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FORESIGHT 2020

How the energy transition could create tougher fiscal terms for upstream investors

And four more factors for upstream investors to watch in 2020

What will our fiscal analysts be watching in the year ahead? We highlight our top five themes.

  1. Green agenda driving tougher fiscal terms 
  2. General elections changing policies and taxation
  3. The shift from coal to gas
  4. Licensing rounds requiring competitive terms
  5. Public sector pushing to get its "fair share"

The energy transition will take centre stage in 2020, having a profound impact on the global upstream investment environment. What does the changing sentiment towards fossil fuels mean for investors, explorers and producers? We asked our experts in petroleum economics how tax regime changes could be employed by governments under pressure to decarbonise.

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. 

OECD 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.

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. Here’s our 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 (US$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 (US$140 million).

What should upstream investors look out for in 2020?

As we’ve discussed above, carbon taxes could shift from being much talked about to actually payable, but this is most likely in OECD countries. Fiscal terms for natural gas could be modified to encourage the transition from coal for power generation. But not everyone is signed up to energy transition as the driver for government policy. Most developing countries will continue to encourage investors to explore for and monetise their oil and gas resources. The constrained investment available will drive competitive terms, and overall we expect terms for new investment to become more favourable.

Download your complimentary copy of “Petroleum fiscal systems: 5 things to look for in 2020” for our full set of predictions for the year ahead. It includes a breakdown of key fiscal issues by region. Fill in the form on this page.

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