral Oil - Shipping portion | A base tax on mineral oil (grunnavgift på mineralolje) applied between 2000 and 2022, in addition to the CO2 tax on mineral oil. Mineral oil used in shipping was exempted from the tax, which was regarded as a tax expenditure. The tax base tax on mineral oil was abolished from 2023. |
Exemption on Basic Tax on Mineral Oil - Fishing portion | A base tax on mineral oil (grunnavgift på mineralolje) applied between 2000 and 2022, in addition to the CO2 tax on mineral oil. Mineral oil used in fishing was exempted, which was regarded as a tax expenditure. The tax base tax on mineral oil was abolished from 2023. |
Petroleum RD&D Funding | The Research Council of Norway (RCN) offers financial support for petroleum research and development activities through funding provided by the Ministry of Petroleum and Energy (MPE). The Council’s allocation to the petroleum sector funds PETROMAKS 2, which supports strategic basic research, knowledge and capacity building, applied research and technology in the petroleum area, focusing on facilitating research and technology for improved recovery from producing fields, exploration in frontier areas, energy efficiency and reduction of greenhouse gas emissions and discharges. The fund is also directed to DEMO 2000, which helps to commercialize new technologies through supporting the promotion of technologies and implementation of pilot and demonstration projects. To strengthen the centres that focus on long-term research in petroleum, PETROSENTER also benefits from this measure. Outside of the RCN funding, the MPE allocates research funding to: international cooperation and development activities; grants to Norwegian Energy partners, which aims to strengthen the Norwegian-based suppliers to the petroleum and energy industry internationally; and funding for the Norwegian Geological Institute. Data for RD&D spending is obtained from the IEA’s RD&D database. Payments are allocated to the GSSE since they do not increase current production or consumption of petroleum products. We use production data from the IEA’s Energy Balances to allocate the annual amounts reported in budget documents to oil and natural gas extraction. |
Operating Deficit for Mine 7 Svalbard | Mine 7 is the last operating coal mine in Norway and the owner-operator company, Store Norske, communicated in 2021 that it plans to close it in 2023. Part of the fund is to help exposure to floodings in the mine because of ice caps melting. |
Operating Subsidy for Store Norske | Store Norske Spitsbergen Kulkompani AS (SNSK) is wholly owned by the Norwegian government, by the Norwegian Ministry of Trade, Industry and Fisheries. Following the government's decision in 2017 to end commercial coal mining in Svalbard, SNSK is no longer engaged in commercial coal mining. SNSK still operates one mine (number 7), to provide coal to the local power plant in Longyearbyen until an alternative means of energy supply is in place. Mine 7 is currently receiving financial support from the government, but it is scheduled to close its operations in 2023. |
Aggregate numbers from the Inventory represent the fiscal cost of support measures for fossil fuels. They should not be interpreted as a level of support for fossil fuels, nor as an indicator of the extent to which the considered policies are favourable or unfavourable to climate mitigation.
The Inventory reports tax expenditures as estimates of revenue foregone due to measures that reduce or postpone tax payments relative to a jurisdiction’s benchmark tax systems to the benefit of fossil fuels producers or users. Tax expenditure estimates can thus increase over time due to either an increase in the offered concession (relative to benchmark tax systems) or an increase in the benchmark itself. Cross-country comparisons of tax expenditures can also be misleading due to differences in countries’ benchmark tax systems.
Notes
← 1. Large hydropower plants in Norway must, however, have at least two-thirds public ownership.
← 2. See https://www.norskpetroleum.no/en/economy/governments-revenues/#:~:text=The%20total%20payment%20form%20tax,NOK%2077%20billion%20in%202023.
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