Wood Mackenzie forecasts possible impact of energy transition

Oil&Gas Materials 14 January 2020 11:23 (UTC +04:00)

BAKU, Azerbaijan, Jan.14

By Leman Zeynalova – Trend:

The energy transition will take center stage in 2020, having a profound impact on the global upstream investment environment, Trend reports with reference to Wood Mackenzie research and consulting company.

The company expects that about two-thirds of the remaining value in global oil and gas assets will go to governments in the form of royalties, taxes and profit-sharing.

As a result, fiscal and regulatory policies will have a significant influence on investors’ ability to meet their objectives and where they choose to allocate capital, according to Wood Mackenzie.

“OECD (Organization for Economic Co-operation and Development) governments are under intense pressure to disincentivise fossil fuel production and encourage investment in renewables. As a result, carbon taxes and renewable subsidies are likely to feature more prominently than they currently do. In Europe, the EU Commission’s pledge to become the first carbon-neutral continent by 2050 is likely to be accompanied by aggressive tariffs on fossil fuel imports,” said the company.

Wood Mackenzie believes while it is highly unlikely that any major oil and gas producing nation will ban further exploration and development soon, some OECD countries that have low levels of indigenous production may follow France and New Zealand’s lead and regulate against future development.

“For developing countries, however, decarbonisation is only likely to drive government policy in 5-10 years’ time. The monetisation of their natural resources remains a higher priority, particularly in power generation. We’ve concluded that the decarbonisation agenda could create tougher fiscal terms for investors, but not by much.”

Wood Mackenzie presents analysis of two possible fiscal policy changes:

Production taxes

Increasing production tax rates, or reducing allowances, makes investment less attractive. Green agenda parties, such as those in Norway, campaign for the removal of terms designed to incentivise upstream activity. But that can have a negative effect on the local economy in a major producing country. Most countries remain more committed to the economic activity generated by oil and gas production.

Environmental taxes

Vietnam imposes an environmental tax on oil and gas production, Nigeria imposes a gas flaring penalty and Norway has applied a CO2 tax on upstream emissions for many years.

The interaction of these taxes with production taxes is important, though. For example, Norway collected NOK 5.7 billion ($630 million) in environmental taxes in 2019. But this is deductible for income taxes, which are charged at a 78% rate, so the net cost to producers was NOK 1.3 billion ($140 million).


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