Covid-19 has cut $285 million in planned global oil and gas investment, says Rystad

 The negative impact of the Covid-19 pandemic on upstream investments in the first two years is estimated at $285 billion while global government income from oil and gas taxation has nearly halved over the past year to $560 million, according to research from Rystad Energy. 

In February 2020, before Covid- 19 started impacting the global energy system, Rystad Energy estimated global upstream investments for the year would end up at around $530 billion, almost at the same level as in 2019. 

However, as the Covid-19 pandemic triggered a collapse in oil prices during the early part of the second quarter last year, E&P companies slashed investment budgets to protect cash flow. This spending trend was not reversed in 2021, when prices rose. Compared to pre-pandemic estimates for 2020 and 2021, spending fell by around $145 billion last year and will end up losing $140 billion by the end of this year. 

Covid-19 has effectively removed 27% of planned investments confirming the worst fears of seismic companies who will need to permanently reset their strategies as a result of less investment in seismic surveys from big energy companies. 

Upstream spending was limited to $382 billion in 2020 and is forecast to marginally grow to $390 billion this year. And though spending will start to grow from 2022 – it will not return to the pre-pandemic level of $530 billion. Growth will be limited and investments will only inch up annually, rising to just over $480 billion in 2025, when the Rystad report’s forecast ends. 

Between 2020 and 2021, shale/tight oil investments are the ones most affected, losing $96 billion of the previously expected spending, or 39% for the sector. Exploration spending is expected to drop by $19 billion, or 22%, compared to what was previously forecast. Greenfield investment in new conventional projects will suffer a $78 billion loss, or 28%, while brownfield investment in existing projects will fall by $92 billion, or 20%. 

‘Since shale/tight oil is both the segment with the highest decline in activity and the supply source in greatest need of continuous reinvestment to keep production growing, the immediate impact on output from this sector has been significant,’ said Espen Erlingsen, head of upstream research at Rystad Energy. 

Meanwhile, Rystad research has also shown that the global government income from oil and gas taxation fell to a multi-year low in 2020 of around $560 billion, as production and prices shrunk. Before Covid-19, oil and gas taxes usually exceeded the trillion-dollar mark, but with the energy transition accelerating this source of state income will never again exceed or meet $1 trillion. 

This year global oil and gas taxes will approach the trillion-dollar mark, reaching about $975 billion according to Rystad Energy estimates, assisted by high oil prices. 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. 

Structural changes will be crucial to stabilize petroleum-reliant economies and avoid geopolitical instability, added Rystad. ‘Using Saudi Arabia as an example, we see that about half of the government take is at risk towards 2050, while total tax income from oil and gas made up 27% of the country’s gross domestic product (GDP) in 2019.’ 

Algeria, Iraq, Kuwait and Libya – all of which are heavily dependent on tax revenue from the upstream industry – 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. 

Overall, Rystad modelling shows that petrostates will lose a cumulative $4.8 trillion in taxes until 2050.