Key Takeaways
- As fossil fuel producers, oil and gas companies are among the most exposed to the energy transition. Oil and gas prices and refining margins are extremely sensitive to medium- and long-term demand expectations.
- Over the next decade, we believe average oil demand will continue to grow. Industry projections from diverse sources typically foresee a decline in demand post-2035 (see chart 1). Unlike coal, prolonged supply-demand imbalances are mitigated by the significant natural decline of oil fields (3%-6% per year).
- Current long-term industry projections still show fossil-based fuels account for the lion's share of global primary energy demand, supported by its vital role in the global economy and mobility. That said, the speed of the transition away from carbon-based fuels is uncertain but is beginning to accelerate. Disruptive external factors such as government environmental policies and regulations on greenhouse gases, and long-term product substitution risks (e.g. vehicle electrification) could weigh on credit quality.
- Pollution is another environmental risk factor, including risks related to the use of chemicals (especially in fracking), as well as high-impact, low probability events such as severe oil spills and refinery accidents. Subsectors with higher exposures to such risks are oil sands, shale, and offshore.
- We also see social risks as above-average for the oil and gas industry, relating to safety and community impacts. A rising medium-term social concern for oil companies stems from stigmatization and reputational risk.
- The oilfield services (OFS) and drilling subsectors have comparable exposure to ESG factors since they are part of oil and gas production and indirectly exposed to prices. OFS companies have to comply with significant international and domestic environmental regulations. While ultimate responsibility for control, safety, behavior, and incidents in a licensed area typically lies with the producer, operational or product shortcomings, as well as potential safety breaches, can cause OFS companies to incur liabilities.
Analytic Approach
Environmental, social, and governance (ESG) risks and opportunities can affect an entity's capacity to meet its financial commitments in many ways. S&P Global Ratings incorporates these considerations into its ratings methodology and analytics, which enables analysts to factor in short-, medium-, and long-term impacts--both qualitative and quantitative--to multiple steps of their credit analysis. Strong ESG credentials do not necessarily indicate strong creditworthiness (see "The Role Of Environmental, Social, And Governance Credit Factors In Our Ratings Analysis," published Sept. 12, 2019).
Our ESG report cards qualitatively explore the relative exposures (average, below, above average) of sectors to environmental and social credit factors over the short, medium, and long term. For environmental exposures, chart 1 shows a more granular listing of key sectors and (in some cases) subsectors reflecting the qualitative views of our analytical rating teams. This sector comparison is not an input to our credit ratings and not a component of our credit rating methodologies; it is based on our current qualitative, forward-looking opinion of credit risks across sectors.
In addition to our sector views, this report card lists ESG insights for individual companies, including how and why ESG factors may have had a more positive or negative influence on an entity's credit quality compared to sector peers or the broader sector. These comparative views of environmental and social risks are qualitative and established by analysts during industry portfolio discussions, with the goal of providing more insight and transparency.
Environmental risks we considered include greenhouse gas (GHG) emissions, including carbon dioxide, pollution, and waste, water and land usage, and natural conditions (physical climate, including extreme and changing weather conditions, though these tend to be more geographic/entity-specific than a sector feature). Social risks include human capital management, safety management, community impacts, and consumer-related impacts from customer service and changing behavior to the extent influenced by environmental, health, human rights, and privacy (but excluding changes resulting from broader demographic, technological, or other disruptive industry trends). Our views on governance are directly embedded in our rating methodology as part of the management and governance assessment score.
Chart 1
The list of entities covered in this report is not exhaustive. We may provide additional ESG insights in individual company analyses throughout the year as they change or develop, with companies expected to increasingly focus on ESG in their communication and strategy updates.
Chart 2
Exploration And Production
Environmental exposure
We see environmental risks for the exploration and production (E&P) industry as well above average, stemming from two types of risks. The first stems from inherent material exposure to greenhouse gas emissions. The second type concerns lower probability but potentially high-impact risks for individual companies from pollution because of well head and transport spills and leaks, and increasingly water use and contamination risks. The most significant risk is the pace of the energy transition away from carbon-based fuels; this could result in stronger deviations from the industry demand forecasts outlined below. It will likely be strongly influenced by long-term government policies for renewable energy, as well as the pace of electric vehicle penetration growth. Risk of secular change and substitution by products, services, and technologies is also a risk embedded in our key credit factors for oil and gas companies.
The combustion of carbon-based fuels, specifically oil-derived products and natural gas, results in carbon dioxide. Natural gas, largely methane, is another greenhouse gas itself (when released) and has 25 or so times the impact of carbon dioxide. Production activities can also be a direct source of greenhouse gases, through methane leaks, gas flaring or extraction methods.
Oil production (and prices) are more exposed over the longer term. According to many market projections, over the next two decades we will likely reach a point known as peak oil, in which aggregate demand for oil will peak and then start to decline. However, demand will likely continue to increase significantly before then. This change would also affect demand for OFS, result in stranded reserves, and likely weigh on prices, depending on the extent and timing of supply corrections, including the typical onshore conventional oilfield decline rate of 3%-6% per year. These risks could also affect the sector by limiting funding availability. Funding constraints for banks and other investors are more common for coal producers, but may well increasingly affect other fossil fuel producers and the sector as a whole.
Also, the risk of pollution is material for companies producing and transporting hydrocarbons and may result in material financial and reputational damage. While infrequent and unpredictable, the occurrence of disasters with the magnitude of the Deepwater Horizon oil spill in the Macondo Prospect can severely affect issuer credit quality due to the significant liabilities incurred from environmental remediation, government fines, and lawsuits from affected industries and consumers. Such liabilities totaled over $60 billion in the case of Macondo. Oil tanker spills, even if vessels aren't operated by an oil company itself, can be a source of material litigation. Finally, the increased frequency of extreme weather events (such as hurricanes) create greater operational risk.
The environmental impact of plastic waste is another topic of consumer focus. Such plastics are largely derived from petrochemicals, which altogether account for about 14% of crude oil demand. Nonetheless, depending on how plastics are used in construction, their carbon content is effectively sequestered. Water use and the risk of contamination of land and aquifers is particularly relevant for shale oil and gas producers as a result of hydraulic fracturing activities. Many countries have stringent development, operating, and decommissioning requirements and potential penalties for companies that extract hydrocarbons. These regulations vary by country and state; for example, Colorado has stricter requirements than other U.S. states. Moreover, many E&P companies, such as those operating in the Gulf of Mexico and North Sea, incur significant asset retirement (decommissioning) obligations that we include as debt in our credit ratios.
Although a fossil fuel, we consider natural gas to be somewhat less exposed to environmental risk. This is because, when burnt for power generation, gas is significantly less polluting than coal. Hence, gas may be seen as a vital bridge fuel in the energy transition to systemic decarbonization, notably in the U.S. given its ample shale reserves. This could support demand growth over the next two decades. However, significant growth in gas would not be in line with a 2-degree Celsius scenario, making the gas industry exposed to more renewables policies over time. Comparing between gas producers and value chains, we note the higher total emissions arising from the liquefaction and delivery of liquefied natural gas (LNG) versus piped gas.
Social exposure
We see social risks in the oil and gas sector equally as above average based on its exposure to safety management, social cohesion, and ultimately consumer behavior risks, which may lead to substitution of products. Per our key credit factors criteria, these factors that can influence producers' profitability, as well as substitution risks ultimately driven by consumer choices. Safety management is a key risk given drilling activities and sometimes harsh environmental conditions, especially offshore. Companies in the sector typically track and manage incidents and have specific programs to educate workforces. The costs to ensure adequate safety and compliance with local regulations can be material, for example, in instances where crew time offshore is limited.
Social cohesion is another key risk, specifically in terms of licenses to operate, given land use and disruptions that drilling and production sites can typically create for local communities. Access to markets can also be contentious, as shown by the Trans Mountain and Keystone XL pipelines in North America. Relationships with communities and governments are important in that a lack of shared benefits could create opposition. This can delay or raise costs for companies' reserve developments or even render them unviable, constraining growth and returns on capital. Our competitive position assessments capture both these qualitative aspects in competitive advantage and quantitative measures such as cash and full-cycle costs in operating efficiency.
Long-term consumer behavior will likely be increasingly influential in the energy transition away from carbon fuels and in reduced use of disposable plastics or those that are uneconomical to recycle. Low-carbon transport is exemplified by the adoption of electric cars, though this won't likely affect oil demand in the next decade. Current long-term industry projections (see chart 1) still show fossil-based fuels account for the lion's share (75% of more) of global primary energy demand in 2035 (potentially 30% for oil, 25% for gas), but substitution risk is real and could become more material in our view, depending on future federal policies and competition from batteries and renewable energy. Ultimately, the sustainability of oil and gas companies' business models depends on factors including the balance of supply and demand, and the all-in costs and funding to continue producing and delivering oil and gas to users.
Governance
While governance is best measured at the company level, we believe the E&P sector has above-average exposure. This results from the strong compliance and oversight needed because of the sensitivities around bidding for and corruption relating to natural resources, particularly in emerging markets. Government ownership can exacerbate the sector's lack of transparency. Furthermore, the high severity of safety incidents also means board oversight and understanding of risk management and company culture have high importance.
Refining And Marketing
Environmental exposure
We consider environmental risks in the refining and marketing sector as well above average because the refining process itself is an important source of carbon dioxide emissions and produces carbon-based fuels and products, demand for which will be influenced by the energy transition. The sector has material exposure to regulations on greenhouse gas emissions and carbon taxes, as well as to pollution, transport spills, and contamination risks. Exposure to physical climate change and severe weather is particularly relevant for U.S. Gulf Coast refiners.
The risk of pollution and accidents is significant for companies refining and distributing hydrocarbons and may result in material financial and reputational damage. The risk of land contamination during operations and the cost of clean-up before property can be turned over for alternative use are also significant, especially at refineries. Therefore, asset retirement obligations that we include in adjusted debt can be material. Hydrocarbon fuels are flammable and frequently produced near and distributed through populated areas. Therefore, most countries have stringent operating and safety requirements for refiners and marketers of oil products. The costs of remaining compliant with these requirements can be material and may be one differentiator between companies' competitive positions and profitability in different countries and regions.
