Agreement between the Government and the Concessionaires (on behalf of the DUC partners)
By this Agreement and its Appendices the Government and A.P. Møller-Mærsk A/S and Mærsk Olie og Gas A/S (the “Concessionaires”) also on behalf of their partners in Danish Underground Consortium (DUC), confirm that preparations are being made for the full reconstruction of the Tyra field facilities.
For the past 45 years, there has been oil and gas production in the Danish part of the North Sea. Central parts of the gas infrastructure are in need of comprehensive restoration, while at the same time extraction in the North Sea can be increased if a number of discoveries, including minor and technically difficult discoveries, are developed.
By introducing bills as soon as possible and during the second half of 2017 at the latest, the Government will seek the Danish Parliament’s consent to lower taxation on hydrocarbon activities in a window from 2017-25 with a view to relaxing investment terms and conditions for all producers of hydrocarbons in the North Sea. At the same time, the Concessionaires will continue the work with the DUC partners of effecting a full reconstruction of the Tyra field facilities. DUC also acknowledges and accepts the Government’s measures to improve third-party access to the infrastructure in the Danish part of the North Sea.
The Government and the Concessionaires agree that the full reconstruction of the Tyra field facilities and the statutory amendments listed below create a basis for the development of several discoveries over the coming years up to and including 2025. The parties estimate that following a full reconstruction of the Tyra field facilities, 129 million barrels of oil equivalents may be extracted from the Sole Concession Area, which cannot be developed without the full reconstruction of the Tyra facilities. To this should be added the volumes from the Tyra field and from fields owned by third parties.
The balance of the arrangement is secured by the hydrocarbon producers’ repayment of the tax reduction if the price of oil increases substantially from the current level, thereby altering the conditions materially.
The Agreement and its Appendices as follows:
1. A tax reduction in a window 2017-25 for all producers of hydrocarbons in the North Sea
- The rate of tax depreciation on assets covered by section 5 C(1), para 3, of the Amortisation and Depreciation Act, in the assessment of the base of the hydrocarbon tax, see Part 3 A of the Hydrocarbon Tax Act, is raised from the current rate of 15% to 20%. The time when depreciation may commence is moved forward to the date of payment as against the date of operation applicable today.
- The Concessionaires and the DUC partners accept that explicit authority is introduced for the imposition of tax on recovered depreciation under the Hydrocarbon Tax Act in case of sale of assets in the course of day-to-day operations.
- The hydrocarbon allowance, currently amounting to 5% for six years, will be increased to 6.5% for six years, and the allowance may be made from the date of payment instead of the date of operation as is the case today.
- The arrangement applies to investments included in plans and works submitted for approval under the act on the use of Denmark’s subsoil during a window from 1 January 2017 to 31 December 2025, where the expense is also paid during this window. The investment is to be approved under the Subsoil Act and put into operation on or before 31 December 2026, see section 3 of the Amortisation and Depreciation Act. Notwithstanding the expiry of the window, the increased hydrocarbon allowance and the higher depreciation rate will remain in force for the investments made during the window.
- If the asset has not been put into operation on or before 31 December 2026, recovered taxation will take place ensuring that the entire tax benefit obtained in relation to the investment is eliminated. Recovered taxation will not take place, however, if the failure to put the asset into operation on or before 31 December 2026 is due to delays beyond the control of the companies constituting force majeure (such as natural disasters or acts of terrorism), and if the investment has been put into operation on or before 31 December 2027.
- Use of the arrangement is optional. A decision to use the arrangement is binding during the period until 31 December 2025.
2. Repayment in case of high oil prices
- An additional tax will be introduced with the purpose of making hydrocarbon producers repay the tax reduction obtained under clause 1, in full or in part, in case of particularly beneficial market developments. All producers of hydrocarbons in the North Sea making use of the tax reduction under clause 1 are covered by the repayment arrangement.
- As from 2022 the following applies: In income years when the oil price is USD 75 per barrel (2017 prices) or more on average, a repayment of the tax reduction will be activated. Thus, hydrocarbon producers will pay a 5% additional tax on their earnings from hydrocarbon extraction before tax and interest payments (EBIT) in the years when the oil price is USD 75 per barrel or more on average and 10% on EBIT in the years when the oil price is USD 85 per barrel or more on average. The trigger prices of USD 75 per barrel in 2017 and USD 85 per barrel in 2017 will be inflated from 2018 (included) by 2% a year.
