BMI View: Denmark's tax hike for small-scale oil producers is the result of a failed attempt by the government to renegotiate the advantageous North Sea agreement with the large Danish Underground Consortium. We believe this modification could discourage small companies from entering, or pursuing, further exploration activities in Denmark's as-yet unexplored offshore acreages. The development creates further downside risk to our already bearish forecasts for the country's oil output.
The government announced on March 1 2013 that it plans to raise oil taxes on small oil producers to gather funds to develop the country's railroad network. Revenues from the tax increase will be transferred to the state Togfondent DK (Denmark Train Fund) to service a US$4.79bn investment plan to electrify and improve Denmark's rail transportation. The plan is aimed at making transportation in the country greener, partially justifying its focus on oil companies.
Interestingly, this tax hike will only target small oil producers. In particular, these include Hess, DONG Energy and Altinex Oil, which contribute about 5.5%, 4.8% and 1.7% respectively to total oil output. The bulk of the country's production is owned by the Danish Underground Consortium (DUC) and will not be affected by the tax. DUC is a large joint venture shared between Maersk Oil's subsidiary, A.P. Moller, (31.2%, operator), Shell (36.8%), Chevron (12%) and Nordsøfonden (20%), which joined in July 2012. The group contributes to more than 80% of Denmark's oil production.
The Rule Of The DUC
The DUC was able to negotiate an exemption from the tax increase with the government. This follows the signing of the so-called North Sea agreement between the group and the government in 2003. The deal originally stated that the government would have to compensate the DUC for any lost earnings in the event of an increase in the hydrocarbon tax before 2043. In recent years, public discontent - supported by the far-left Endhedslisten party and nationally recognised think tank Concito - gave the government justification to renegotiate these terms. However, the decision by Maersk Oil and its partners to accept the oil producer exemption from corporate tax cuts as part of the government's recently announced Vækstplan DK growth plan prevented the country from modifying the North Sea agreement.
Consequently, while no companies in the oil industry will benefit from the corporate tax cuts, only small producers will face a hike in the hydrocarbon tax. We believe this could be detrimental for the country's future exploration prospects. Denmark's crude oil market is already very concentrated. As such, raising the tax burden on small companies can only worsen the situation and discourage foreign investment.
Independent oil companies could nonetheless be crucial for the future of Denmark's hydrocarbons sector. We forecast the country's oil output will continue to drop in the coming years, potentially leaving the country to become a net importer by 2020. While proven reserves are on the decline, there remains unexplored acreage offshore Denmark thus offering potential upside. Exploration leaders such as DONG energy could, however, become discouraged by a highly concentrated market and unfavourable tax environment.
|Danish Oil (LHC) & Gas (RHC), Production, Consumption & Net Exports|