Social exposure
Social risks in the refining and marketing sector are above average and weighted toward exposure to safety, social, and, ultimately, consumer behavior. Safety management is critical and generally routine given that oil products are combustible and pollutants. With the large scale of some refinery complexes, accidents can be major events involving fatalities. Companies in the sector typically track and manage incidents and have specific programs to educate workforces. The severity of incidents was demonstrated by the March 2005 catastrophic fire and explosions at BP PLC's America Refinery in Texas City during the restarting of a hydrocarbon isomerization unit. Fifteen workers were killed and 180 others were injured. At the PDVSA Amuay plant in August 2012, an explosion killed 47 after a gas leak and operations were severely affected. We view other accidents, which are typically less severe, as weighing on refiners' operating efficiency: Refiners with a history of accidents or poor safety records tend to have weaker business risk assessments than peers.
We believe consumer behavior will likely be increasingly influential in the energy transition away from carbon fuels. Longer-term risk could stem from supply-demand imbalances, which could be prolonged and heavily weigh on refining margins. This is particularly important given refineries are long-term fixed assets. In addition, environmental factors may directly influence shifts in product mix and volumes, as seen with the International Maritime Organisation's mandated reductions in the sulphur content of bunker fuel, or IMO 2020. This involves some significant investment requirements for refineries in terms of upgrading or changing refinery set-ups, although it may also create opportunities to capture premium margins.
As concerns about global warming grow, fuel retailers, as the local face of the oil industry, might face more protests and disruptions. Poor management of social and particularly safety factors typically leads to reputational issues, with differing impacts on companies and their creditworthiness.
OFS And Drilling
For decades, oil and gas producers have outsourced most of the activities associated with the lifecycle of oil or gas fields to OFS companies. We believe these companies, which provide drilling and construction and supply services, have similar above-average exposure to many of the same environment and social risks and requirements as oil and gas producers. OFS revenues and profit margins are generally strongly influenced by prevailing and expected supply and demand balances and oil and gas prices. Ultimate responsibility for control, safety, behavior, and incidents in a licensed area typically lies with the operator (the producer). However, operational or product shortcomings, as well as safety breaches, can create significant liabilities, such as for Transocean Ltd. after Macondo, and reputational damage. Strong safety cultures and safety records are a credit strength. Similarly, experienced crews on proven offshore rigs and drillships are often preferred to cheaper, untested providers. Leading operators, such as the supermajors and many national oil companies, will typically have stringent qualifying requirements, in part to manage reputational risks. We can assess positively the competitive positions of those service or drilling companies that routinely meet these conditions.
Finding, training, and retaining employees of a sufficient caliber at the right time can be problematic. In this context, so-called local content requirements for fields and contracts in some countries can have unintended consequences and present risks to performance, safety, and profitability. For example, some of the recent problems in the Brazilian vessel supply and offshore industry can be attributed to local content requirements in the context of the rapid, huge developments of pre-salt reserves. These challenges also highlighted risks relating to procurement and tendering. Tendering can expose companies to significant risks, including bribery, especially for high value contracts.
ESG Risks In Oil And Gas
Europe, Middle East, And Africa E&P And Integrated
Table 1
| Company/Rating/Comments | Analyst | |
|---|---|---|
| Aker BP ASA(BBB-/Stable/--) | ||
| We view AKER BP as less favorably positioned than global peers in terms of environmental exposure, due to 100% pure play offshore oil and gas production on the Norwegian continental shelf. This leaves the company more vulnerable to the risks of spills, partly mitigated by the absence of exposure to deep and ultra-deep water production, and the strict environmental regime in Norway. Furthermore, the risk appears well managed, as it has avoided any material event in the past decade. In addition, AKER BP's carbon dioxide emissions rate per barrel is well below the industry average, which over time could benefit it in the context of carbon dioxide taxation. | Edouard Okasmaa | |
| BP PLC(A-/Positive/A-2) | ||
| We believe BP is more exposed to environmental risks compared to the broader industry. The Macondo incident in the Gulf of Mexico, even if 10 years ago, has demonstrated how big financial losses can be in the event of an oil spill. We believe this incident was a wake-up call for BP and the entire industry. While we believe that management has improved safety and current safety statistics are in line with peers, the consequences of any material environmental incident for BP (notably in the U.S.) would still be worse than for its peers in our view. BP is one of the leaders in the global energy transition and is committed to reducing carbon emissions in line with the Paris Climate Agreement. BP's portfolio enjoys a higher share of natural gas than most of the other majors. BP is also investing in renewables, similar to its peers, but so far these investments have not exceeded 5% of total capital spending. | Simon Redmond | |
| Eni SpA(A-/Stable/A-2) | ||
| We view ENI's exposure to environmental risks as similar to the broader oil and gas industry, even if it aims to increase its share of natural gas production to 60% and management is committed to have a net zero carbon footprint for direct emissions of equity upstream activities by 2030 (scope 1), also offsetting through forestry projects. In coherence with this, by 2025 Eni aims to eliminate gas process flaring and reduce fugitive methane emissions by 80% versus 2014. Downstream, the company has transformed two of its loss-making refineries into biofuel refineries, improving profitability and the company's impact on the environment. Eni remains engaged in clean-up and restitution initiatives in relation to chemical plants and other activities in Italy and elsewhere. The company's decarbonization strategy includes €3 billion (9% of group 2019-2022 capex), with €950 million allocated for circular economy projects and €1.4 billion for renewable projects, for a total installed capacity of 1.6 gigawatts by 2022. We assess Eni's management and governance as satisfactory. A key area of risk for Eni, with large operations in Africa, relates to strong policies and oversight on bribery and other illegal activities. Eni provides extensive details on its Anti-Corruption Compliance Programme and was the first Italian company to receive the ISO 37001:2016 "Anti-Bribery Systems" certification. Recently allegations were made by the Nigerian government that bribes were made by or on behalf of Eni. While the company denies any illegal activity, this highlights the risk of operating in certain countries. Overall, we take into account Eni's longstanding operations in Africa, and former legal cases, for example in Algeria, where Eni was acquitted. | Edouard Okasmaa | |
| EnQuest PLC(B-/Positive/--) | ||
| We see environmental risk for Enquest as relatively higher than peers in the E&P sector given its mainly oil operations in the offshore North Sea, concentrated in the Kraken and Magnus fields, which accounted for more than half of production in the first half of 2019. In our view, production activities in that area bear high operational risk, which, if an oil spill occurred, would result in high environmental and reputational damage. The key mitigating factor stems from the company's good track record, with improving incident rates that are in line with its peers in the sector. | Ivan Tiutiunnikov | |
| Equinor ASA(AA-/Stable/A-1+) | ||
| We think Equinor is more exposed to environmental risks because of its higher share of offshore operations, which would be more severely affected by a low-probability spill. However, Equinor's track record in offshore is very robust since it has avoided any major oil spills over the past 10 years. Equinor's injury frequency is slightly higher than peers', which also reflects a higher share of offshore operations, where the injury rate is naturally higher because the process is more technically challenging. Otherwise, Equinor is one of the leading companies globally in the energy transition. Equinor accepted multiple initiatives under its climate roadmap to reduce its environmental footprint by turning to a low-carbon oil and gas portfolio and building a strong position in renewables. Equinor aims to reduce annual carbon dioxide emissions by 3 million tons by 2030. One of the ways to achieve this is by eliminating flaring in its operations to zero by 2030. The company's decarbonization strategy also includes significant investments in new energy, constituting around 15%-20% of annual capital expenditures (capex) by 2030. Equinor has already built a notable presence in wind energy and is continuing to do so with its Empire Wind and Dogger Bank projects. | Alexander Griaznov | |
| Equinor US Holdings Inc.(A/Stable/A-1) | ||
| Equinor US Holdings is more exposed to environmental risks than its peers, primarily due to its offshore operations in the Gulf of Mexico, which have higher sensitivity to environmental damage in case of oil spills (including significant cleanup costs and legal obligations). That said, Equinor US has policies and procedures to minimize such risks. In addition, similar to its parent, the company is looking at ways to diversify its operations into renewables, in particular wind energy in the U.S. (although material contributions may only be visible in the long term). | Ivan Tiutiunnikov | |
| Gazprom PJSC(BBB/Stable/A-2) | ||
| Gazprom's exposure to environmental and social factors is comparable to that of broader oil and gas industry. With 90% of Gazprom's production being gas, Gazprom ranks below most oil majors on carbon emissions, and has publicly communicated targets to reduce greenhouse gas emissions. At the same time, methane leaks have a powerful greenhouse gas effect. EU policies aimed at increasing the share of intermittent renewable generation could negatively affect Gazprom's pipeline exports to Europe, most likely over the long term. In our view, how long gas will remain a bridge fuel to the low-carbon future will depend on the development of new energy storage technologies and EU mandates. On the other hand, China's focus on transitioning from coal to cleaner gas fuel creates future export opportunities for Gazprom, subject to multibillion dollar investments. Social considerations are both positive and negative credit factors for Gazprom. Gazprom's social mandates in Russia weigh negatively on our business risk assessment, given strongly subsidized local gas pricing and reduced flexibility to curb spending. However, they also create incentives for the Russian government to protect and support the company and factor in positively when assessing its role and link with the Russian government. | Elena Anankina | |
| Ithaca Energy Ltd.(B+/Stable/--) | ||
| We view Ithaca's environmental risk exposure as higher than peers in the industry, reflecting its concentrated exposure to two main operating fields in the North Sea after acquiring assets from Chevron. This poses a risk of low probability, high-impact events related to oil spills and contamination, especially because we consider operations in the North Sea being high risk. We reflect this in our weak business risk profile assessment, though the company has no history of material environmental issues. The company also has a robust health and safety track record, with low and declining injury rates over the past few years. We understand that its previous owner, Chevron, did not experience material health and safety issues at the North Sea assets in the past. | Ivan Tiutiunnikov | |
| Neptune Energy Group Midco Ltd.(BB-/Positive/--) | ||
| We view Neptune as having higher environmental exposure than peers, reflecting its high share of offshore production, notably in the North Sea, where regulation is more stringent and risks related to harsh weather conditions are also important. This leaves the company more vulnerable to potential spills and other events that could materially impact its financial performance. This risk appears well managed by the company, which has avoided any material events in the past and has a well-below-industry-average carbon dioxide emissions rate per barrel. | Ivan Tiutiunnikov | |
| Repsol S.A.(BBB/Positive/A-2) | ||
