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Oslo - Statoil delayed a $15.5bn Arctic oil project on Wednesday due to a planned tax increase, dealing a blow to the Norwegian government's hopes of creating a new oil region in the far north.
State-controlled Statoil said it would halt the Johan Castberg development, the biggest project in Norway's part of the Barents Sea, and withhold contracts for now after the tax rise sharply raised its already high break-even cost.
The decision comes as energy firms around the globe review their offshore projects, especially Arctic developments, which tend to be more expensive and also more risky.
Falling oil prices and rising costs for everything from labour to equipment are also reducing investment appetite, pushing firms toward more certain projects.
Norway, the world's seventh-largest oil exporter, announced plans for its first oil tax change in two decades last month, saying it would cut the amount energy firms can write down on their investments and also limit the period for writedowns.
The move "reduces the attractiveness of future projects, particularly marginal fields and fields which require new infrastructure," said Oeystein Michelsen, Statoil's development chief for Norway.
Statoil said Castberg's break-even cost would rise by $7 per barrel as a result of the tax hike, making it potentially less attractive than other projects the company is considering. Statoil has not said what Castberg's break-even cost is.
The company estimates Castberg to hold up to 600 million barrels of oil, which at peak production would account for nearly a tenth of the firm's total output.
Statoil is expected to be the second-biggest spender on offshore projects over the next five years, trailing only Brazil's Petrobras, analysts said.
But like global peers ConocoPhillips and Royal Dutch Shell, it is under pressure from investors to curb spending at a time when costs are rising.
"We believe that there is considerable investor disquiet over the absence of free cash flow being generated by the majors," UBS analysts said in a note to clients.
Blow
Castberg is a high-profile development and its delay is a blow to the government, which promoted it as a huge step in revitalising the country's poorer and sparsely populated north.
The Labour-led government, which badly trails in opinion polls ahead of elections in September, has been under fire from energy firms this year, who argue that recent regulation and tax changes reduce the sector's viability.
Norway's oil output, which peaked in 2000, is expected to fall to a 25-year low this year.
With a final decision on the tax rise and possible state aid for Statoil still pending, Statoil's decision to delay Castberg is seen by some as a move to put pressure on the government.
"We interpret Statoil's decision to very publicly defer the final investment decision of a high-profile project ... as a deliberate gesture to demonstrate that the proposed tax change may have consequences which ultimately impair the value of Norway's resource base to the state," Deutsche Bank said in a note to clients.
Oil minister Ola Borten Moe played down the delay.
"I am confident than Johan Castberg will be built," he told reporters. "It is an important project for Norway, and for Statoil as well."
The centre-right Conservative Party, which polls tip to win the election, said it has yet to form a view on the tax proposal.
Statoil owns a 50% stake in the Castberg project while ENI, which is working on nearby Goliat, has 30% and state holding company Petoro has 20%.
