Fact box – Required rate of return
Economic theory stipulates that a project should be implemented if its NPV is positive, and rejected when the NPV is equal to zero or negative. Even were all projects with a positive NPV to be sanctioned, this does not describe what actually happens. That is because company behaviour includes rationing capital. That means projects with a positive NPV are not necessarily realised because their profitability is insufficient to come high enough up a company’s internal ranking.
In 2015, the Auditor General’s office investigated required returns and investment behaviour on the NCS. It reported that the companies generally required a higher real rate of return than the state, and that the requirement was often higher than that prescribed by the capital asset pricing model. In addition, the office described a trend whereby investment on the NCS must compete more strongly with projects abroad and where only the most profitable projects in commercial terms are realised [14].
A study by Wood Mackenzie in 2018 [15] indicated that oil companies required a return of 13-14 per cent for projects typical of the NCS.
The climate risk commission concluded that the requirement for higher returns by the companies pointed towards lower investment on the NCS than would be socioeconomically profitable [16].
This report is referred to by the MPE in its energy White Paper [17]: "The [commission] notes that the oil companies probably require a higher return than the state when assessing projects. This points towards lower investment on the NCS than is socioeconomically profitable". In its supplementary White Paper [18], the ministry adds: "Experience from the NCS is that the companies require a high expected return and great economic robustness before sanctioning new investments. The companies typically apply a higher return than the state for investment decisions and require that projects are also financially robust with significantly lower oil and gas prices than expected."