North Sea Oil: challenges and profits

By Eugene Eteris, from Denmark

 The year 2004 started for oil extractors in northern Europe with good news, i.e. the price for crude oil has been at the level of 28 USD per barrel. For oil producers in the North Sea it’s going to be even higher: because of transportation additional costs, the price of oil is around 30-31 USD per barrel. With these high profits for oil businesses, some governments would like to check existing situation in oil and gas agreements, e.g. Danish government started to re-examine exiting accord with its main contractor, i.e. A.P.Moller-Maersk AS company involved in oil and gas extraction

Historic revelations

Press-photo Oil platform on the North Sea.

In the mid 1950s the Dutch scientists discovered commercial deposits of oil and gas on the North Sea shelf, followed by as much successful findings by Norwegian and British colleagues. Danish and German share of the “oil/gas pie” has not been as promising as the Norwegian, but it anyway allowed the Danish economy to be sufficient in oil and gas already in the beginning of 1990s.

The North Sea mineral resources’ “division” among the “lucky five states” (i.e. Norway, the UK, the Netherlands, Germany and Denmark) has been arranged in a way that the states adjacent to the sea have got a corresponding share of the North Sea-bed zone. So to say, the longer was the national seashore line the bigger was the sea exploration sector. That was the reason why the UK has got the bigger share of the underground territory and its oil and gas resources. That allowed the UK to be self-sufficient in natural gas, mainly due to the North Sea resources. Analysts say there are enough natural gas supplies from the North Sea to meet domestic demands in the UK for at least the next decade.

The Danes pump gas and oil from its sector through existing about 20 North Sea platforms (15 for oil exploration and 5 – for gas) to the city of Fredericia, to the nearest refinery, and the technical staff and shifts are delivered from another Danish city  Esbjerg.

Danish way into oil resources’ conquest

As soon as business people in Denmark acquired information about existing valuable resources in the country’s sector of the North Sea region, they addressed the government in order to get a license for resources’ exploration. Needless to say that in early 1960s there were not very many enthusiasts that could feel a “sense of profit” from both quite a distant and, at the same time, not at all commercially definite endeavour. One of the most brave and courageous entrepreneurs was Arnold Peter Moller, the father of the present richest man in the Danish Kingdom. Not less due to the seabed exploration. When Arnold started to get hold of the business in early 1962 his son was looking into another side of business, i.e. supermarkets. In fact he was the first to introduce in 1960s first supermarkets in Denmark, which somehow appeared to be a profitable adventure after all.   

The contract with the state APM concluded for a period of half a century, i.e. up to July 8th, 2012, with a reservation that during the first 40 years the state could not change a fix rate of taxation concerning volumes of extracted oil and gas. The level of such tax burden was not at all great as at the time of contract negotiations it was still very uncertain how profitable the whole enterprise might appear to be.

The first oil was delivered to the Danish continent coast line already on July 4th, 1972; unfortunately Arnold could not enjoy the wonderful results of his efforts, he passed away a couple of years before the magnificent event happened. And then, after 30 years of intensive efforts in the North Sea, in 1992 another historic moment occurred: oil and gas extracted from the sea’s underground increased that of Danish internal consumption. So, the country could even have a chance to export energy resources. Presently the Danish sector in the sea provides 50 per cent more energy than the country can actually consume. But all that was still a distant perspective from the early 1960s...

After Moller’s death his son Maersk Mc-Kinney Moller still did not show any particular interest in oil business. He was still partly in trading, partly in another father’s initial ideas of earning for living – shipping. Arnold bought his first ship and started business about hundred years ago. But father’s testament and, not least, the fact of enormous money already invested into the project, forced him into it. But still, he wanted to share his uncertainties about the project with other Danish entrepreneurs interested in the deal. From the ranks of those invited and interested to participate, Maersk created DUC – Dansk Undergrunds Consortium. APM’s share in DUC was fixed at 39 per cent; other important partners were and still are: Chevron-Texaco and Shell. DUC’s profits during the last years have been increasing at a rate of about 80 per cent.    

As soon as forty years elapsed since the initial contract was concluded, Danish government expressed a strong desire (backed by radical politicians) to “reconsider the terms of the initial agreement”. In particular, the state owned company DONG – Dansk Olie og Naturgas – and some politicians have been actually very worried about ATM’s great profits. Out of total amount of APM’s profit for 2002 of about 12 billion Danish crones (or about 2 billion USD), after tax exemptions, the North Sea resources provided APM with more than a half, i.e. about 7 billion crones. Another argument for revision was that oil reserves in the North Sea could not possibly last longer than 10-15 years and that the government was to use resources in the most efficient way. 

On top of this, DUC managed to keep about a billion USD a year in his account due to a special clause in the agreement that the state would allow DUC to keep all investments in the North Sea exploration tax-free. This practically meant that for each 10 million crones investments APM could withhold 25 million crones from the company’s taxable profit. Some parties in the present government coalition think that all the DUC huge profits are not just fair! After all, the sea natural resources are still the public property. At the same time some express intentions to revise 30 years-old agreement with APM where there is still a clause that APM can withhold 5 per cent aggregate profit as a “guaranty for uncertain investments”. Opponents think that presently there are no grounds for such “uncertainties” that could be taken into consideration some 30 years ago.

Anyway, present revised and adopted APM-Government agreement is valid up to 2012, and further on up to 2042, and in its revised part the state managed to increase government’s share of profit from 45 per cent to 61 per cent. On the other hand, APM has included in the new deal a clause against any changes in corporate taxation that can endanger APM’s position. At the end of December 2003 Danish Parliament – Folketinget – approved new agreement that made a state’s share in oil and gas profit bigger. Or, in other words, the more APM will get from the sea resources, the more the state budget will acquire.

Maersk Mc-Kinney, now 90 years old himself, nominated as his company’s Maersk Olie og Gas managing director a young 48 years old businessman Michael Pram Rasmussen.

There is an important European Union dimension in the present revision agreement. At the end of 2002 the EU took a major step towards creation of a single market in energy resources, gas and electricity. EU member states’ governments must open their electricity markets to competition from other EU countries by July 2004 for business and by 2007 for households.

Press-photo Tanker Nordhpacific in the North Sea.

Who’s profiting?

It would not be too difficult to predict that oil and gas production in the North Sea might expect good profits. But probably nobody would expect such a success. Some states like, for example Norway, the most advantageous of all the five countries in the North Sea region, has earned already about 100 billion USD from these resources’ exploration. This is, so to say, for a rainy day, i.e. allocations are already invested into various social programs and pensioners’ funds at a sum of about 180 thousand Norwegian crones per capita. As for Denmark the acquired advantages have not been so huge; but anyway the budget has allocated quite a sum, i.e. equal to “personal profit” of about 25 thousand Danish crones per capita. In the coming 8-10 years national budget will get about 28 billion USD. For the companies that have a deal in the exploration of these resources the business would, no doubt, be profitable as well.