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Petroleum economist in demand

08 July 2011 The University of Stavanger

Based on the Norwegian model, professor of petroleum economics at the University of Stavanger Petter Osmundsen has made his mark on taxation guidelines for oil producing countries worldwide to follow. He is nevertheless critical of his native country’s petroleum policy.

Being one of a very few researchers in petroleum taxation, professor Osmundsen’s expertise on the taxation of large oil revenues has become an export article in itself. In 2010, the International Monetary Fund (IMF) published The Taxation of Petroleum and Minerals, in which professor Osmundsen has written a chapter on petroleum taxation.

Among other themes, it discusses how tax systems should respond to changing oil prices.

“A linear system like the Norwegian has proved itself to hold good incentive properties and to be stable over time. The impact of increasing and decreasing oil prices are shared between companies and the authorities. Most petroleum taxation systems are regressive, which means that the effective rate of taxation falls when oil prices rise. This is being compensated by frequent changes in taxes, resulting in an unstable tax system which discourages investments.”

More research needed
The Norwegian system – with its predictable taxation of oil revenues – is highly sought after. Still, there is a crack in the system, according to professor Osmundsen at the University of Stavanger.

Even though Norway is enjoying huge oil earnings, government grants for petroleum research have diminished over the last few years.

“Technological developments generate higher productivity and more cost efficient development and operation. Research which could increase the recovery of oil from mature fields about to run dry is therefore vital. If this is not done, Norway is irrevocably set to lose billions in income,” professor Osmundsen warns.

He would like to see the government commit itself to supporting research within the petroleum industry for many years to come.

Sharing technology
Each company takes into account its own research gains, and sometimes less due to decentralised management systems. The manager may only take into account the benefits for a single project or field, which he is responsible for, instead of the company as a whole.

The stakes involved in developing e.g. new and more effective drilling technologies are thus too small, compared to the profits gained by the society in general. In 2010, Osmundsen studied increased oil recovery and so-called knowledge externalities.

“If the state contributes to the development of new technology, all parties operating on the Norwegian continental shelf will benefit. Many companies are likely to be able to share the same technology,” the petroleum economist explains.

“Finding and producing more oil by using newer and better technology will increase everyone’s profits, as well as yielding bigger tax revenues. This is why it is important for Norwegian authorities to finance this kind of research. By repeatedly slashing its funding of research and development carried out by the oil industry, the government exercises exactly the kind of short-sightedness it accuses the companies of.”

Professional recognition
Professor Osmundsen is not afraid of expressing his views. He is an acknowledged author, and is often invited to give lectures for the oil industry, government ministries, the Norwegian Petroleum Directorate, the Oil Tax Office and the Norwegian Petroleum Society.

He is a member of the industrial economics research team in at the University of Stavanger, which is busy studying the interaction between technology and economics. Among other tasks, the team is seeking to explain the decrease in drilling speed. The industrial economics research team publishes its articles in scientific journals both within economics and technology.

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