Ratings agency warns of rising upstream credit risk
A report by credit ratings agency Moodys published September 21 warns that both independent and integrated upstream companies face "material and increasing exposure" to the low-carbon future.
Weakened demand for oil and gas is the major reason. While integrated producers have greater scale and geographic diversity, their traditional focus on the largest, most complex projects increases their exposure to transition risks, it said.
“Companies face daunting challenges in strengthening their resilience to a low carbon future, because doing so will require a capital-intensive diversification of their business to adapt to shifts in the energy system, and strategic cost management to ensure the economic viability of current and future assets,” it added.
The report also notes, however, that a third of integrated oil & gas companies have made some material investments in green technologies and are likely to make more such investments as the energy transition accelerates. Over time this may increase their resilience to carbon transition risk and differentiate them from their peers.
The agency reached its conclusions using four metrics: current business profile; policy, market and technology risk; medium-term management response; and long-term resilience. Each component is scored by assessing equally weighted, sector-specific subcomponents.
The release issued with the report did not comment on the rising difficulty of obtaining finance as some banks, such as the European Investment Bank and EBRD, are retreating from oil and gas projects. This raises the spectre of continuing lags between demand and new supply, such as today's gap in gas. Demand for fossil fuels continues strong as the world recovers from the pandemic.
Most of the European international oil companies have set out bold plans for decarbonisation with deadlines for net zero emissions from every aspect of their businesses (Scopes 1-3). At the same time they have been increasing their investments in renewable energy and some have reduced their exposure to oil and gas.
Lightsource BP announced September 20 it had received $1.8bn in financing from major banks to expand its solar portfolio. And Anglo-Dutch major Shell the same day announced it had offloaded its 175,000 barrels/day US Permian oil business to ConocoPhillips.