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Global petrostates can forget trillion-dollar oil and gas tax revenues as energy transition bites

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,“ says Espen Erlingsen, head of upstream research at Rystad Energy.

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, Erlingsen adds.

Using Saudi Arabia as an example, we see that 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.

Source: Rystad Energy