Area fees and area fee exemptions

1. What are area fees?

Area fees are a tax that licensees in a production licence must pay to the State, represented by the Norwegian Offshore Directorate.

The legal basis for the fee can be found in Section 4-10 (1) and (6) of the (Norwegian) Petroleum Act (PA), with further details laid down in Section 39 et seq. of the (Norwegian) Petroleum Regulations (PR).

The fee is considered to be remuneration for the acreage and natural resources the State is making available to the licensees by awarding the production licence. It acts as an incentive to promote activity and value creation in the area covered by the licence, and simultaneously provides motivation to relinquish acreage that the licensees do not consider to be interesting.

Area fees clarifications (Letter from MoE, Norwegian only)

2. Exemptions from the duty to pay area fees

The authorities may grant exemptions from the duty to pay area fees following an application from the licensees.

Licensees may apply for exemption pursuant to Section 39 (2), (3) and (7) of the PR in the following instances:

1. If a plan for development and operation of petroleum deposits (PDO) has been submitted.
2. If the licensees drill a wildcat well outside the work obligation during the period as indicated in Section 3-9 (2) of the PA.
3. If the Ministry decides that area fees shall not be paid, in whole or in part, or that the duty to pay the fee shall be postponed.

Grounds for exemption:

Deposits included in plans for development and operation (PDOs) – Section 39 (2) of the PR

Licensees can apply for exemption by submitting a PDO, an amended PDO or application for PDO exemption. The exemption will apply as of the date the PDO is submitted to the MPE. There must be approval from the MPE before the exemption can be granted. Exemption applications must be submitted to the Norwegian Offshore Directorate.

The application should contain the following:

• Information about when the PDO, potentially amended PDO or application for PDO exemption will be submitted.
• Proposed delineation of the area to be exempted from area fees (AFEX). The area must be based on the extent of the deposits covered by the PDO/PDO exemption. The base case outline (expected value) of the deposit(s) must be used as a basis.
• Maps showing an outline of the deposit(s) and an outline of the exempted area (AFEX). The map must be in PDF format and must contain information about the location, such as the boundaries of the production licence or block. In the event of multiple deposits spread over a significant geographical distance, multiple, distinct exemption areas may be relevant.
• Depth structure maps showing top reservoir and oil/water or gas/water contact for all deposits included in the PDO. The map must be in PDF format.
• XML files in accordance with the Norwegian Offshore Directorate's specifications; see Item 3.

In each individual instance, the documentation must clearly describe and demonstrate the criteria that form the basis for the conducted delineation.

Drilling a wildcat well during the extension period – Section 39 (3) of the PR

Licensees can apply for a two-year exemption if they drill a wildcat well[1] during the extended initial period or in the extension period[2]. Drilling an appraisal well[3] or development well[4] (production wells, injection wells, observation wells and combinations thereof) will not provide grounds for exemption.

An exemption will only be granted if the wildcat well being drilled is an addition to the work obligation for the production licence. The Norwegian Offshore Directorate's classification of the well will be decisive for whether or not a well is called a wildcat well. Wells must be registered with the Norwegian Offshore Directorate pursuant to Section 13 of the Resource Management Regulations (RMR).

Exemptions will be granted for the area that delineates the prospect being drilled and any additional prospects in the production licence with significant geological dependencies in the prospect being drilled. This applies for prospects that will presumably be drilled and come on stream within a reasonable timeframe if the prospect being drilled yields positive results. This means that information from the well being drilled could be decisive for a potential decision to drill to determine additional prospectivity.

The area will once again be subject to an area fee following the end of the exemption period. The area fee will then escalate over three years.

Exemption applications must be submitted to the Norwegian Offshore Directorate once the final report on geoscience and technical reservoir well data has been submitted, cf. Section 31 of the RMR.

