Global petrostates can forget trillion-dollar oil and gas tax revenues as energy transition bites, Rystad reports
The global government income from oil and gas taxation fell to a multi-year low in 2020 of around $560 billion, as production and prices shrunk. Before Covid-19, oil and gas taxes usually exceeded the trillion-dollar mark. Petrostates will miss these former glories, a Rystad Energy report projects, as the accelerating energy transition will cause this source of state income to shrink and never again exceed or meet $1 trillion.
2021 will be the last year global oil and gas taxes will approach the trillion-dollar mark, reaching about $975 billion according to Rystad Energy estimates, assisted by high oil prices. From 2022, 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.
“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. The earlier the energy transition risks are realized the better they can be addressed. Structural changes will be crucial to stabilize petroleum-reliant economies and avoid geopolitical instability as the global energy systems shift onto a sustainable pathway,“ says Espen Erlingsen, head of upstream research at Rystad Energy.
Using Saudi Arabia as an example, about half of the government take is at risk towards 2050, while total tax income from oil and gas made up 27% of the country’s gross domestic product (GDP) in 2019. 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 take is at risk, meaning that this group is the most exposed to revenue risk as a result of the energy transition.
Rystad's data and tools allows it to quantify energy transition risk for the oil and gas upstream sector in different low-carbon scenarios. The above estimates are produced by Rystad Energy’s base case scenario, called the Mean scenario. To address the possibility of some deviation we also have a low-case and a high-case scenario.
However, the International Energy Agency’s (IEA) Sustainable Development Scenario (SDS) model has perhaps become the most widely used benchmark, calling 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 ad gas taxes will be much lower than our own Mean Case, with petrostates losing a cumulative further $4.8 trillion from today until 2050.
Price risk (which underlies revenue risk) is a central driver of energy transition risk. To understand the revenue risks inherent in the energy transition, it is essential to know which oil prices to expect within each of the key decarbonized demand scenarios. Rystad's price forecasts are formulated from its supply and demand balances projections and Rystad Energy has been a front-runner in warning the market that peak oil demand is closer than ever and at a lower ceiling than previously thought.
Even with production significantly reduced, some new development and new 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. Investment in upstream projects is therefore still needed, even in the most aggressive energy transition scenario considered in this report.