The Impact of CO2 Taxation on Oil and Gas Production in Norway
Authors: Celius H.K. , Ingeberg K. 
Published: December 2007

The Impact of CO2 Taxation on Oil and Gas Production in Norway.

This paper analyses the effect of the CO2 tax which was imposed on the burning of gas in the Norwegian sector of the North Sea, effective in 1991. The introduction of the tax resulted in a number of technical improvements aimed at the reduction of flaring, and increased energy efficiency of the power generation and total production process. An economic analysis was done to establish the following:How did the tax affect the profitability of the technical measures which were implemented - did the tax make it profitable, or would it have been profitable without the tax;can we expect improvements to continue in the coming years; andwhat will be the impact on the development of new fields, on field abandonment and on measures to improve oil recovery - how much more oil will be left in the reservoir because of the tax.

The first task was analysed by an empirical approach, the latter based on models.

The reduction in CO2 discharge during 1990-1993 was in the order of 8%, the main contribution came from reduction in flaring. This rate of improvement is not expected to continue, since most processes have been brought up to "state-of-the-art" by during these initial years. However, continuous energy optimisation is still expected to give some improvements.

The majority of the technical measures taken to reduce the CO2 discharge proved to be profitable without the tax, and no unprofitable measures were implemented.

The effect of earlier abandonment of fields is smaller than expected, advancing the abandonment by a few weeks for a typical North Sea field. The same seems to be the case for development of new fields. The additional reserves needed to compensate for the tax is in the order of 3 – 4% for a medium GOR oil field, above 5% for a larger gas field.

Introduction

In January 1991, the Norwegian authorities introduced a CO2-tax, which was originally set at 0.6 NOK/Sm3 of gas which was flared or used for energy purposes. and 0.6 NOK per liter of diesel fuel. The tax has gradually been increased, to reach 0.82 NOK/Sm3 in 1994. This is equivalent to short of USD 20 per barrel of oil, if we compare by energy content, and is the highest CO2-tax in the world.

The rationale behind a tax is to add a cost for the use of the environment which is otherwise not reflected in the price/cost structure of the production. This added cost is expected to make the industry take alternative technology or revised procedures into use, and by that reduce the CO2 emission, and reduce the tax. To make such policy work, alternative technology must exist. or be developed.

CO2 emissions from the petroleum industry represents more than 20% of the total emissions in Norway. A projected increase in the emissions due to increased oil and gas extraction will make it difficult to stabilize emissions at 1989 level by the year 2000, which has been the Norwegian government's stated objective.

Gas consumption for energy use to extract and transport oil and gas contribute 83% to the emissions, and flaring gas contributes 10%. The remainder is diesel consumption on exploration rigs, and well testing.

In principle, the CO2 tax may have three different effects for the oil and gas sector, of which all could contribute to reduced emissions:–The tax may lead to fuel substitution away from carbon intensive fuels;–The tax will spur investments in more effective technology and more energy efficient operational procedures;–The tax may contribute to reduced extraction of oil and gas, since taxation increases the extraction cost and thus reduces the profitability of the production.

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