The application should contain the following:

• Proposed delineation of the area to be exempt from area fees (AFEX), based on map outlines of the individual prospects that have been drilled. The base case outline (expected value) of the prospect must be used as a basis.
• Maps showing outlines of the individual prospects that have been drilled and an outline of the exempted area (AFEX). The map must be in PDF format and must contain information about the location, such as the boundaries of the production licence or block.
• Relevant maps (structure map, attribute map, etc.) for the relevant prospective levels. The same criteria apply for any prospects that are geologically dependent on the prospect that has been drilled. The maps must be in PDF format.
• XML files in accordance with the Norwegian Offshore Directorate's specifications; see Item 3.

In each individual instance, the documentation must clearly describe and demonstrate the criteria that form the basis for the conducted delineation.

General exemption decision – Section 39 (7) of the PR

Such decisions are based on a general exemption rule. The decision is based on the Ministry's free discretionary assessment.

The intention behind the exemption rule is to provide an option for adjusting or granting exemptions from the fee in instances where it does not function as an incentive for efficient resource management. As a point of departure, exemptions must only be granted in instances where it is considered obvious that levying the fee is not expedient.

The rule is practised such that licensees can apply for exemptions in instances where:

• New 3D seismic is being collected or other extensive geological or geophysical work (G&G work) is being carried out.
• External factors prevent further development of mature discoveries.
• The relevant production facility is placed outside the deposit, but within the acreage covered by the PDO.

Collecting new 3D seismic or carrying out other extensive geological or geophysical work (G&G work)

Exemption is contingent on the collection/work being an addition to the work obligation for the production licence. Collection/work that is part of the work obligation does not provide grounds for area fee exemption.

Exemptions will be granted following a concrete assessment which e.g. emphasises whether the activity goes beyond normal activity in the licence. This must involve extraordinary work beyond the normal and expected work in the licence leading up to submitting a PDO.

A key part of the assessment will also be that the licensees are incurring significant costs and that the activity is necessary.

A potential exemption will be issued once the activity is complete and documented. The exemption period and area will be determined following a concrete assessment. The exemption will be granted for a limited period and can comprise the entire licence or a defined area within the licence. Applications must be submitted to the MPE, with a copy to the Norwegian Offshore Directorate.

The application should contain the following:

• Explanation of how the collection/work is an addition to the work obligation.
• Documentation and overview of the costs associated with collecting new 3D seismic and/or G&G work, distributed by licence for each year.
• Map showing the area where the collection and/or G&G work has been carried out. The map must be in PDF format and must contain information about the location, such as the boundaries of the production licence' or block.

External factors that prevent further development of mature discoveries

Two criteria must be satisfied in order for exemptions to be granted under this alternative:

• Further development of discoveries must be prevented by "external factors".
• The project/resource must be sufficiently "matured" in the sense that future profitable recovery is likely.

The external factors requirement means that this must involve an external circumstance outside the licensees' sphere of control. External factors that prevent further development could, depending on the circumstances, be a lack of available capacity in existing infrastructure or lack of access to new infrastructure, presuming that an independent development is not financially feasible. Lack of rig capacity is normally not sufficient.

Whether or not an exemption will be granted will be subject to a concrete assessment. As a point of departure, the resources must have been proven through drilling, and there must be real, concrete plans to implement the project.

The exemption period is normally limited to one year and will be given for the area that delineates the discovery.

Applications must be submitted to the MoE, with a copy to the Norwegian Offshore Directorate. The application should contain the following:

• An explanation of the extent to which this involves an external obstacle.
• An explanation of the extent to which future profitable recovery is reasonably certain.
• Proposed delineation of the overall area to be exempted from area fees (AFEX) based on the extent of the deposit. The base case outline (expected value) of the deposit(s) must be used as a basis.
• Map showing an outline of the deposit and an outline of the exemption area (AFEX). The map must be in PDF format and must contain information about the location, such as the boundaries of the production licence or block.
• Depth structure map of top reservoir and oil/water or gas/water contact for the deposit. The map must be in PDF format.
• XML files in accordance with the Norwegian Offshore Directorate's specifications; see Item 3.

