Norway Raises Oil Taxes in Bid to Ease Cost Pressures on Economy

Norway announced it will raise taxes on oil companies by about 3 billion kroner ($520 million) a year to damp cost pressures and overheating in western Europe’s biggest oil producer.

The government will limit four-year exemptions on so-called free cash flow to 22 percent from 30 percent and raise the special petroleum tax to 51 percent from 50 percent, keeping a top tax rate of 78 percent, according to a presentation in Oslo yesterday. The increase comes as it also lowered overall corporate taxes to 27 percent from 28 percent, which will be financed by closing loopholes and corporate interest rate deductions.

“The changes will lead to an increased focus on costs in the petroleum industry,” Finance Minister Sigbjoern Johnsen said. “This can damp the pressure and cost increases created by the high activity level in the petroleum sector.”

Norway is starting to feel the pain from Europe’s debt crisis and the strengthening krone even as it struggles to absorb wealth from its offshore oil and gas production. This has split the economy, causing job cuts in traditional industries such as forestry production as record investment offshore pushes wages and costs up nationwide.

The changes were met with immediate criticism from the oil industry. The largest producer in Norway is state-owned Statoil ASA. Other major producers off the Nordic country’s shores include Total SA, ConocoPhillips, Royal Dutch Shell Plc and BP Plc.

Weaken Business

“Stability and predictability have been crucial for the competitiveness of the Norwegian continental shelf,” said Erling Kvadsheim, an official at Norwegian Oil and Gas Association, an industry lobby group, in an e-mailed statement. “The proposed changes will weaken this.”

Norway is struggling to maintain oil production as fields in the North Sea are depleted. The government, which funnels most of its oil revenue into a wealth fund, estimates output will decline for a 13th year this year.

The government, which releases its budget tomorrow, also reiterated that it will keep spending within the fiscal guideline of 4 percent of the nation’s sovereign wealth fund. The fund is now valued at about $740 billion.

Growth in exports will slow to 0.5 percent this year, down from 2.9 percent in 2012, the central bank estimates. Weaker growth prospects are feeding through to the labor market, pushing up registered unemployment to the highest since 2011.

The krone reached a record on a trade-weighted basis in February and its strength has kept inflation below the bank’s 2.5 percent target since late 2010. The central bank, which has held its benchmark rate unchanged at 1.5 percent since March last year, has signaled that it may cut rates further to cool krone gains.

Growth in Norway’s mainland economy, which excludes oil, gas and shipping, is estimated to slow to 2.75 percent in 2013 from 3.5 percent last year, according to central bank forecasts.