- Statistics Denmark will be required to compile annual statistics for the average oil price corresponding to the existing Brent Dated reference price. If the basis of the calculated Brent Dated reference price changes significantly, or if that reference price ceases to exist, Statistics Denmark must calculate a new oil price index on the basis of a correspondingly transparent, publicly accessible international price index reflecting as far as possible the characteristics that apply to oil production in the Danish part of the North Sea. The annual average oil price as calculated by Statistics Denmark is used in the evaluation of whether the oil price has been above the oil price limit in the relevant income year.
- The additional tax is deductible in the base of the hydrocarbon tax under Part 3 A of the Hydrocarbon Tax Act.
- The aggregate repayment is not to exceed the value of the estimated tax reduction obtained by the companies under the arrangement. Therefore, hydrocarbon producers draw up a separate repayment balance representing the maximum aggregate repayment. The repayment balance carries interest at the rate of 4.5% from 2022. The repayment obligation expires in 2037, when the repayment balance will cease to exist.
- The additional tax will be collected and paid in the same way as hydrocarbon tax under Part 3 A of the Hydrocarbon Act, cf. Part 3 of the Act on assessment and collection etc. of tax on hydrocarbon extraction.
- The repayment balance is calculated as from 2017 on the basis of an assessed value of the increase of the hydrocarbon allowance and an assessed value of the relaxed depreciation rules, revalued to adjust for the bringing forward of the dates of allowance and depreciation. The yearly accrual of the repayment balance is calculated by multiplying the total investment expenditure of the year by 20.1%. The additional tax is only charged when the repayment balance is positive.
3. Improved third-party access to the infrastructure
- The Government and the Concessionaires agree that it should be uncomplicated for all companies to use the infrastructure in the North Sea on transparent and reasonable terms, and that negotiations on access to infrastructure should be conducted swiftly.
- The Concessionaires and the DUC partners are aware and accept that the Government intends to introduce bills to amend the Danish Subsoil Act with the purpose of making it easier for the rights holders to use other parties’ facilities for extraction, transportation and treatment (third-party access). The relevant amendments of the Subsoil Act are described in Appendix Y.
- The Concessionaires and the DUC partners are aware and accept that the Government intends to introduce a bill to amend the Pipeline Act with the purpose of securing more expedient incentives for users to reserve capacity and for the owner to make new investments. The relevant amendments to the Pipeline Act are described in Appendix Y. On that background, the parties agree that the provisions of the bill represent a change to the payment for the use of the pipeline, and thereby an amendment to the Agreement of 19 May 1981 between the Energy Minister and the Concessionaires.
A political agreement has been entered into between the Government, the Social Democratic Party, the Danish People’s Party, the Social-Liberal Party and the Socialistic People’s Party, securing a comfortable political majority behind this Agreement.
The Government intends to introduce bills in the Danish Parliament, designed to implement the necessary statutory amendments and carry out the adaptations required by this Agreement. Bills to amend the Subsoil Act and Oil Pipeline Act will be introduced in the Danish Parliament in October 2017. A bill amending the hydrocarbon taxation will be introduced as soon as possible and at the latest in October 2017.
Accordingly, the parties agree as follows:
- It is assumed by both parties that the Government will obtain the necessary consent from the Danish Parliament and in that connection manage to make the necessary and assumed statutory amendments.
- In addition, both parties assume that the European Commission will confirm in writing that the Agreement does not give rise to objections concerning State aid.
- The Agreement does not release the Concessionaires from the duty to obtain the necessary permissions and approvals under the Subsoil Act and other legislation.
- Unless the Concessionaires and their DUC partners have informed the Minister for Energy, Utilities and Climate before the end of 2017 that it has been decided to implement the full reconstruction of the Tyra field facilities, this Agreement will lapse. The Concessionaires are liable towards the Danish state for the obligations that result from the Sole Concession and the legislation in general, following a final investment decision on the full reconstruction of the Tyra field facilities.
- The parties assume that the incorporation of this Agreement into statutes, decisions, etc., will be effected in a manner satisfactory to both parties as provided by the Agreement.
- The DUC partners’ investment decisions, see clause 4.4, are binding as between the DUC partners, and the undertakings under the JOA (Joint Operating Agreement) ensure as between the partners that (notwithstanding any direct or indirect transfers) the participating companies possess the necessary financial capacity to carry out the full reconstruction of Tyra.
It is agreed that any questions or problems arising in connection with the Sole Concession, including this Agreement, will be subject to negotiation. Any disagreement between the parties to the Agreement will be resolved by arbitration under the provisions set out in the Sole Concession to that effect.
The Sole Concession as most recently revised by the North Sea Agreement of 29 September 2003, with Addendum dated 18 October 2004, will remain in force subject to unchanged terms and conditions.