Presentation on the complaint case before the EFTA Surveillance Authority regarding the Norwegian petroleum tax system and the reimbursement of exploration cost. Norway has reimbursed around 100 billion NOK since 2005. Bellona has alleged that this aid is unlawful aid, potentially leading to recovery. What is the consequenses for M&A activity in the sector?

1. Is the exploration reimbursement State aid?
Consequences for M&A activity
E&P Transactions on the Norwegian Continental Shelf Event
Kluge and PwC
Sola Strand Hotel, 6 June 2018
Bjørnar Alterskjær, Kluge

2. Agenda:
•State aid
•The Norwegian petroleum tax
•Bellona’s complaint
•Timeline
•Dealing with State aid issues in M&A

3. • Single market in
Europe (the EEA)
• State aid
provisions
• EFTA Surveillance
Authority – (ESA)

4. 4
Prohibition of State aid
State aid rules – creating a level playing field between companies in Europe
Unlawful aid may be recovered
Increased focus on State aid granted through fiscal measures (e.g. Apple 13 bn euro)

5. When is a tax measure State aid?
• EEA Article 61 – “Selectivity” – does a measure treat “comparable products or undertakings”
differently?
• 3-step selectivity test
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6. The procedure for complaints – State aid
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Complaint
Information request(s)
Phase I approval:
No aid or compatible aid
Formal investigation –
initiates phase II
Phase II approval:
No aid or compatible aid
Negative decision
(with recovery)
Comments Norway and third parties;
reaction Norway on comments
from third parties
Publication of opening

7. Norway’s petroleum tax
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• Total tax rate of 78 % on profits
‑ Ordinary company tax: 23 %
‑ Additional special tax 55 %
• The petroleum taxation system is intended to be neutral (regardless of tax position)
‑ Exploration costs fully deductible
‑ Losses can be carried forward with interest
‑ Reimbursement of exploration cost
‑ Reimbursement of tax value of losses by termination of petroleum activities

8. Bellona’s complaint and Norway’s response
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21 August 2017 22 September 2017 7 December 2017 9 February 2018

9. Our take on the 3-step selectivity test
Does the case have merit? 9
Step Our preliminary assessment Risk and uncertainty
1: What is the
correct reference
system?
- Probably the Petroleum tax system and the rules on
deductions
ESA could define a wider reference
system
2: Derogation from
the reference
system?
- The reimbursement does probably not derogate from the
reference system (but admittedly unusual in a tax system)
ESA may regard the reimbursement
to constitute a derogation from the
general tax system or the petroleum
tax system
3: Is the derogation
justified by the
logic of the
system?
- Potential derogations would probably be justified (but
admittedly a unique arrangement)
ESA may regard the derogation to
not fall within the logic of the
system (general tax system or
petroleum tax system)

12. Where does the case stand?
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Complaint
Information request(s)
Phase I approval:
No aid or compatible aid
Formal investigation –
initiates phase II
Phase II approval:
No aid or compatible aid
Negative decision
(with recovery)
Comments Norway and third parties;
Reaction Norway on comments
from third parties
Publication of opening
Decision on
whether to open
or close likely
around summer
2018

13. If Phase II is launched, this might take a
while (additional 12-18 months)

14. Complaint
Final negative
decision: ESA asks
Norway to recover the
aid
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ESA opens a formal
investigation
Phase I Phase II Recovery phase Litigation phase
Potential timeline (recovery scenario)
August 2017 September 2018 March 2020
Judgement of the
EFTA Court, possible
annulment of the
decision
May 2021
Phase I Phase II
Recovery phase
Litigation phase

15. • A ESA decision would be directed towards Norway
• Norway would have to recover the benefit from each of the beneficiaries
‑ Determine counterfactual situation
‑ Comparison hypothetical tax bill
‑ Complex calculations
What if there is a negative decision with recovery?
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16. Scale of risk – reimbursements around 100 bn NOK
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The paid out
reimbursements
(plus interest) is
the «worst case»
recovery scenario
Source: Dagens Næringsliv

17. • In our opinion, the measure should not be regarded as State aid (but unique case – so
difficult to estimate the probability)
• Risk is present as long as the case is pending
• Past reimbursements (after August 2007 – 10 year limitation rule) should be prioritized in
any due diligence exercise
M&A and State aid I
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18. •Recovery of how much?
‑ Depends on the wording of the decision
‑ Exploration reimbursements received
‑ Counterfactual situation with hypothetical tax bill
‑ + Interest and compound interest
•Recovery from whom?
‑ The real beneficiary of the aid
M&A and State aid II
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19. M&A and State aid III
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Situation: Risk:
Asset sale (transfer of license interest) Risk normally rests with seller for previous
reimbursement associated with the transferred interest
Asset sale (transfer of license interest) with buyer
carrying seller’s future exploration costs for
seller’s remaining license interest («carry
structure»)
Risk placed on buyer for future reimbursement for
seller’s exploration costs paid by the buyer under the
carry structure?
Share sale Risk would normally be transferred to purchaser
(but may sometimes rest with seller, depending on the factual situation and on
the agreements between buyer and seller)

20. • Higher risk of ESA opening formal investigation than the risk of a final negative decision
(with significant recovery)
• If the formal investigation procedure is initiated, the level of risk should be re-assessed
• The value of risk could be determined based on the likelihood of different outcomes:
‑ E.g. a 15 % risk of 1,7 billion NOK recovery claim (including interest) would have a value
of 255 million NOK, with a range of different outcomes between 0 and 1,7 billion NOK
M&A and State aid IV
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21. • How should the risk be dealt with?
‑ Should the risk be reflected in the transfer price?
‑ Should the matter be solved by indemnities?
‑ An indemnity clause should be constructed in a manner that ensures that it is not
regarded as a circumvention of the recovery order
M&A and State aid V
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22. • ESA will probably issue a decision around summer 2018
• Two possible outcomes:
‑ A no aid decision
‑ A decision opening the formal investigation procedure
• The decision may be brought before the EFTA Court (if the applicant has standing)
• Risk should be re-evaluated in light of ESA’s decision
M&A and State aid VI – next step
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23. Thank you for your
attention!
Bjørnar Alterskjær
bal@kluge.no
+ 47 932 25 542
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