As governments are looking to put a price on carbon or raise current carbon taxes, the oil and gas industry globally is bracing for the impact of those levies on the economies of upstream projects.
The oil industry itself, for the most part, supports carbon pricing as one of the most efficient ways to reduce emissions and fight climate change—the two main drags on the oil sector since the energy transition push became mainstream.
Carbon pricing is a tangible way for governments to “make polluters pay,” and the net-zero commitments of major economies suggest that putting a price on carbon could become increasingly popular in coming years, including in countries with vast oil and gas reserves such as the United States.
Carbon pricing could come either in the form of a fixed carbon tax rate or an emissions trading scheme (ETS) in which producers with higher emissions could potentially buy “more carbon emissions” from producers emitting less.
This, in turn, would affect the economics of oil and gas exploration and production projects, as well as the value of the assets, Wood Mackenzie says.
Oil and gas producers will not be caught off guard, however: they have been modeling carbon pricing in projects and financial assumptions for some time, and they are also advocating for carbon pricing. The promoters of carbon pricing include Europe’s biggest oil firms, as well as the largest oil lobby in the United States, the American Petroleum Institute (API), which has just conditionally endorsed the idea of carbon pricing.
Carbon Price Impact On Projects And Assets
Currently, there are more than 60 carbon levy regulations at various international, national, and regional levels. Yet, the existing rules impact very few major oil and gas producing areas at a rate above US$20 per ton, according to Graham Kellas, Wood Mackenzie’s Senior Vice President, Global Fiscal Research.
The industry has already been including assumptions of carbon pricing in their financial models for some time, with most calculating carbon taxes of between US$40 and US$100 per ton.
As per WoodMac’s estimates, most asset values will not be affected by carbon pricing if that levy is at US$40/ton. However, if the rate is as high as US$200 per ton, a third of all assets would have at least 50 percent of their remaining value of assets reduced.
The carbon pricing itself will be an important assumption in future asset values and project economics, but the actual tax treatment of carbon taxes in various legislations could be even more important, as it could mitigate the impact of a carbon tax on financials.
“Our analysis shows that the fiscal treatment of carbon taxes is arguably more important than pricing,” said Kyrah McKenzie from WoodMac’s upstream research team.
There Can’t Be Universal Carbon Pricing
Norway’s proposed tripling of the carbon tax—in which the carbon price would be higher than $250 per ton in 2030—could have less serious implications in Norway than if such a price is levied in other parts of the world, according to McKenzie. That’s because Norway has other tax legislation in place that would offset the impact. This includes high tax rates against which carbon taxes are deductible, as well as low carbon intensity, which also reduces producers’ exposure.
It is evident that carbon pricing is not a “one-size-fits-all” solution to making industries that pollute pay. Various countries have different tax regimes and different ways of collecting revenues from oil produced on their land or in their waters.
“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,” WoodMac’s Kellas said.
Oil & Gas Industry Supports Carbon Pricing
The oil and gas industry is endorsing carbon pricing, with some European supermajors such as BP and Shell advocating for such measures for years, while others, such as the API, only recently supported the idea.
Last month, the API endorsed carbon pricing. However, the API wants it to be economy-wide and non-duplicative with other greenhouse gas regulations.
BP also supports carbon pricing because, it says, it is needed, fair, efficient, and increasingly global.
According to BP’s chairman Helge Lund, carbon pricing “targets the root of the problem – carbon emissions – and harnesses the power of the market to create change. It gives companies financial incentives to invest in the energy transition – allocating capital, driving innovation, and scaling technology.”
Equinor, which applies an internal carbon price of at least US$55 per ton of CO2 in its investment analysis, says it works with governments and other organizations to support carbon pricing and complementary climate and energy policies.
Most of the world’s biggest oil and gas companies now support putting a price on carbon as an incentive for polluters to reduce emissions. Most of those firms have come to the carbon-price debate well-prepared: they apply assumptions of carbon costs in their investment analysis and portfolios.
Whenever more oil and gas-producing nations—including the United States—decide to levy carbon taxes or emissions trading systems, the industry will already have an idea which projects and assets would or wouldn’t work at certain tax rate levels. Carbon pricing, albeit an imperfect way to tax carbon emitters, could give the oil and gas industry regulatory certainty, one of the key factors for making investment decisions.