Energy producers face growing climate pressure: S&P
Problems are intensifying for the energy industry after a climate strike hit three of the nation’s biggest oil and gas producers.
Oil and gas producers face stricter regulations from climate pressure and higher risks of stranded assets and significant asset writedowns, ratings agency S&P has warned.
Problems are intensifying for the energy industry after a climate strike shook the global energy industry, hitting three international giants who are among the nation’s biggest oil and gas producers.
“These events regarding climate change underscores what has become a global concern among sovereign nations and investors and could serve as a wakeup call for an industry that is perceived by many to be slow to adjust to climate change and emission mandates,” said Standard & Poor’s analyst Thomas Watters.
“In our opinion, stricter regulations, substitution, and secular shifts in industry supply and demand fundamentals will contribute to a more difficult operating environment for fossil fuel producers and will likely augment the risk of stranded assets and significant asset writedowns.”
The ratings agency said companies face risks to their credit profiles.
“We expect to see sustained pressure on oil and gas producers’ core cash engines from many stakeholders, including shareholders and courts. Uncertainties about rates of change in demand and the energy industry as a whole, present some of the most significant challenges for companies and their credit profiles.”
Shell, owner of major Queensland and West Australian LNG projects, was found by a Dutch court partially responsible for climate change and ordered to sharply cut carbon emissions. Exxon, operator of the huge Bass Strait gas fields, reeled as a tiny activist hedge fund won two board seats after shareholders backed its call for management to accelerate efforts to combat global warming.
Chevron, which runs the giant Gorgon and Wheatstone LNG plants in Western Australia, was also hit with a vote to cut emissions released by its customers, known as Scope 3.
The climate push adds to a volatile landscape for Australian producers, with last year’s oil price plunge resulting in an industry-wide $25bn writedown hit from companies spanning Shell through to Woodside Petroleum, Oil Search and Origin Energy.
S&P Global Ratings hiked the risk assessment for the energy exploration and production industry in January to moderately high from intermediate and the midstream sector to intermediate from low risk.
“The transition and the timing of peak hydrocarbon demand in our view, has and will continue to accelerate due to COVID-19 and the growing adoption of ESG investment mandates amongst global investors and financial institutions. We also cited that the risk of disinvestment and capital market access may become more challenging and costly for hydrocarbon producers,” Mr Watters said.
“The events also raise the spectre that oil and gas companies could possibly be held legally responsible for their role in climate change while executives who choose to ignore climate change or don‘t act quick enough, could stand to lose their positions.”
European companies including Shell and Total are channelling more investment into green projects and generation in a bid to lower emissions and meet expected demand within the electricity sector.
However, S&P said their moves may not hand them a materially stronger credit profile.
“Several large integrated oil and gas companies based in Europe have made strategic decisions to alter their business models to become more of an energy company rather than just an oil and gas company recognising the threat posed by climate change and renewable energy. However, at this juncture we don‘t see these strategies as providing material credit differentiation,” S&P said.
Australian corporates are increasingly under pressure on climate change as institutional investors such as Climate Action 100+, backed by Australian superannuation funds, use their power to hold companies to account while Blackrock has signalled urgent action and a vow to back proposals from green activists.
Australian producers face a reckoning after the push for greater action on climate and a landmark International Energy Agency report that found no oil or gas fields should be opened up if the world is to reach net-zero emissions by 2050, the Australasian Centre for Corporate Responsibility said.
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