Monday, March 27, 2023

Heavy windfall taxes could make oil business financially unsustainable – Rystad Energy

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Windfall taxes have been introduced in some nations as a knee-jerk reaction to the global energy crisis to help ease the pockets of consumers paying the highest prices in decades for electricity, gasoline, and travel.

Country’s such as Canada and the United Kingdom have gone this route. However, Norway-based Rystad Energy believes this approach would only hurt the oil industry in the end.

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The energy research and business intelligence company said the proposal of windfall taxes on oil and gas stand on two main bases; that the high oil prices due to the war in Ukraine give the impression that companies are profiting from a catastrophe and that since the world is moving away from fossil fuel, the windfall tax would not discourage future investment.

So, it is easy to see why nations jump at the opportunity to further accelerate the transition to renewables and, at the same time, redistribute income to the people most affected by the war and the disruption.

Before such steps are taken, Rystad Energy said the situation must be analysed as “rationally as possible”.

“If heavy windfall taxes were to be levied on oil and gas firms now, their business could quickly become financially unsustainable,” Rystad Energy pointed out. “This would probably be to the joy of some environmental activists. Yet, it is prudent to always be careful of what you are wishing for. In the current global primary energy mix, half of the primary sources come from oil and gas. If this sector were to become financially unattractive, we would most likely undergo a deep energy crisis.”

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With renewables and nuclear sources needing years to be developed, a sudden drop in oil and gas supply would end up decreasing the total supply of energy. And this would have highly damaging effects on the global economy and end up hurting the most vulnerable people in the world, Rystad Energy said.

The company believes governments should allow the high profits to be redeployed into energy projects and leave it to the market to efficiently allocate the resources between oil and gas projects and renewable ones.

“Because governments are unlikely to generate more efficient allocations, and windfall taxes on oil and gas would only increase uncertainty in an already highly uncertain sector,” Rystad Energy outlined.

Over in Guyana, the government has made its position clear; a windfall tax cannot be implemented given the fiscal regime governing the contract the country has with the lone group of companies producing oil offshore.

Guyana is bound by the provisions of the 2016 Production Sharing Agreement (PSA) with ExxonMobil Guyana, Hess and CNOOC, which clearly preserves the economics of their projects at the Stabroek Block, by virtue of a stabilisation clause.

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