Kvale - Guiding new players in the Norwegian Market
Updated: Nov 14, 2018
After the emergence of the Norwegian oil and gas industry in 1960's, there was a strong need to educate every participant in the sector. Public servants, lawyers, and engineers had very little experience, but had the power to make decisions. The main challenge was the lack of experience of the players in the oil and gas field. In 1988, Anders Kvale and Jens Brede established Kvale which only employed two lawyers. At the time, Norsk Hydro and Statoil had some disputes and after working at Norsk Hydro for one year, Anders Kvale used his experience to open his own business. Statoil contacted him and he became a regular service supplier to the company.
According to Jens Brede, Managing Partner at Kvale, the company started with some big arbitration disputes such as the Ula case (related to the tariffs of transporting oil from the Ula field), which later became well known. “We successfully litigated the tariff disputes and we have been delivering legal services to Statoil ever since,” says Jens Brede. Kvale is now an advisor to many large players in the industry. The firm is deeply engaged in transactional work with a wider portfolio and has at least 3 core partners that are involved solely in the oil and gas sector. During the last 30 years, Kvale has acquired vast knowledge of the market which allows it to cover every legal aspect related to the oil and gas industry and give advice to the new players that are entering the market.
The features of the Norwegian licensing scheme is of particular interest for companies that are establishing their oil and gas activities in Norway for the first time. “The concession system implies the need to apply for a production license which for newcomers also normally involves a voluntarily process to be pre-qualified as a licensee,” says Yngve Bustnesli, Partner at Kvale. The pre-qualification system is made to predict if a company will meet the technical and financial requirements in order to be granted license. The licenses are divided into two
types: exploration and production licenses.
Exploration licenses allow players to perform seismic surveys and other activities related to exploration. Production licenses are granted for an initial period of up to 10 years where the
players are required to fulfill certain work obligations. If these obligations are fulfilled, the license period can be prolonged up to a maximum of 50 years. The authorities are focused on taking advantage of all the resources that are economically viable for exploitation. “You are obliged to exploit the resources that you have been given access to instead of leaving them behind and looking for a better opportunity,” says J. Brede.
The system is based on a step-by-step approach which is controlled by Norwegian authorities. “In order to reach the next level, it is necessary to have the requested approval or license granted by the authorities,” says Y. Bustnesli. As an example, to be able to develop a discovery, a detailed plan for development of the field must be approved by the authorities. “Afterwards, oil production needs to be approved, thus finalizing the process with the decommissioning of the facilities,” adds Y. Bustnesli. The Ministry of Petroleum and Energy is the main administrative body entitled to grant licenses. Norway has a strong focus on safety and activities are monitored by the Petroleum Safety Authority to guarantee prudent operations and compliance with the HSE regulations.
Until the production starts, the company can take advantage of the tax benefit, and that is very attractive for interested parties that wish to apply for licenses and perform operations in Norway. “It is important to highlight that, in contradiction to popular beliefs, the Norwegian tax system is very beneficial for newcomers with no production activity. From day one, new players are able to deduct 78% of the costs,” says Y. Bustnesli. Jens Brede adds that the sum of all tax benefits available for the players on the shelf is probably the most remarkable change during the last 10 years, and has attracted a large number of newcomers. In the early phase, the Norwegian Continental Shelf had three Norwegian companies: Statoil, Saga, and Norsk Hydro that merged into a single company (Statoil) and became a competitor to other major international oil players such as Shell, ExxonMobil, among others. There are now approximately 40-50 relatively small new companies whose motivation to come to Norway was the tax deduction scheme comments Jens Brede. “This becomes particularly relevant during challenging times when the risks are high because everyone assumes that the chances of finding another Ekofisk or Troll field are very small. Because the benefits are marginal, the tax scheme has become a key tool for reducing the threshold of participation,” says J. Brede.
An important aspect of the Norwegian licensing system is that the Norwegian State directly participates, usually with less than 50% participating interest in various licenses, through State’s Direct Financial Interest portfolio which is managed by Petoro. “Unlike in other countries, it is mandatory to enter into a Joint Operation Agreement (JOA) which has standard terms approved by the authorities. It is necessary for companies participating in the joint venture to cooperate and comply with the requirements established in the Petroleum Act, the JOA, and the accounting agreement,” continuous Y. Bustnesli. There are no Production Sharing Agreements in which the parties create a joint venture. “The JOA is more integrated and is part of the requirements to perform operations in the Norwegian continental shelf,” says Y. Bustnesli.
Currently, many companies are transferring licenses and, naturally, various considerations must be taken into account before making final decisions. “We are very well acquainted with the regulatory framework, we are able to assess the risks, and we know about new developments for future proposals,” says Y. Bustnesli. Furthermore, Kvale is familiar with the contractual setup and is able to determine major risks that others might not find in a development project. “I believe that the total contractual and regulatory experience, in addition to having an active position being part of most of the major transactions in the Norwegian Continental Shelf, has allowed Kvale to provide cost-effective advice,” says Y. Bustnesli. “The core contribution of our firm is that we can give the client some certainty about the risks involved in oil and gas activities. We provide the clients with information on how these transactions work, where the risks lie, and what are the opportunities,” says J. Brede.
Despite recent challenges in the market, there are many opportunities in the Norwegian Continental Shelf, both in new fields and mature areas. “Licensing rounds for mature areas are held yearly and, in the present, it is common to see major oil companies starting to divest their portfolio in Norway”, says Y. Bustnesli. This creates opportunities for newcomers to obtain assets in Norway, as opposed to what was the case 5-10 years ago. “It is important that companies that invest in assets are aware that there are new rules with alternative financial liabilities for decommissioning costs. If a company sells production assets, it will assume an alternative financial liability for the costs of decommissioning for many years in the future; to avoid that, the buyer usually demands some kind of a guarantee, be it a letter of credit, a parent company’s guarantee, or a decommissioning security agreement,” says Y. Bustnesli. The Norwegian Oil and Gas Association has developed standards for decommissioning security agreements that are used as a starting point in these transactions. “These guarantees are not cheap and it is something that has to be considered when performing activities and investing in the Norwegian oil and gas sector,” adds Y. Bustnesli
The oil and gas sector will definitely not cease to exist in the coming years. There are many new areas to explore, particularly in the North of the country. Furthermore, interesting discoveries are being made in the North Sea and near places where no one believed resources could be found because drilling activities had been performed there many times. “There are many new developments to come and we have witnessed the industry’s ability to cut costs. The Johan Sverdrup development has been a remarkable example of cost reduction strategies and we see that the industry is focusing on costs instead of time,” says J. Brede.
Reducing costs allows companies to survive with lower oil prices and increases the viability of fields that were not profitable in the past. “In addition, the Norwegian supply industry has interesting opportunities to capitalize on,”continues J. Brede. “However, there will be many challenges as the fields mature and production ends, decommissioning is not a simple task,” adds J. Brede. Decommissioned assets are required to be brought onshore in an environmentally friendly way and many companies seek advice and need contracts to be
developed. “I believe that we will see changes in the industry. It will be interesting to see minor oil companies taking over assets because they have different cost structures and can see benefits that large companies cannot. The industry will be active for the foreseeable future and Kvale will have a role to play for many years to come,” concludes the Managing Partner at Kvale.