Governments in leading oil-producing nations suffered an unprecedented decline in revenues in 2020 and are unlikely to see a repeat of their past riches due to the accelerating pace of energy transition, according to a report by Norwegian research house Rystad Energy.

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The report found that global government income from oil and gas taxation fell to a low of around $560 billion as production and prices shrank in 2020.

The 2020 figure was calculated at barely half of pre-Covid-19 levels, when oil and gas taxes usually exceeded the $1 trillion mark.

Former glories

“Petrostates will miss these former glories... as the accelerating energy transition will cause this source of state income to shrink and never again exceed or meet $1 trillion,” Rystad warned.

With oil prices currently riding high — Brent futures were above $71 per barrel late on Thursday — the Oslo-based consultancy forecast that 2021 will be the last year that global oil and gas taxes will approach the $1 trillion mark, probably reaching about $975 billion.

“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,” the report predicted.

Economic diversification needed

Rystad suggested that many countries that remain dependent on tax revenues from the upstream industry may be left with no other option other than to diversify their economies in order 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," said Espen Erlingsen, head of upstream research at Rystad Energy.

“Structural changes will be crucial to stabilise petroleum-reliant economies and avoid geopolitical instability as the global energy systems shift onto a sustainable pathway."

Taking Saudi Arabia as an example, Rystad showed that about half of government take is at risk through 2050. Tax income from oil and gas made up 27% of the country’s gross domestic product (GDP) in 2019, Rystad calculates.

Meanwhile, Algeria, Iraq, Kuwait and Libya 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,” the report states.

On the other hand, Rystad suggested that, even with significant reductions in production due to the energy transition, some new developments and even some new discoveries will be required to meet demand.

“Investment in upstream projects is therefore still needed, even in the most aggressive energy transition scenario considered in this report,” the report concluded.