| We believe Repsol's exposure to ESG risks is overall comparable to its global peers, even though it is ahead of many industry players in integrating energy transition in its strategy and has a higher share of upstream gas production (about 63%). In relative terms the company has allocated more of its capital spending in 2018-2020 (including acquisitions) to renewables and low-carbon businesses (renewables and low-carbon electricity generation, wholesale gas, and retail gas and power) than peers. Repsol is committed to achieve 7.5 GW of low-carbon electricity generation capacity by 2025. Repsol's safety record has improved since 2013 (its total recordable incident rate has decreased to 1.59 from 2.95 since then), but despite being satisfactory compared to the overall industry, it remains higher than close peers such as Total S.A. or Royal Dutch Shell. | Christophe Boulier | |
| Rosneft Oil Co. PJSC(BBB-/Stable/--) | ||
| We view Rosneft's exposure to environmental and social risks as similar to the broader oil and gas industry. While the incidence of oil spills in its Russian operations has been high, the fines have been financially modest and we believe that Rosneft's status as a national oil company limits its potential exposure. Also, in 2018, the number of reported incidents dropped by 45%, representing a 9% reduction in terms of the amount of oil spilt. The company's refineries are being upgraded, but many still produce EURO-5 standard fuels, which have higher emissions of particulates and nitrogen oxides. It was the first in Russia to produce and sell EURO-6 gasoline, which is currently marketed in Moscow and 578 stations elsewhere. We assess Rosneft's management and governance as satisfactory. Rosneft is a public joint-stock company, with a relatively autonomous management team, and most board members represent not only the Russian government, but also BP. Nonetheless, Rosneft is the state's principal vehicle for implementing oil policy. Rosneft's reporting under IFRS compares well with peers in terms of timeliness and detail. | Simon Redmond | |
| Royal Dutch Shell PLC(AA-/Stable/A-1+) | ||
| We believe that Shell's exposure to environmental and social risks is comparable to that of the broader industry, even if we view management's strategy as more focused on the energy transition. Unlike most peers, Shell targets greenhouse gas reductions from its energy products sold, including customers' emissions (scope 3) by 50% by 2050 and around 20% by 2035. In addition, Shell has linked nearer-term net carbon footprint targets to executive remuneration. Shell has a high share of gas and liquefied natural gas (LNG), which is relatively positive from an environmental perspective. To enable this transition, Shell aims to shift its portfolio to natural gas and biofuels, developing new energy sources development, and expanding electric mobility. The planned investment of $1 billion-$2 billion a year until 2020 in its New Energies division is still moderate (about 5% of total capex, similar to BP but lower than 10% share for Equinor, Total, and Repsol). Bearing in mind the size of the group, we don't expect the New Energies division to generate a significant share of cash flow in the next five to 10 years. From a social, notably safety, perspective, Shell has not suffered major offshore incidents. The group has, however, had explosions and fires in its refineries and chemical operations globally over the past decade. Shell's total recordable case frequency is in line with peers. In 2017 a tanker truck explosion in Pakistan killed more than 200 people. Shell did not accept liability because the tanker was owned by a contractor, but paid the government and families of the injured and provided additional support to affected communities. We assess Shell's management and governance as satisfactory, similar to peers. Operations in emerging markets nonetheless expose Shell to allegations of corruption and bribery. The Dutch Public Prosecutor's Office is prosecuting the company regarding a $1.3 billion Nigerian exploration license settlement in 2017. | Simon Redmond | |
| Seplat Petroleum Development Co. PLC(B/Stable/--) | ||
| We view Seplat's social risk exposure as higher than global peers, given its operations in Nigeria's Niger Delta, which has seen multiple instances of oilfield and pipeline terrorism since the 1990s. Most of the incidents relate to either political or economic terrorism, which has abated somewhat in the past two years. For example, in 2016, a militant group blew up the Forcados pipeline infrastructure, which was Seplat's only oil export pipeline link at the time. Consequently, in 2016 and 2017, Seplat's ability to export oil and generate revenue were badly affected. To mitigate this risk, Seplat diversified its routes to market with the Escravos pipeline and Warri Refinery export route. In addition, Seplat's limited scale and concentration in the Niger Delta could expose it to nearer-term social issues. For example, lawsuits from local communities could delay or disrupt hydrocarbon pipeline projects, thereby affecting pricing and production. However, Seplat's global memorandum of understanding with relevant communities and practice of involving the local communities in work programs (which is designed to align the interests of communities and Seplat). This approach has been one of Seplat's strengths, allowing it to increase production since it acquired the OMLs 4, 38, and 41 in 2010. The company has a robust health and safety track record, with declining injury rates over the past three years. Seplat has no history of material environmental issues. We assess Seplat's management and governance as fair, broadly on par with other junior oil and gas companies. Seplat is focused on retaining its regulatory and social licenses to operate, and to balance multiple stakeholder interests. | Rishay Singh | |
| State Oil Co. Of Azerbaijan Republic(BB-/Stable/--) | ||
| Our assessment of management and governance is weak, constraining our assessment of Socar's stand-alone credit profile. Although Socar's IFRS statements are not qualified, we believe that Socar's disclosure (for example, on segment performance or operating statistics) is less detailed than peers'. Socar has a complex group structure, with international operations, several business segments, and multiple large-scale projects in various locations. Socar's strategy depends heavily on the government's decision-making, which can be driven by the broader strategic agenda and not just by the economic rationale. Environmental and social risks are broadly comparable to the industry average. As the national oil company in an emerging market environment, Socar faces less stringent environmental regulations than some of its peers in developed markets, and energy transition to renewables is not on top of the local agenda. The operator of ACG and Shah Deniz is BP, which uses its international expertise to limit gas flaring, oil spills, and other potentially negative impacts on the fragile Caspian ecosystem. Italian politicians have voiced environmental concerns about the TAP gas pipeline project, in which Socar has an equity stake, but we don't think this will affect the project's construction. TAP is recognized as a project of common interest in the EU because it aims to diversify Europe's gas supplies. On the positive side, Socar invests considerable amounts in modernizing its relatively aged refinery, to reduce the plant's emissions and improve fuel quality. Social factors are both positive and negative credit considerations for Socar. Socar is Azerbaijan's biggest employer and faces considerable social mandates to supply domestic customers with gas and refined products at low prices and to fund certain social expenditures, reflected in its IFRS statements as distributions to the government. We expect this practice to continue. It constrains discretionary cash flow and is one of the factors limiting future deleveraging. On the other hand, its social mandate also strengthens its role in our GRE assessment. On safety, we understand that the fire on Socar's Guneshli platform in December 2015 led to 31 fatalities and production loss, but to our knowledge, the controversy is somewhat dated and the company did not face any significant financial charges. | Elena Anankina | |
| Total S.A.(A+/Positive/A-1) | ||
| We view Total's exposure to environmental and social risks as broadly similar to the rest of the oil and gas industry, even if management's strategy is comparatively more focused on the energy transition and UN Sustainable Development Goals. A particular environmental risk stems from Total's large offshore operations, including off the U.K. and Norway coasts, but excluding the Gulf of Mexico. At the same time, Total is one of the more proactive large oil and gas companies given its investments in solar, electricity retail, and battery storage. Between 2015 and 2030, Total aims to reduce the energy intensity of its products by 15% by shifting to gas and LNG and developing renewables capacity carbon neutral businesses. Total's annual capital investment on low carbon electricity is $1.5 billion-$2 billion per year (roughly 10% of total), which is broadly in line with leaders in this field such as Repsol and Equinor, but like them the contribution of low-carbon businesses to cash flow will remain minimal in the next five to 10 years. Total's strong cultural focus on safety and its record have improved over the past decade in terms of both downstream fires and fatalities. The last major incident dates back to 2001 when its former French AZF chemical plant exploded, killing 31 people, wounding 2,500, and costing the company over $1 billion. From a social point of view, Total was able to restructure its French downstream operations within the constraints of union and employment requirements. We assess Total's management and governance as satisfactory. Having a greater presence in emerging markets than peers, especially sub-Saharan Africa (43% of upstream net income), can lead to greater exposure to corruption or bribery. The group's culture, controls, and social engagement have mitigated these risks with no material controversies reported in the past decade. | Edouard Okasmaa | |
| Ratings as of Feb. 11, 2020. | ||
North America E&P And Integrated
Table 2
| Company/Rating/Comments | Analyst | |
|---|---|---|
| Apache Corp.(BBB/Stable/A-2) | ||
| We assess Apache's exposure to ESG risks as in line with its peers. The company's concentration in Texas, which accounts for 52% of production, benefits from a generally favorable regulatory and political climate for E&P companies. However, deepwater activities such as the company's North Sea operations, which account for 13% of production, have heightened risk for a catastrophic event. | Ben Tsocanos | |
| Athabasca Oil Corp.(CCC+/Stable/--) | ||
| We view the environmental considerations that have mostly triggered ongoing social activism against pipeline development and oil sands production to be less supportive of credit quality for Athabasca compared to the oil and gas industry, albeit similar to other Canadian oil sands-focused producers. Moreover, we see the company's credit profile as relatively more exposed to environmental and social risks due to the production of GHGs from its oil sands-focused upstream operations. In addition, protracted delays in completing new pipeline projects and expansions, have created a structural disadvantage for Canadian oil-focused E&P companies, with a direct adverse effect on revenues and profitability, as constrained egress capacity from western Canada has translated to significant price discounts for several grades of Canadian crude, particularly heavy oil. Although government intervention to curtail oil production, particularly heavy oil, has alleviated some price volatility, the protracted delays in completing new pipeline projects and expansions, have created a structural disadvantage for Canadian oil focused E&P companies, resulting in significant price discount and a direct adverse effect on revenues and profitability. Athabasca's business plan is to maintain heavy oil production flat, while investing in its light oil and liquid-rich projects in the Montney in the Grater Placid area and the Duvernay in the Greater Kaybob area, which should decrease the company's exposure to heavy oil in the long term. Given 72% of Athabasca's 2019 expected average daily production is linked to the GHG-emitting Leismer thermal oil and Hangingstone thermal oil projects, its approach to emissions management and reduction is under heightened scrutiny from stakeholders and subject to increasing Canadian regulations. The Canadian federal government's environmental policies provide provinces with the latitude to implement either a carbon tax or cap and trade system. Both aim to reduce carbon emissions. Although, full-cycle costs are increasing as a result of these environmental initiatives, they have not materially affected Athabasca's profitability and rating. | Michelle Dathorne | |
| Berry Petroleum Co.(B/Stable/--) | ||
