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November 17th, 2011

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The stateÂ’s share of profits from oil and gas exploration in the North Sea is worryingly low, an environmental policy think-tank claims, leading the climate and energy minister to call for the current deal to come under re-evaluation.

The deal was introduced in 2003 by the previous government and is due to run out in 2043, though the climate and energy minister, Martin Lidegaard (Radikale), has declared that with the steep increases in oil prices, the current deal does not necessarily redistribute the profits fairly.

“The elevated oil prices and the altered tax arrangements mean that we find it natural to revisit the deal to ensure that the state’s taxation is robust in relation to the new circumstances,” Lidegaard told the press this week.

The opposition, however, warned the government that reopening the agreement would put it in dangerous territory.

“They are some very serious and dangerous thoughts,” Torsten Shack Pedersen (Venstre) said, adding that a new tax arrangement in favour of the government could have negatively affect the earnings and workplaces the oil industry provides.

“This is just a case of [the government] looking for places where they can increase taxes,” he added.

Far-left government ally Enhedslisten (EL) responded positively to the news, however, arguing that the current deal has been cheating the state out of billions of kroner a year.

“It’s money that we desperately need,” EL climate and energy spokesperson Per Clausen said. “We expect now that the government work out a plan on how increased taxation on oil will ensure more money for next year’s budget.”

Oil and gas exploration in the North Sea is controlled by the Dansk Undergrunds Consortium (DUC) which is owned by Maersk, Shell and Chevron. Responding in Politiken newspaper, representatives from Shell and Maersk argued that the state is already profiting handsomely from the current taxation deals.

“You could say that it’s a gold mine for the state,” Shell spokesperson Regitze Ree said. “Every time we earn a krone, they earn two. Is that not okay?”

And while Maersk would not reveal their numbers related specifically to North Sea oil and gas exploration, the company did declare that in 2010 the total A.P. Moller-Maersk tax bill for all its operations amounted to 9.5 billion kroner.

“Higher oil prices have meant higher earnings and so higher tax payments which has benefitted both businesss and the state,” Maersk wrote in a statement.

Denmark is just one country with an exclusive economic zone in the North Sea (Image: Wikipedia)

Maersk added that while it intends to cooperate with the government’s reevalution of the deal, it did not want the current deal to be changed.

The right-wing Dansk Folkepartisupports Maersk’s position. MP Henrik Thulesen Dahl, speaking to public broadcaster DR, argued that raising taxes on oil companies was a measure borne of envy.

“But we are open to creating incentives for getting more oil out of the ground which will benefit both companies and the taxman.”

The claim was made in a study carried out by environmental policy think-tank Concito, which was headed by Lidegaard until he took office earlier this year. The organisation argues that a dramatic increase in the price of oil since the 2003 deal, from $20 a barrel to over $100 a barrel today, has meant oil companies are reaping much higher profits than were initially imagined.

The government has consequently not earned as much money as it should, while the after tax profits of oil companies from North Sea oil is five times what an average Danish company makes.

“Concito’s collected appraisal of the 2003 deal is that the increase in the state’s portion of the income to 60 percent between 2004 and 2012 does not give an optimal income to the state, especially given the rapid increases in oil price,” the think-tank wrote in its report

Concito also criticised an unusual compensation clause in the 2003 deal in which oil companies would be compensated should an existing tax on hydrocarbons be raised.

“The compensation clause is the real economic scandal,” Concito chief economist Frans Clemmensen said. “Legal and economic experts were warning against it when it was proposed in 2003. It’s very unusual that a government would attempt to make it impossible for future governments to change taxes.”

The 2003 deal decreased the hydrocarbon tax from 70 percent to 52 percent, and Concito argues that the effect of the higher tax rate would be especially noticeable when oil prices are high, like they are now.

In 2001 a commission set up by a Social Democrat-led government to establish how to revamp taxation of oil pumped from the North Sea recommended a model in which the state – which actually owns the oil – would get up to 84 percent of oil revenues when oil prices were extraordinarily high.

According to Concito, had that happened, it would have generated an additional 75 billion kroner in tax revenue.

The DUC earned 125 billion kroner between 2004 and 2010 while the government earned 185 billion kroner.

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