Facility placed outside the deposit, but within the area delineating the deposits included in the PDO

Licensees can apply for exemption from area fees in instances where a PDO (potentially amended PDO or application for PDO exemption) has been submitted, and the facility that will produce the deposit is located outside the area that delineates the deposit included in the PDO. (Area fee exemptions will not be granted in these instances pursuant to Section 39 (2) of the PR, because exemptions under this rule are limited to the area that delineates the deposit.)

Exemptions are normally granted as long as a PDO, potentially amended PDO or application for PDO exemption is submitted and as long as the facility is engaged in recovery. Once production ends, the area fee for this area will be escalated over three years as stipulated in Section 39 (2) of the PR.

In these instances, exemption will normally be granted for the area that delineates the facility with anchoring points.

Applications must be submitted to the MPE, with a copy to the Norwegian Offshore Directorate. The application should contain the following:

• Which deposit the facility is producing from.
• Which PDO covers the relevant deposit and when the PDO, potentially amended PDO or application for PDO exemption was submitted to the authorities.
• Proposed delineation of the overall area to be exempted from area fees (AFEX) based on the placement of the facility with anchoring points.
• Map in PDF format showing an outline of the exemption area (AFEX). The map must be in PDF format and must contain information about the location, such as the boundaries of the production licence or block.
• XML files in accordance with the Norwegian Offshore Directorate's specifications; see Item 3.

In each individual instance, the documentation must clearly describe and demonstrate the criteria that form the basis for the conducted delineation.

Drilling a wildcat well during the extension period - Section 39 (3) of the PR

Licensees can apply for a two-year exemption if they drill a wildcat well¹ during the extension period². Drilling an appraisal well³ or development well⁴ (production wells, injection wells, observation wells and combinations thereof) will not provide grounds for exemption.

An exemption will only be granted if the wildcat well being drilled is an addition to the work obligation for the production licence. The Norwegian Offshore Directorate's classification of the well will be decisive for whether or not a well is called a wildcat well. Wells must be registered with the Norwegian Offshore Directorate pursuant to Section 13 of the Resource Management Regulations (RMR).

Exemptions will be granted for the area that delineates the prospect being drilled and any additional prospects in the production licence with significant geological dependencies in the prospect being drilled. This applies for prospects that will presumably be drilled and come on stream within a reasonable timeframe if the prospect being drilled yields positive results. This means that information from the well being drilled could be decisive for a potential decision to drill to determine additional prospectivity.

The area will once again be subject to an area fee following the end of the exemption period. The area fee will then escalate over three years.

Exemption applications must be submitted to the Norwegian Offshore Directorate once the final report on geoscience and technical reservoir well data has been submitted, cf. Section 31 of the RMR.

¹ See Section 3 (u) of the Resource Management Regulations

² See Section 3-9 (1) second sentence and (2) of the PA

³ See Section 3 (a) of the Resource Management Regulations

⁴ See Section 3 (v) of the Resource Management Regulations

3. Digital map format

The format of the digital map data must be as follows for exemptions pursuant to Section 39 (2), (3) and (7) of the PR:

• The area for which the licensees are seeking an area fee exemption (AFEX) and the deposit outline must be submitted as two separate XML documents with reference to the form file. See text box
• File names must be structured as follows:

• "AFEX [field/discovery/prospect name].xml"
• "Deposit [deposit name].xml"
• Discoveries and fields must be named according to the naming convention on the Norwegian Offshore Directorate FactPages

• The AFEX area must be listed in whole degrees and minutes pursuant to Section 15 of the PR.
• If an AFEX area consists of multiple production licences, a joint XML file must be submitted for all production licences in the AFEX area.
• The deposit outlines can either be stated in decimal degrees or in degrees, minutes and seconds with decimals.
• The polygons in the outlines must be closed. This means that the first and last point are identical.
• All coordinates must be stated with datum ED50.

A dedicated tool has been developed to validate the XML documents before submitting the application to the NPD. Go to https://factmaps.sodir.no/validateAFEX/ and drag XML files for the AFEX application and deposit into the validator. The outlines will be shown along with information about the production licence, discoveries and field outlines. Check the "Validation report" for any errors or deficiencies. The XML files can be downloaded as a geodatabase file, if this is desired.