| We view Berry's exposure to environmental and social risks as elevated compared with sector peers given its operations in California, which is generally not supportive of oil and gas drilling activities. In addition, the financial impact of a localized environmental incident, tighter regulation, or community opposition to drilling or fracking could hinder Berry's ability to develop and replace reserves, given its asset concentration. Nevertheless, Berry is trying to proactively mitigate potential regulatory risks by limiting its operations' environmental footprint and engaging with the communities where it operates. The company has a good safety track record and no history of significant environmental accidents. We view Berry's management and governance as fair, reflecting a sound operational history, which is instrumental in preventing environmental damage from its wells and infrastructure. | Christine Besset | |
| Canadian Natural Resources Ltd. (BBB+/Stable/A-2) | ||
| We see CNRL as having higher environmental and social risks than the industry average due to its concentration in thermal and conventional heavy oil production, and oil sands mining and upgrading. Environmental considerations triggered ongoing social activism against Canadian pipeline development and oil sands production. We also believe oil sands production is more exposed to regulatory changes given its higher emissions compared with the broader industry. With about 95% of its production from Canada, and conventional and thermal heavy oil representing a large portion of its product mix, CNRL is highly exposed to the industry's stringent and increasing environmental regulations, including either a carbon tax or cap and trade system aimed to reduce carbon emissions. The largest negative credit impact however stems from social risks, as ongoing indigenous activism against proposed pipeline expansions has weakened regional Canadian crude oil prices, notably heavy oil, relative to U.S. and global benchmark prices. Protracted delays in constructing new pipelines and expansions have led to wide hydrocarbon differentials for the industry, which have hurt revenue and profitability for Canadian E&P companies. | Michelle Dathorne | |
| Cenovus Energy Inc.(BBB/Stable/NR) | ||
| We believe Cenovus Energy's credit profile has higher exposure to environmental and social risks than the global industry due to the high GHG emissions from its oil sands-focused upstream operations. Environmental considerations triggered ongoing social activism against Canadian pipeline development and oil sands production. We also believe oil sands production is more exposed to regulatory changes given its higher emissions compared with the broader industry. The largest negative credit impact stems from social risks, as ongoing indigenous activism against proposed pipeline expansions has weakened regional Canadian crude oil prices, notably heavy oil, relative to U.S. and global benchmark prices. Environmental and social risks in the supply chain, most notably the protracted delays in completing new pipeline projects and expansions, have created a structural disadvantage for Canadian oil-focused E&P companies, hurting revenues and profitability. The company's approach to emissions management and reduction is under heightened scrutiny from stakeholders and subject to increasing Canadian regulations. The Canadian federal government's environmental policies provide provinces with the latitude to implement either a carbon tax or cap-and-trade system. Both aim to reduce carbon emissions. The costs associated with emissions reduction are reflected in reported operating and finding and development (or full-cycle) costs. Although, full-cycle costs are increasing as a result of these environmental initiatives, they have not adversely affected Cenovus' profitability and rating. | Michelle Dathorne | |
| Chesapeake Energy Corp.(CCC/Negative/NR) | ||
| We view Chesapeake's exposure to environmental and social risks as in line with peers in the oil and gas sector because of its relatively broad geographic and product diversification. It operates primarily in Texas, Louisiana, Appalachia, and Wyoming. We believe Texas and Louisiana have generally favorable regulatory and political climates for E&P companies. The permitting process for new wells and infrastructure is relatively streamlined and faces infrequent opposition, in part because of the industry's importance to Texas' economy. Appalachia, on the other hand, is generally less favorable and we believe susceptible to higher regulations and, up until recently, significant transportation constraints partly due to greater regulatory hurdles. | Carin Dehne-Kiley | |
| Chevron Corp.(AA/Stable/A-1+) | ||
| We view Chevron's exposure to environmental factors as similar to its large integrated peers, with areas we view as having above-average risks such as its large offshore operations, as well as sizeable U.S. onshore shale hydrofracking activities. That said, given the typically large scale and diversity of its operations and strong safety record, we believe risks are mitigated. About 7.5% of total production is in the U.S. Gulf of Mexico, which we see as a high-risk area of operations; however, Chevron's history of successful operations, strong safety record, and strong financial reserves offset this risk outside of a catastrophic event. Chevron also has a significant footprint in shale development, with a particular focus on its rapidly growing Permian Basin assets in West Texas and New Mexico (forecast to account for 20%-25% of total production by 2023). We view the regulatory and political environment as generally favorable, and are not aware of any major controversies or incidents reported against Chevron related to fracking activities. Sound governance is supported by Chevron's alignment of compensation with carbon reduction initiatives, such as a 25%-30% reduction in flaring and 20%-25% reduction in methane emissions through 2023, supporting carbon reduction through its operations. Chevron has also begun a CO2 injection project at its Gorgon liquefied natural gas plant in Australia that is expected to reduce emissions around 40% over the life of the operations. Finally, a specific area of risk for Chevron and its peers relates to the oversight of operations in emerging markets, including countries such as Angola and Kazakhstan (about 20% of total production including that of equity share affiliates as of Dec. 31, 2018). However, the company has a history of operations in these countries without any noteworthy controversies. | Paul Harvey | |
| ConocoPhillips(A/Stable A-1) | ||
| We see ConocoPhillips' environmental and social risks as in line with the broader industry and mitigated by its significant regional and product diversification. The company has successfully operated in the lower 48 U.S. states. About 23% of its operations are in more favorable legislative regions such as the Eagle Ford shale and Permian Basin in Texas, which helps to offset its exposure to the more sensitive operations in the Williston Basin (North Dakota) and Alaska (21% of output). It is also exposed to offshore risk, with 35% of production from offshore platforms in Europe and Asia Pacific. Additionally, international operations are diversified between the Asia-Pacific, Middle East, and Canada among other regions, helping to balance the potential regulatory or political impact from any one region. ConocoPhillips' scenario planning enables it to understand a range of risks around commodity prices, and the potential price risk associated with various GHG reduction scenarios, which assists in its strategic planning and capital allocation decisions. | Carin Dehne-Kiley | |
| Devon Energy Corp.(BBB-/Stable/A-3) | ||
| We view Devon's exposure to environmental and social risks as comparable the oil and gas sector because of its relatively broad geographic diversification in Texas, Oklahoma, and the Rockies. We view Texas as having a generally favorable regulatory and political climate for E&P companies. The permitting process for new wells and infrastructure is relatively streamlined and faces infrequent opposition, in part because of the industry's importance to the state economy. Although Oklahoma has a similarly favorable climate for E&P companies, recent earthquakes have prompted community concerns about the use of underground saltwater injection wells, which could lead to additional regulation of these wells. | Carin Dehne-Kiley | |
| Encana Corp.(BBB/Stable/A-2) | ||
| We view Encana's exposure to environmental and social risks as in line with the broader oil and gas sector due to its broad geographic diversification. Encana has operations in Canada and four U.S. states. In the U.S., environmental policies in Texas, Oklahoma, and North Dakota are not as strict as in Canada. In contrast, Canada's environmental regulations are more uniform. Encana, like other Canadian oil and gas companies, is actively working to reduce carbon emissions, and the costs associated with emissions reduction are in line with peers and reflected in reported operating and finding and development (or full-cycle) costs. Although we expect these costs to continue increasing, we expect Encana's profitability to remain in line with the E&P peer group. | Michelle Dathorne | |
| EnVen Energy Corp.(B/Stable/--) | ||
| We view EnVen's environmental risk as higher than the oil and gas industry because it operates exclusively in deepwater U.S. Gulf of Mexico. This leaves the company vulnerable to disruption and damage from hurricanes and the higher potential consequences of accidents and spills in an offshore context. Although these events are rare, they are generally more difficult to contain and repair in deepwater due to water depth and high pressure environment. Clean-up and remediation costs, in addition to potential fines, can also have a material negative financial impact. While the company has insurance, it may be afflicted by larger-than-anticipated financial obligations, high deductibles, or increased regulatory scrutiny, which would make future drilling more costly and difficult to execute. | Sarah Sherman | |
| EOG Resources Inc.(A-/Stable/A-2) | ||
| We view EOG's exposure to environmental and social risks as broadly in line with the oil and gas sector because of its relatively broad geographic diversification, primarily in Texas, New Mexico, North Dakota, Wyoming, and Utah, as well as Trinidad. We believe Texas has a generally favorable regulatory and political climate for E&P companies. The permitting process for new wells and infrastructure is relatively streamlined and faces infrequent opposition in part because of the industry's importance to the state economy. In North Dakota, E&P companies face stricter restrictions on natural gas flaring and some community opposition to new pipelines that could limit EOG's ability to grow and market oil production from the region over the medium term. Companywide, EOG installed over 1,500 kilometers of gas-gathering pipelines between 2013 and 2017 to capture gas and minimize flaring. The company also implemented a leak detection and repair program that reduced fugitive emissions by over 90% in 2017. We view EOG's management and governance as strong, reflecting management's operational effectiveness, industry expertise, experience, and history of achieving its financial and operational goals. | Denis Rudnev | |
| Exxon Mobil Corp.(AA+/Negative/A-1+) | ||
| We believe ExxonMobil's exposure to environmental and social risks is comparable to the broader industry: areas with above-average risks are large offshore operations (notably in the Gulf of Mexico), oil sands projects in Canada, which account for 6.5% of production, as well as sizeable U.S. onshore shale hydraulic fracking activities (Permian Basin and Bakken shale). With the exception of a truly catastrophic event (similar to the Valdez oil spill in 1989, for which ExxonMobil ultimately paid $4.3 billion in clean-up costs, settlements, and fines), the financial impact of a localized environmental incident, tighter regulation, or community opposition is somewhat limited due to the company's massive scale, scope, diversification, and its ability to reallocate capital. On environmental factors, the company will spend approximately $5.7 billion in 2019 and 2020 (just under 10% of its total capex) to prevent and minimize the impact of its operations on the environment, including projects to manufacture clean fuels, reduce GHG emissions, and fund asset retirement obligations. On social and safety risks we believe ExxonMobil has a strong track record. We view ExxonMobil's management and governance as strong, reflecting, in part, its exceptional operational performance, management expertise, and consistent business strategy. The board considers the risk of potential changes in demand for its products for any reason, including climate change, when reviewing company strategy and business plans. | Carin Dehne-Kiley | |
| Fieldwood Energy LLC(B-/Stable/--) | ||
