Assessing the impact of tax systems on investment incentives in future marine minerals projects on the Norwegian Continental Shelf

Abstract

This study analyzes the impact of two principally different tax systems on potential investment decision-making in marine minerals projects, using the Norwegian Continental Shelf as a case study. The exploration phase of a project is modeled as a multistage decision process through which a company acquires information to reduce geological uncertainties about potential deposits. At different decision gates, the company decides whether it is optimal to continue exploration or abandon the deposits based on their expected economic viability. A dynamic valuation framework is used to evaluate the impact of potential tax systems on corporate decision-making concerning both the exploration of deposits and the project value resulting from the extraction of deposits. Specifically, a standard corporate tax system and variations of the Norwegian petroleum tax system are compared.

The findings suggest that a tax system similar to the Norwegian petroleum tax system, but with lower tax and refund rates, offers advantages for both companies and the states. Specifically, the petroleum tax system with a 30% total tax rate and a 25% refund rate yields the highest expected net present value for the company and reduces its exploration risks compared to the standard corporate tax system. While shifting parts of the exploration risks from the company to the state, the petroleum tax system with a 60% total tax rate and a 55% refund rate generates the highest net tax balance for the state. A trade-off tax system could be designed to share the risks inherent in mineral exploration and extraction, maintaining a balance between corporate and regulatory decision-makers by encouraging investment in the sector and ensuring sustainable economic benefits to the state.