Trillion-dollar oil and gas tax revenues are set to be a thing of the past, as the accelerated energy transition will decrease this source of state revenue, according to a report by Rystad Energy on Wednesday.
Governmental revenue from oil and gas taxation fell to a multi-year low in 2020 to around $560 billion, as production and prices shrunk from the highs seen during the pre-Covid-19 era when oil and gas taxes exceeded the trillion-dollar mark.
Citing high oil prices, the agency estimated that 2021 will be the last year global oil and gas taxes will approach the trillion-dollar mark, reaching about $975 billion.
From 2022 onwards, taxes will be limited to the low $800 billion range, only ticking up in the early 2030s to about $900 billion before starting their final and uninterrupted decline to as low as $580 billion in 2040 and about $350 billion in 2050, it explained.
“As the energy transition ramps up, countries highly dependent on tax revenue from the upstream industry may have no other option than to diversify their economy to sustain state budgets. This is clearly the rational course for them to follow, but there are inherent challenges in the form of insufficient economic and legal institutions, infrastructure and human capital,“ said Espen Erlingsen, head of upstream research at Rystad Energy.
The earlier the energy transition risks are realized the better they can be addressed, Erlingsen said, emphasizing the importance of structural changes to stabilize petroleum-reliant economies and to avoid geopolitical instability as the global energy systems shift onto a sustainable pathway.
Taking the example of Saudi Arabia, the agency said that about half of the government's take is at risk towards 2050, compared to 2019 when total taxable income from oil and gas made up 27% of the country’s gross domestic product (GDP).
Algeria, Iraq, Kuwait and Libya – all of which are heavily dependent on tax revenue from the upstream industry – all garnered around 40% of GDP in 2019 from oil and gas tax revenue. In these countries, about 50% of the government's take is at risk, meaning that this group is the most exposed to revenue risk as a result of the energy transition.
The agency cited the Sustainable Development Scenario (SDS) model of the International Energy Agency (IEA), which calls for temperature increases well below 2 degrees Celsius.
“We have also modeled this scenario in our report, and our model suggests that if it materializes, global government income from oil and gas taxes will be much lower than our own Mean Case, with petrostates losing a cumulative further $4.8 trillion from today until 2050,” it said.
The agency described the price risk, which underlies revenue risk, as a central driver of energy transition risk.
It said that understanding the revenue risks associated with the energy transition requires knowing what oil prices to expect within each of the primary decarbonized demand scenarios.
Even with production significantly reduced, some new development and discoveries will be required to meet demand, as 25% of production must come from new developments and 10% from new discoveries in the 2021 to 2050 period, the agency warned.
“Investment in upstream projects is therefore still needed, even in the most aggressive energy transition scenario considered in this report,” Rystad said.
By Sibel Morrow