| We believe Fieldwood Energy's exposure to environmental risk is higher compared to peers in the E&P sector since the company exclusively operates in the Gulf of Mexico. U.S. shelf operations are susceptible to weather related damages and shut-ins, which could reduce production and increase costs to repair damages. Additionally, the company recently increased its exposure to deepwater drilling where the potential for oil spills, while unlikely, are generally more difficult to contain and repair due to water depth and high pressure environment. Clean-up and remediation costs, in addition to potential fines, can also have a material negative financial impact. While the company has insurance, it may be affected by larger-than-anticipated financial obligations, high deductibles, or increased regulatory scrutiny, which would make future drilling more costly and difficult to execute. Moreover, offshore producers often carry significant asset-retirement obligations stemming from future expenditures to plug and abandon wells and remove platforms, pipelines, and facilities after reserves have been depleted. Such cash flows divert funds away from growing production and the company's reserve base. However, Fieldwood's asset retirement obligations have been greatly reduced over time through elevated plug and abandonment spending, which retired certain assets. | David Lagasse | |
| Great Western Petroleum LLC(B-/Stable/--) | ||
| Great Western's credit quality is more negatively influenced by social risk factors than its sector peers given its exposure to Colorado, where the recently passed SB 181 gives greater authority to local governments to regulate oil and gas drilling activity. Great Western's operations are 100% in Colorado, where it holds about 62,000 net acres. Within this amount, we estimate that approximately one-third is in Adams County, which is generally less supportive of the oil and gas industry than counties such as Weld, where most of the state's oil and gas activity is centered. Adams County is the first county to enact new rules since the passage of SB 181 in April 2019, recently announcing it would increase the distance requirement between new wells and "occupied structures" such as homes, schools, day care facilities, and hospitals, to 1,000 ft., given the bill's focus on the health and safety of the local Colorado communities. Homeowners have the option to grant waivers to allow wells to be drilled within this distance. These rules were enacted as the county ended its six-month moratorium on new drilling permit issuance. Great Western is actively engaged with elected officials both at the state level and in Weld and Adams County, and has instituted multiple voluntary conditions on permits that include innovative, leading-edge technologies such as a continuous air emissions monitoring program that provides data to local government leadership and further addresses air quality concerns that SB-181 and other regulatory frameworks seek to resolve. | Paul O'Donnell | |
| Husky Energy Inc.(BBB/Stable/--) | ||
| Environmental and social risks in the supply chain, most notably the protracted delays in completing new pipeline projects, have created a structural disadvantage for Canadian oil-focused E&P companies, with a direct adverse effect on revenues and profitability. We view the environmental considerations to be less supportive of credit quality for Husky compared to the industry, albeit comparable to Canadian heavy oil and oil sands-focused peers. This reflects the ongoing social activism against pipeline development and oil sands, while emissions management and reduction are under heightened scrutiny from stakeholders and subject to increasing Canadian regulations. Husky's oil sands production accounts for most of its production and has some offshore gas production in Asia, and its refining assets are under heightened scrutiny from environmentally conscious stakeholders. Safety concerns over its iceberg management protocols off Canada's east coast, the fire at its Superior refinery, a pipeline spill in Saskatchewan, and a small oil spill offshore Canada's east coast highlight the need for enhanced corporate oversight of its safety procedures. These recent events are not sufficiently material in financial terms, but if similar incidents continue to occur, they could affect our rating on Husky. | Michelle Dathorne | |
| Imperial Oil Ltd.(AA+/Negative/A-1+) | ||
| We see Imperial Oil Ltd.'s credit profile as more exposed to environmental and social risks compared to the broader oil and gas industry, albeit comparable to Canadian heavy oil and oil sands-focused peers. This reflects GHG emissions from its oil sands-focused upstream operations. More importantly, protracted delays in completing new pipeline projects and expansions, have created a structural disadvantage for Canadian oil-focused E&P companies, hurting revenues and profitability because constrained egress capacity from western Canada has translated to significant price discounts for several grades of Canadian crude, particularly heavy oil. Imperial has been insulated from this price discount due to the nature of its integrated operations. The positive margin uplift from the downstream segment has mitigated much of the increase in local price differentials for Canadian heavy oil production. Moreover, Imperial has a total transportation by rail capacity of about 200,000 barrels of oil per day that give it more flexibility to circumvent the issues imposed by egress constraints. Given that 90% of 2019 expected average daily production is linked to Kearl and Syncrude mining projects and Cold Lake thermal oil project, Imperial is highly exposed to the industry's stringent and increasing environmental regulations. The Canadian federal government's environmental policies provide provinces with the latitude to implement either a carbon tax or cap and trade system. Both aim to reduce carbon emissions. Imperial, like other Canadian oil and gas companies, is actively working to reduce carbon emissions, and although, full-cycle costs (including costs to reduce emissions) are increasing as a result of these environmental initiatives, they have not hurt Imperial's profitability and rating. | Phalguni Adalja | |
| Kosmos Energy Ltd. (B-/Stable/--) | ||
| We believe Kosmos Energy's exposure to environmental risk is high compared to peers in the E&P sector because of its focus on deepwater offshore operations worldwide and its U.S. Gulf of Mexico presence, accounting for 38% of total production. In addition, the U.S. Gulf of Mexico operations are susceptible to interruption and damage from hurricanes. While the company has insurance, it may be affected by larger-than-anticipated financial obligations, high deductibles, or increased regulatory scrutiny, which would make future drilling more costly and difficult to execute. | Matthew Terral | |
| MEG Energy Corp.(B+/Stable/--) | ||
| Our assessment of ESG factors' effect on MEG Energy's credit profile reflects the high exposure to environmental and social risks due to the production of greenhouse gas-creating commodities from its oil sands-focused operations. Environmental and social risks in the supply chain, notably the protracted delays in completing new pipeline projects, have created a structural disadvantage for Canadian oil-focused E&P companies, with a direct adverse effect on realized heavy oil prices, revenues and profitability. We view environmental considerations that have mostly triggered ongoing social activism against pipeline development and oil sands production to be less supportive of credit quality for MEG compared to the broader oil and gas industry, albeit similar to other Canadian oil sands producers. With 100% of its production from Canada oil sands (in situ) operations, MEG is fully exposed to the heavy oil price deep discounts caused by insufficient pipeline capacity out of western Canada. Protracted delays in constructing new pipelines and expansions have led to wide hydrocarbon differentials for the industry, which have hurt revenue and profitability for oil and gas companies. MEG tempers its exposure to discounted Western Canada Select (WCS) prices through active marketing and logistics strategies that move some of its crude production beyond the WCS market. As an oil producer, the company is also highly exposed to stringent Canadian environmental regulations and heightened scrutiny from stakeholders for emissions management and reduction approach. | Abidali Maredia | |
| Occidental Petroleum Corp.(BBB/Stable/A-2) | ||
| We view OXY's ESG exposure as on par with the industry. The bulk of the company's production comes from Texas (42%), which has an accommodating regulatory and political climate for oil and gas-related activities. Restrictions on drilling and pipeline construction are limited obstacles to development relative to other states. Through its acquisition of Anadarko Petroleum in August, OXY now has exposure to operations in Colorado (26%) and the Gulf of Mexico (11%), which we believe have heighted political and environmental risk, respectively, but represent relatively modest proportions of overall assets. The countries in which OXY operates outside of the U.S. also have relatively favorable climates for E&P operations, though security conditions in Colombia (2%) have at times disrupted the company's operations. OXY is reducing GHG emissions by minimizing gas flaring and exploring potential commerciality of carbon capture related to its enhanced oil recovery operations, which could somewhat reduce the negative effects of regulation on financial performance. The company has a strong recent safety record with very low recorded incidents. | Ben Tsocanos | |
| Osum Production Corp.(CCC+/Stable/--) | ||
| Environmental and social risks in the supply chain, notably protracted delays in completing new pipeline projects, have created a structural disadvantage for Canadian oil-focused E&P companies, with a direct adverse effect on revenues and profitability. Although government intervention to curtail oil production, particularly heavy oil, has alleviated some price volatility, the protracted delays in completing new pipeline projects and expansions have created a structural disadvantage for Canadian oil-focused E&P companies, resulting in significant price discounts and a direct adverse effect on revenues and profitability. Furthermore, we view the environmental considerations that have mostly triggered ongoing social activism against pipeline development and oil sands production to be less supportive of Osum's credit quality compared to the broader oil industry, albeit similar to other Canadian oil sands producers. With 100% of its production coming from its Orion thermal project in the Cold Lake region, Osum is fully exposed to the heavy oil price deep discounts caused by insufficient pipeline capacity out of western Canada. OPC and its parent company, Osum Oil Sands Corp., also owns a vast undeveloped reserve based linked to its Taiga thermal oil project, but since it is also in the Cold Lake region, the development of this asset will not change the company's full exposure to heavy oil in the long term. Given Osum's increasing heavy oil production, its approach to emissions management and reduction is under heightened scrutiny from stakeholders and subject to increasing Canadian regulations. The Canadian federal government's environmental policies provide provinces with the latitude to implement either a carbon tax or cap-and-trade system. Both aim to reduce carbon emissions. Although, full-cycle costs (including costs to reduce emissions) are increasing as a result of these environmental initiatives, they have not hurt OPC's profitability and rating. | Michelle Dathorne | |
| Suncor Energy Inc.(A-/Stable/A-2) | ||
| We view the environmental considerations that have mostly triggered ongoing social activism against pipeline development and oil sands production, to be less supportive of credit quality for Suncor Energy compared with the broader oil and gas industry, albeit similar to other Canadian oil sands focused producers. With 93% of its 2018 production from Canada and about 86% of its projected 2019 production coming from its oil sands (mining and in-situ) operations, Suncor is highly exposed to stringent environmental regulations, conflicting provincial regulations, and indigenous activism. Protracted delays in constructing pipelines have led to wide hydrocarbon differentials for the industry, which have hurt revenue and profitability for oil and gas companies. In our view, the pervasive and persistent challenges to pending pipeline expansion projects have created a structural disadvantage for Canadian E&P companies, as constrained export capacity from western Canada has translated into significant price discounts for several grades of Canadian crude, particularly heavy oil. Suncor's upgrading and refining capacity does insulate its production from the prevailing volatile price discounts for Canadian heavy oil; however, its revenue and overall profitability remain vulnerable to persistent price discounts for its lighter crudes sold into the open market. | Michelle Dathorne | |
| W&T Offshore Inc.(B-/Stable/--) | ||
