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. Related: U.S. Oil Production Is About To Climb
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.