Putting carbon pricing plans in place could “transform upstream oil and gas economics”, says an analyst.
As it stands, there are currently only a few countries that require producers to either pay a carbon tax or participate in an emissions trading scheme (ETS).
But as governments seek to meet decarbonisation targets, that could soon change, according to analysis by Wood Mackenize. The energy researcher claims carbon charges are “likely to come”, and it believes they will transform the upstream sector, affecting both asset values and the industry’s economics.
“Governments have two options for imposing carbon charges on upstream operations,” said Graham Kellas, Wood Mackenzie senior vice president of global fiscal research. “They can either levy a carbon tax, which is where a fixed tax rate is applied to all carbon dioxide emissions, or implement an ETS.
“Under both schemes, the financial impact on specific projects can potentially be mitigated by an emissions allowance.”
Joe Biden’s green agenda making carbon pricing charges more likely for US upstream oil and gas operations
More than 60 carbon charge regimes currently exist at international, national and subnational levels, but very few affect major oil and gas producing areas at a rate above $20 per tonne, according to the analysis.
Norway is the standout country for upstream carbon charges. As well as having levied a tax on CO2 since 1991, it is a member of the EU’s ETS. The EU scheme, which the UK also participates in, is the world’s largest and most active of its type.
North America’s first carbon tax for large oil and gas producers was established by the Canadian province of Alberta in 2007. British Columbia implemented a similar tax in 2008, with the Canadian federal government introducing a levy in 2019.
Last year, the Canadian government announced its carbon tax rate would rise to the equivalent of about $135 per tonne by 2030.
In the neighbouring US, the second-highest emitting nation, Wood Mackenzie notes that President Joe Biden’s green agenda is making carbon charges for upstream operations in the country “far more likely”.
Norway’s carbon pricing plan to affect oil and gas producers
The energy researcher said the Norwegian government’s proposal to almost triple its overall carbon tax rate on upstream oil and gas operations makes a “bold statement”, considering that E&Ps operating on the Norwegian continental shelf already pay the highest carbon taxes in the world.
Norway’s new carbon plan aims to reduce emissions from sectors such as waste and agriculture, which are not already exposed to carbon taxes. But oil and gas producers will also be affected.
“The proposals would see the combined Norway CO2 tax and EU ETS price reach $262 per tonne by 2030 – nearly a three-fold increase compared to today’s price,” said Kyrah McKenzie, a member of WoodMackenzie’s upstream research team.
“The changes will increase carbon taxes to almost $2bn per annum by 2030, and would make up about $2 per barrel of operating expenses, similar to transportation tariffs. This could increase up to $10 per barrel of oil equivalent at more mature fields.”
But McKenzie said Norway’s high tax rates, against which carbon taxes are deductible, would help “offset the rise”, while the country’s low-carbon intensity also “reduces exposure”.
“As a result, the implications for asset and company value are minimal,” she added. “We believe asset valuations would fall by about 1% ($1.4bn), though company value could fall by up to 5% for those with more mature, high-carbon portfolios.”
While cessation of production may be brought forward at some Norwegian fields, the impact on recovery is limited. WoodMackenzie’s research indicates that less than 50 million barrels of oil equivalent would be left in the ground.
“Our analysis shows that the fiscal treatment of carbon taxes is arguably more important than pricing,” said McKenzie. “A $262 per tonne carbon price in other parts of the world would have more serious implications.”
Producers have already been including carbon pricing assumptions in their financial models
Kellas noted that producers have been including carbon pricing assumptions – usually between $40 and $100 per tonne – in their financial models for some time.
He said that at $40 per tonne, most asset values are “relatively insensitive” to the carbon charge, although he believes even that rate could “wipe out the remaining value of some assets”.
But at $200 per tonne – a lower rate than Norway is proposing for 2030 – a third of all assets would have at least 50% of their remaining value transferred in carbon charges, added Kellas.
“These figures assume all emissions are subject to any carbon charge,” said the analyst. “Actual exposure will be lower, depending on each government’s willingness to offer emissions allowances in the form of free emissions credits.
“This is the most important measure governments can use to modify carbon charges, thereby safeguarding asset values and lessening the impact on investment in the sector.”
The other principal instrument to soften the impact of carbon charges is the ability to offset these against other payments to governments.
“While mitigating the impact of carbon charges is possible, it will be complicated to achieve in many jurisdictions,” said Kellas.
“Countries with fiscal regimes including royalty, which is levied on gross revenue and does not allow deduction of operating costs, will be at a disadvantage relative to those with tax-centric systems. And, for upstream operations governed by production sharing contracts, mitigation will be even more complex.”