| We believe W&T Offshore faces higher environmental and social risk than E&P peers because it operates exclusively in the U.S. Gulf of Mexico, where it is susceptible to interruption and damage from hurricanes. This risk exposes the company to potential harm to its employees and the environment by accidental oil spills or weather-related disasters. While unlikely, these are generally more difficult to contain and repair in deepwater offshore wells than onshore wells. While the company has insurance, it may be affected by larger-than-anticipated financial obligations, high deductibles, or increased regulatory scrutiny, which would make future drilling more costly and difficult to execute. | Paul Harvey | |
| Ratings as of Feb. 11, 2020. | ||
Latin America Upstream And Integrated
Table 3
| Company/Rating/Comments | Analyst | |
|---|---|---|
| Ecopetrol S.A.(BBB-/Stable/--) | ||
| Ecopetrol's credit quality is influenced by environmental factors similar to the broader oil and gas industry. In Colombia, oil and gas companies need to obtain an environmental license to use natural renewable resources (water, soil, and air), file an environmental impact study, and plan prevent, mitigate, correct, and compensate for any activity that may be harmful to the environment. As a result, Ecopetrol has established a three-year plan to consider the environmental significance of the hydrocarbon value chain, recognizing water and energy flows as the main resources used in production processes. The plan includes three action lines: comprehensive management of water resources, climate change and biodiversity, and sustainable production. We believe Ecopetrol is taking adequate implementation measures to mitigate potential environmental risks. As a national oil company, we see Ecopetrol's credit quality more strongly influenced by social factors than private players: the company's very important role in the Colombian economy is a key contributor to our assessment of very high likelihood of extraordinary government support. In line with this, we see the company as more active in developing several programs to contribute with social infrastructure projects such as schools, hospitals, and toll roads, which improve the standard of living of communities where the company is highly influential. The company expects to invest approximately $700 million billion in socio-environmental projects between 2019 and 2021. Moreover, the company is engaged in incorporating a health and safety management approach into its operations. | Fabiola Ortiz | |
| Petroleo Brasileiro S.A. - Petrobras(BB-/Positive/--) | ||
| We see governance factors as greater risks to Petrobras compared to global oil and gas, as well as domestic peers because of the past corruption scandals and weak government oversight. We view the company's management and governance as only fair, up from weak a year ago because the company has been improving its internal controls and relationships with suppliers. It is still too early to say if those changes will be sustainable. We also see Petrobras as more exposed than international peers to social risks, including government mandates that have historically affected its financial position. Up until 2014, the Brazilian government attempted to contain inflation by constraining the fuel prices Petrobras could charge. The improved governance framework and prices following international parity should benefit Petrobras' profitability and cash flow generation. Finally, we also see the company as more exposed to environmental risks due to its concentration in deep and ultra-deep offshore. Petrobras' core strategy for the next five to 10 years will likely stay focused on offshore, though it has established a track record as a very good operator with significant experience in the pre-salt area. | Luisa Vilhena | |
| Petroleos Mexicanos(A-/Negative/--) | ||
| We assess PEMEX's management and governance as weak because its ownership and control from the federal government exposes its business strategy and financials to policy risks. Continuous political involvement in PEMEX's decision-making has led to changes in its medium- and long-term business objectives, which partly explains the trajectory of its SACP over the past several years. The company is exposed to environmental risks, similar to international oil and gas peers, notably related to its offshore operations, as well as its downstream. PEMEX's plans to develop a new refinery in the state of Tabasco for instance could pose environmental threats to mangroves and the surrounding ecosystem. Furthermore, new environmental regulations will limit the sulfur content of bunker fuel, which could weigh on heavy oil producers' profitability if the international price of heavy crude comes under pressure. PEMEX has specific environmental policies, and adheres to multilateral actions to mitigate climate change and reduce gas emissions. The company has also halted the use of fracking activities to prevent ecological damage. As a national oil company, we believe PEMEX has both positive and negative social factors. Its important social and economic role contributes to our assessment of almost certain likelihood of government support. On the other hand, the company is a major employer and incurs (above-average) hefty taxes, which form a major share of the state budget and have negatively influenced its financials. Another specific social risk relates to fuel theft in Mexico. In December 2018, the company engaged a joint plan with the federal government to deter this illegal activity, and according to PEMEX the plan has been successful thus far, reducing gasoline theft 93%. In early 2019, an illegal breach to PEMEX's gasoline transportation pipeline caused a major fuel leakage and an explosion followed, killing over 120 people. This prompted the company to take remedial actions to support the affected community. | Luis Manuel Martinez | |
| YPF S.A.(B-/Negative/--) | ||
| Argentinean YPF's environmental exposure is aligned with that of the overall oil and gas industry. Its production is increasingly coming from shale formations in Vaca Muerta, which are isolated and deep, reducing the likelihood of environmental accidents, especially underground water contamination. This is because shale formations in Vaca Muerta are 2,500–3,000 meters below the surface, while aquifers are at 300–500 meters. Also, the company produces light oil, which has low sulfur content and is cleaner for the environment, and therefore less likely to fall under stricter regulations than heavy oil. The main source of environmental concern stems from a legal suit for $14 billion made by the liquidating trustee, Maxus Energy Corp. (Maxus), a subsidiary of YPF, arguing that Maxus has failed to pay its share of the liabilities associated with the clean-up of the Passaic River in New Jersey. Among several companies responsible for the toxic spillage decades ago was Diamond Shamrock Chemicals (Diamond)--which Maxus owned at the time. Maxus sold Diamond to Occidental Chemical Corp. in 1986 with an indemnity for Diamond's activities before that year, including environmental liabilities. YPF acquired Maxus in 1995, presumably inheriting the liability. Maxus filed for bankruptcy in 2016, so it argued that it had no capacity to fund the clean-up efforts, which New Jersey mandated in order to dredge 3.5 million cubic yards of contaminated soil. The clean-up costs were originally estimated at $1.38 billion. In our view, the amount claimed seems disproportionate to the clean-up cost, especially considering that Maxus was one of many entities that allegedly contaminated the river. Based on this and the company's legal department's views, we consider this potential liability as low probability and that will most likely have a limited financial impact. From a governance standpoint, although the Argentine state owns 51% of YPF, we consider the company independently run. The government does name the CEO and the chairman of the board. Also, because YPF is the largest oil and gas producer, both very important products for the economy, there were times when the government asked for softer price hikes or even temporary price freezes. These limitations usually are short-lived and don't materially deviate the company's revenues from import parity. On the other hand, gas prices are regulated for all gas producers and prices are typically set based on customer type, with average prices for residential users usually well below import parity and higher prices for industrial and power generation. | Diego Ocampo | |
| Ratings as of Feb. 11, 2020. | ||
Asia-Pacific Upstream And Integrated
Table 4
| Company/Rating/Comments | Analyst | |
|---|---|---|
| China National Offshore Oil Corp.(A+/Stable/--) | ||
| CNOOC's exposure to environmental risks is comparable with that of peers, even though it has extensive offshore operations. As one of the three national oil companies in China, CNOOC has to meet the government's environmental protection targets. CNOOC considers ESG to be high priority for its operations. All new projects have to go through environmental and social impact assessments. Emissions of major pollutants have been falling in the past couple of years. CNOOC is also involved in the offshore wind power industry; it began work on a wind project in Jiangsu Province in January 2019. However, we believe this initiative is still in the early stages and its impact on the company's creditworthiness will be limited in the next three to five years. CNOOC has experienced no impactful environmental or safety issues in the past five years. The last major oil spill happened at its Penglai 19-3 oilfield in Bohai Bay in June 2011. ConocoPhillips (COP) was the operator of the field, and its violation of the overall development plan caused the spill. However, CNOOC paid RMB480 million (about US$74 million) for the protection of Bohai Bay. We also see CNOOC's governance as better than other rated Chinese peers. Its parent CNOOC Group is one of the eight central state-owned enterprises that were ranked A by the State-owned Assets Supervision and Administration Commission for consecutive 15 years. CNOOC ranked sixth and was the only Chinese company among the top 10 of Forbes' World's Best Employers in 2018. | Danny Huang | |
| China National Petroleum Corp.(A+/Stable/--) | ||
| We see CNPC's practices and exposure to environmental factors as comparable with that of the overall oil and gas industry. CNPC places a high priority on ESG in its operations. As one of China's three national oil companies, CNPC has to meet the government's environmental protection targets. CNPC is the only Chinese member of the Oil And Gas Climate Initiative (OGCI), which focuses on reducing energy value chain carbon footprints, accelerating low-carbon solutions, and enabling a circular carbon model. The other 10 members of the OGCI are among the largest oil companies globally. CNPC published its Low Carbon Development Roadmap in 2017. This document outlines targets for reducing carbon dioxide per industrial value add 25% by 2020 from 2015 level, and domestic natural gas production accounting for 55% of total domestic oil and gas production by 2030 to reduce China's carbon intensity. CNPC has experienced no major environmental issues in the past five years. Its chemical oxygen demand and sulfur dioxide, ammonia nitrogen, and nitrogen oxide emissions have been declining in the past couple of years. | Danny Huang | |
| Korea National Oil Corp.(AA/Stable/--) | ||
| We see environmental exposure for KNOC as comparable to the industry. Given South Korea's high dependency on oil imports, KNOC plays a key role securing and mitigating potential risks related to disruptions in the nation's oil supply. For KNOC in particular, tighter regulation or social opposition is somewhat limited due to its status as one of South Korea's key government-related entities. In terms of environmental factors, the company does not have a negative record. | Shawn Park | |
| Oil and Natural Gas Corp. Ltd.(BBB-/Stable/--) | ||
| We see Indian, majority state-owned ONGC as having similar exposure as major integrated oil and gas companies. Its offshore focus implies somewhat higher exposure from a low probability, high-impact event such as a large oil spill or fire. The company has faced a few incidents of fires and explosions in its India operations over the past few years, but we view these as one-off/isolated incidents, such as caused by equipment malfunction or extreme weather rather than a failure to follow safety and control best practices or any systemic deficiencies in the company's approach to environmental hazards. | Shruti Zatakia | |
| Petroliam Nasional Bhd. (Petronas)(A/Stable/--) | ||
| Malaysian national oil and gas company, Petronas, faces comparable environmental risks to other major integrated oil and gas companies. It has extensive offshore operations, which imply greater exposure to low probability, high-impact events such as an oil spill. Petronas, downstream operations are also concentrated on a few large assets, like the US$27 billion Pengerang Integrated Complex in Johor, Malaysia. That said, the company has a record of responsibly managing environmental risks by ensuring its operations comply with regulations and through robust leadership, employee empowerment, and shared accountability with contractors. We view Petronas' social and governance practices as in line with peers. As the national oil and gas company, it is one of the most scrutinized state-owned enterprises in a country with many local sensitivities. And with about 50,000 staff worldwide, predominantly in Malaysia, the company is also a large local employer. Accordingly, Petronas pursues dialogue and engagement with its constituents. We believe that the company has been working on decisively reinforcing its safety policies after some setbacks, such as the Sabah-Sarawak gas pipeline explosion in 2014 or the condensate tank fire at Kertih in 2017. | Bertrand Jabouley | |
| PTT Public Co. Ltd.(A-/Stable/--) | ||
| We consider Thai national oil company PTT's exposure to environmental factors as comparable to major integrated oil and gas companies. We believe PTT's proactive approach to allay rising environmental concerns supports its operational long-term viability. PTT aims to reduce its GHG emissions by 20% by 2030, from 2012 estimated levels. This is broadly consistent with Thailand's commitment to reduce GHG emissions by 20% in 2030 from 2005 estimated levels. Some subsidiaries of PTT's have experienced environmental incidents in the past few years. In particular, the Indonesian government sued PTTEP in 2016 after a major oil spill from its Montara well--off the coast of Australia--in 2009, though it eventually withdrew its US$2 billion claim against the company. Due to the group's record of sound operating performance and no major spill events since this incident, we believe event risk is low. The growing level of government and public scrutiny of PTT acts as a structural motivation for the company to increase transparency and maintain a good governance framework. We consider the allegation of employee bribery in a supply contract with Rolls Royce PLC in 2017 to be a one-off event. In line with our view of good governance practices, PTT Exploration and Production Public Co. Ltd. and parent PTT have acted swiftly to investigate the case. | Bertrand Jabouley | |
| PTT Exploration and Production Public Co. Ltd.(A-/Stable/--) | ||
| PTTEP, subsidiary of Thailand's national oil company PTT Public Co. Ltd., has greater exposure to environmental risks than the broader industry because of low probability, high-impact risks stemming from offshore oil or gas leaks. About 30% of its production comes from the Bongkot fields in Thailand. Approximately 90% of the company's producing assets are also in offshore basins. That said, because of PTTEP's record of sound operating performance and no material spills over the past decade (since the Montara incident), we consider event risk to be low. | Bertrand Jabouley | |
| PT Medco Energi Internasional Tbk.(B+/Stable/--) | ||
| We see Medco's exposure to environmental risks as average, with areas of exposure such as offshore production and mining, versus supportive elements such as its high share of gas production (about 60% of 2019 production). In addition, its power generation segment's reliance on gas (46% of Medco's portfolio in 2018), hydro, and geothermal (54%) makes it more environmentally friendly than coal, which is the mainstream fuel in Indonesia. The extraction of copper and gold at 32.3%-owned PT Amman Mineral Nusa Tenggara's mining arm presents challenges in terms of wastewater treatment or site restoration, given its scale and the operations' concentration on a single site. The ongoing multibillion (U.S. dollars) expansion program at the mine will not likely be completed within the next 24 months. While it could see delays, it does not have any near-term credit implications for Medco. The company lacks a clear climate roadmap to ensure reduction of its negative environmental footprint, what is not unusual for smaller players. We see exposure to social risks and safety standards as comparable to the industry. Incident rates in oil and gas were down 50% between 2016 and 2018; still, there were a number of incidents in the past few years, including a fire in a gas well located in the onshore Tarakan field in East Kalimantan in March 2019, and an oil spill in 2018 at the port of Tanjung Api-api, South Sumatra. The incidents did not affect earnings. | Bertrand Jabouley | |
| PT Pertamina (Persero)(BBB/Stable/--) | ||
| We see national oil and gas company, Pertamina as more exposed to environmental risks than the broader industry. Pertamina has a record of incidents. In July 2019, the company experienced a major oil spill on the northern Java coast. Restoration efforts will take several months. In March 2018, a pipeline in Balikpapan, East Kalimantan, ruptured and leaked crude oil, causing five fatalities and contaminating a mangrove forest. An official investigation found faults in the company's operations, including no proper monitoring system in the nearby refinery or routine inspections. These local incidents have had a limited impact on the company's financial strength so far, as Pertamina has not received substantial fines or penalties as a result. We see the company's growing exposure to gas--accounting for 57% of 2018 production versus 53% in 2015--as a comparative positive. Pertamina aims to reduce its greenhouse gas emissions by 6.5 million tons from 2010 levels, but the magnitude and timeline of the effort remains somewhat unclear. Compared to the key mandate to contain the nation's imports of hydrocarbons through sustaining domestic production, leading the energy transition looks secondary, as seen with an anecdotal--for a company of this size--geothermal capacity of 1,822 megawatts. The company does not have a vibrant climate roadmap to reduce its environmental footprint, in our view. Social factors are both negative and positive for Pertamina compared to peers. It plays a critical role as the national fuel distributor through its network of 7,146 delivery points. This social obligation undermines its creditworthiness because the company may have to maintain unprofitable operations in remote locations in the archipelago, or bear the burden of fuel subsidies due to a time lag before the government refunds part or the entire differential between market and regulated prices. On the other hand, its social and energy security mandates contribute to our assessment of almost certain likelihood of extraordinary government support. | Bertrand Jabouley | |
| Santos Ltd.(BBB-/Stable/A-3) | ||
| Australia-based Santos' environmental exposure is comparable to that of the broader oil and gas industry. Santos faces increasing public scrutiny to reduce carbon emissions, which is an area of heightened focus in the oil and gas industry in Australia. Santos has long-term targets of achieving net-zero emissions from its operations by 2050 and has set medium-term targets, which include reducing emissions by more than 5% across existing operations in Cooper Basin and Queensland by 2025. Santos has had a dedicated carbon team since the early 2000s to support integration of greenhouse gas emissions management and climate change within its strategy. Historically, Santos has only had to address minor infringements for environmental violations. | Minh Hoang | |
| Woodside Petroleum Ltd.(BBB+/Stable/NR) | ||
| Australia-based Woodside Petroleum's environmental exposure, including offshore, is comparable to that of the broader oil and gas industry. Woodside faces increasing public scrutiny to reduce carbon emissions and is an area of heightened focus in the oil and gas industry in Australia. Western Australia's Environmental Protection Authority's proposed a zero-carbon guideline. Although the guideline was later withdrawn, it threatened the compliance of future and existing LNG projects. Woodside currently targets a 5% improvement in energy efficiency by 2020 that includes both sustainable emissions reductions and energy efficiency improvements. We view Woodside's management and governance as satisfactory, even if the company recently had to fire 11 people for behavioral breaches, three of which involved fraudulent activities. Woodside's global operations (which include prospective developments outside Australia) expose the business to a wide range of risks, including natural disasters, political factors, and changes in the regulatory environment, as well as bribery, fraud, and corruption. | Minh Hoang | |
| Ratings as of Feb. 11, 2020. | ||
Global Refining And Marketing Companies
Table 5
| Company/Rating/Comments | Analyst | |
|---|---|---|
| CITGO Petroleum Corp.(B-/Stable/--) | ||
| While we view environmental factors as material for CITGO Holding and CITGO Petroleum, it is in line with other global refining peers and its governance is exposed to some political risk through its ownership by Petróleos de Venezuela S.A. (PDVSA). CITGO replaced its board with independent members free from PDVSA's influence, which has not disrupted the company's operations or strategy. Despite PDSVA's recent default, for which CITGO Holding shares are pledged as collateral, we believe appropriate ring-fencing and restrictive (bondholder-friendly) covenant provisions on the secured debt limit leakage to any potential new owner. Overall, we have not identified governance shortfalls that harm the credit. We believe U.S. sanctions on Venezuela are a moderate to low risk for CITGO. Although the sanctions have curtailed the company's ability to import Venezuelan crude, CITGO has successfully demonstrated its ability to source crude from a wide array of global suppliers and we view the company has a good and efficient operator. | Kimberly Yarborough | |
| China Petroleum & Chemical Corp. (Sinopec)(A+/Stable/--) | ||
| Sinopec's environmental practices and exposure are comparable with that of the broader oil and gas industry, in our opinion. As one of China's three national oil companies, Sinopec is responsible for achieving the government's environmental protection targets. Sinopec announced its Green Corporate Action Plan in April 2018, with the aim of making Sinopec a "clean, efficient, low-carbon, and recycling" green corporation by 2023. Specific targets include energy conservation of 6 million tons of standard coal and an 18% reduction in sulfur dioxide. The company spent RMB7.9 billion (about US$1.2 billion) in environmental protection in each of 2017 and 2018. The company also supplied the Chinese domestic market with national standard (NS) V (equivalent to Euro V) gasoline and diesel in 2017 and NS VI in 28 cities in northern China from September 2017, as required by the government. Sinopec is also promoting and developing bio jet fuel and biodiesel in China. Sinopec's bio jet fuel was put into commercial use in 2017 and its B5 biodiesel was launched in Shanghai in October 2017. Sinopec has not experienced severe environmental issues since an oil pipeline explosion in Shandong Province because of a leak in late 2013. There have been incidents involving fires at refineries, but their financial impact has been insignificant. | Danny Huang | |
| Corral Petroleum Holdings AB (Publ)(B+/Positive/--) | ||
| We believe Corral is better positioned on environmental aspects than refiners globally, even though environmental factors represent a high risk to the refining industry, particularly in Sweden. In its efforts to increase renewable fuel share, Preem uses byproducts from the forest products industry, which compares positively to the use of other alternatives, notably imported palm oil. Sweden has a 2030 target to decrease the climate impact of its transport sector by 70% from 2010. This aligns with its goal of a fossil fuel-independent vehicle fleet by 2030. While this puts pressure on the country's main refiner, Preem, to increase its share of renewable fuels, we see opportunities to have an edge on other refiners in continental Europe if and when regulation on green fuels becomes more stringent. Corral has highly energy-efficient refineries, which makes a difference, with Preem generating 21% less carbon dioxide for a comparable quantity of fuel production than the average western European refinery. Also, the energy efficiency index of about 78 is among the lowest in the world, with an EU average just below 100, benefitting competitive position. | Christophe Boulier | |
| Empresa Nacional del Petroleo(BBB-/Stable/--) | ||
| We see social factors as a more supportive credit driver for ENAP, as its role supports our assessment of a very high likelihood of government support. ENAP is Chile's sole refinery operator and is responsible for 60% of the national fuel supply. Environmental factors are in line with the industry. GHG emissions are monitored by environmental agencies in Chile, although there are no specific regulations on refinery emissions. We consider the company's management and governance as satisfactory, comparable to most domestic Chilean entities. The board comprises seven members, two appointed directly by the Chilean president, four from proposals of the High Public Management System, and one by the company. | Juan Barbosa | |
| GS Caltex Corp.(BBB+/Negative/A-2) | ||
| We consider Australia-based GS Caltex as having comparable environmental and social risks to oil refining companies. The energy sector's exposure to GHG emissions, pollution, and increasing water usage have led GS Caltex to try to improve the energy efficiency of its manufacturing processes and to reduce pollution by recycling heat and waste material. As a result, GS Caltex has been reducing energy consumption by around 2,000 terajoules annually over the past three years. Its recycling rate for waste materials was 67% in 2018. The company also has a satisfactory employee safety record. | Shawn Park | |
| KazMunayGas International N.V. (B/Stable/--) | ||
| We assess KMGI's management and governance as fair and believe it has greater exposure to governance risks than other Romanian companies and oil peers. The key risk is the outcome and potential further development of the Romanian state's Directorate for Investigating Organized Crime and Terrorism (DIICOT) investigation. Romanian prosecutors have seized some of KMGI's assets as part of an investigation into its privatization, which took place in 2000, to cover for potential damages suffered by the state. The group is suspected of being involved in the privatization of the Petromidia refinery, as well as the conversion of its historical debt. However, DIICOT recently decided that this was not a criminal case. We view KMGI's exposure to environmental risks as relatively in line with peers, balancing relatively modern and complex equipment (highlighted by the relatively high score on the Nelson Index of its key refinery Petromedia) with relatively limited visibility on the company's progress and commitment to reduce its carbon dioxide emissions. | Christophe Boulier | |
| Marathon Petroleum Corp.(BBB/Stable/A-2) | ||
| With its recent acquisition of Andeavor, Marathon now has two refineries located in California, which tends to have stricter environmental requirements than other states and consequently higher operating costs. We therefore consider refineries in California as having higher environmental and operating risks than those in other parts of the U.S. That said, these additional costs are largely passed on to the consumers. MPC has undertaken initiatives to minimize its environmental impact and reduce its carbon footprint, replacing less-efficient assets to reduce GHG emissions. Its consolidated 2019 environmental capex are estimated to be about $420 million, compared to approximately $380 million in 2018 million. In our view, these costs are manageable given the approximate $2.8 billion in total capex costs for 2019 (excludes MPLX and the former Andeavor Logistics midstream business). The company has a solid safety record, with very low recorded incidents. We assess MPC's governance as satisfactory, reflecting, in part, its strong organizational performance, strategy execution, and depth of leadership resources. It has also improved its transparency in disclosing additional operational data over the prior quarters to be in line with peers. | Mike Llanos | |
| MOTIVA Enterprises LLC(BBB/Stable/A-2) | ||
| Motiva operates in the refining and chemicals industries, which are industries that have significant exposure to environmental and social risks. We believe Motiva is a good operator, and we estimate it spent approximately $800 million in 2019 for asset integrity, maintenance, turnaround, and growth projects. While we view Motiva's governance as supportive, in our view the company's long-term financial strategy is somewhat less transparent than its publicly rated peers. Saudi Aramco, a government-related entity of the Kingdom of Saudi Arabia, owns and controls Motiva. | Stephen Scovotti | |
| Petroleos del Peru Petroperu S.A.(BBB-/Stable/--) | ||
| We view Petroperu's credit quality as more positively influenced than peers by social and environmental factors, as they underpin our view of a very high likelihood of extraordinary government support. Petroperu is a key infrastructure asset in Peru as the main fuel distributor in the country. Supplying about 50% of the domestic market's needs, it is important for the government's energy strategy, which uplifts its rating by four notches from its SACP of 'b+'. Regarding to environmental factors, the company aims to reduce air pollution by modernizing its Talara refinery. This project should reduce the amount of sulfur in fuels from 1,800 parts per million (ppm) to 50 ppm, which will help reduce toxic emissions by 2021. It's also working to improve the degree of octane in naphthas and to decrease refinery waste. Moreover, the company is investing $5 billion to build a new refinery, with operations expected to be ramped up in the first half of 2021. We view the company's governance structure as comparable to those of its regional industry peers, such as ENAP or ANCAP. Two of the board's six directors are senior government officials. The government is therefore highly involved in the company's decisions on investment and approval of additional debt incurrence. | Juan Barbosa | |
| Phillips 66(BBB+/Stable/A-2) | ||
| We consider Phillips 66's environmental and social risk as lower compared to the broader refining industry. While its refining and chemicals businesses require substantial capex and incur operating costs related to compliance with environmental regulations, Phillips 66 is making investments to reduce carbon emissions, such as research and development, premium coke, and renewable fuels. Since 2014, Phillips 66 has invested more than $6 billion in environmental protection projects and sustaining capital. We view Phillips 66's governance as satisfactory and somewhat stronger than its industry peers, with a board of 30% women, consistent safety track record, and a focus on increased transparency on its ESG policies and related risks. | Stephen Scovotti | |
| Reliance Industries Ltd.(BBB+/Stable/--) | ||
| We perceive Indian Reliance Industries' exposure to environmental risks as lower than that of regional and global peers. The company's upstream oil and gas operations are very small relative to peers and also mainly land-based or shallow water operations. Its downstream chemicals value chain has a substantial environmental footprint in terms of production of nonrecyclable plastics. However, we believe Reliance is not disproportionately exposed to these factors relative to large global manufacturers in the refining and petrochemicals space. On social factors, notably safety, we see Reliance's track record as in line with the industry. Its refining and petrochemicals operations are located on a single site, but they have had several years of stable operations without major environmental, health, or safety incidents, nor social disruptions. | Bertrand Jabouley | |
| SK Innovation Co. Ltd.(BBB/Stable/--) | ||
| We see Korean refiner SK Innovation as facing comparable environmental and social risks as the broader oil and gas industry. The energy sector's exposure to GHG emissions, pollution, and increasing water use, have led SK Innovation (SKI) to take measures to reduce its harmful impact on the environment. SKI has made strides in improving its GHG emissions, and targets to reduce emissions by 7.8% by 2025. Over the past decade, SKI has invested in technology related to batteries for electric vehicles. As a result, SKI is one of the global top-tier companies in the market for one major component, wet-type battery separators. SKI's social, notably safety, risks are comparable to peers, with no noticeable large accidents at its refineries over the past decade. The company worked to improve safety measures for its employees and has a low industrial accident rate (which halved since 2015). | Shawn Park | |
| Valero Energy Corp.(BBB/Stable/--) | ||
| Similar to peers, Valero's refining operations have high exposure to potential environmental and social risks. For example, in April 2018, an explosion at Valero's Texas City refinery injured some workers. However, we view Valero to be a good operator, and infrequent incidents would not generally affect our view of a refining company's business risk profile or rating. Valero has made major capital investments to its refineries to reduce carbon emissions, while at the same time expanding refining capacity. Sustaining capital spending totaled about $1.27 billion for the nine months ended 2019, which includes costs for turnarounds and regulatory compliance. Valero has also taken steps to minimize emissions by producing renewable diesel fuel and has invested in cogeneration systems that produce electricity and thermal energy. The company is among the largest ethanol producers in the U.S., with 14 plants in the Midwest. Ethanol production has helped partly offset the significant costs for renewable identification credits, which can affect profitability and a refiners' competitive position. We assess Valero's governance as satisfactory, in part reflecting its operational performance, strategy execution, and leadership. | Michael Grande | |
| Ratings as of Feb. 11, 2020. | ||
Global OFS Companies
Table 6
| Company/Rating/Comments | Analyst | |
|---|---|---|
| Baker Hughes A GE Company(A-/Stable/A-1) | ||
| We believe Baker Hughes' exposure to environmental and social risks is in line with oilfield services peers, with regulatory risks mitigated by the group's global footprint. Most of Baker Hughes' operations are outside the U.S., and about 76% of its gross trade receivables were tied to international markets as of Dec. 31, 2018, making it less exposed than most peers to potential environmental restrictions on U.S. drilling and completion activities. We are not aware of any material liabilities incurred by the company resulting from product deficiencies or safety. We view Baker Hughes' management and governance as satisfactory. Internationally, the oilfield services industry's operations are subject to the Foreign Corrupt Practices Act (FCPA), the U.K. Bribery Act, and other anticorruption laws, which have been violated across the industry, as companies conduct business in emerging markets through third-party or other local contacts. Although no current violations exist, in 2007, predecessor Baker Hughes Inc. was found in violation of FCPA rules and fined $44 million, a record at the time. We believe the company now has adequate policies and controls to help prevent (or address) both environmental and regulatory violations. | Paul Harvey | |
| Diamond Offshore Drilling Inc.(CCC+/Stable/NR) | ||
| We see Diamond Offshore and its peers in the offshore drilling industry as more exposed to environmental and safety risks than the broader industry because it provides offshore drilling services, which are highly technical, often operating in harsh conditions around the world. This risk exposes Diamond Offshore--in extreme cases such as offshore oil spills--to potentially ruinous financial penalties, loss of equipment, loss of contracts, and operating licenses being suspended or revoked. While Diamond has insurance, it may be affected by larger-than-anticipated financial obligations, high deductibles, or increased regulatory scrutiny, which could increase costs or hurt demand for offshore drilling services. | Paul Harvey | |
| Geophysical Sub-Strata Ltd.(B-/Stable/--) | ||
| We assess Indian contract drilling and oilfield services company Geophysical's governance as weak, constraining its credit quality. The company's entrepreneurial ownership, complex group structure, and frequent and sizable transactions with parties outside the group are major factors that underpin our assessment of its below average governance. We lowered our ratings on Geophysical on Oct. 10, 2019, following unexpectedly large shareholder distributions and growing related-party transactions. Such transactions, if sustained, will weigh on the company's liquidity amid steady capital spending. | Shruti Zatakia | |
| Halliburton Co.(A-/Negative/A-2) | ||
| We believe Halliburton's ESG factors are consistent with peers such as Baker Hughes and Schlumberger, which all face the challenges of working in emerging markets and varying regulatory environments. Halliburton is more concentrated in the U.S than its peers. In particular, as the leading hydraulic fracturing company in North America, Halliburton faces many environmental regulations and has incurred nonmaterial accruals related to groundwater and site remediation costs. Additionally, the oilfield services industry's international operations are subject to the FCPA, which has seen violations across the industry as companies enter emerging markets through third-party or other local contacts. In particular, during 2017 Halliburton paid $29.2 million to settle an SEC investigation into its use of a local content provider in Angola and violations of the FCPA's books and records and internal controls provisions. Additionally, Halliburton is exposed to offshore environmental risk as evidenced by its $1.1 billion fine related to Macondo. We view Halliburton's management and governance as satisfactory. We believe the company has adequate policies and controls to help prevent and address both environmental and regulatory violations. | Ben Tsocanos | |
| Noble Corp. PLC(CCC+/Stable/--) | ||
| We view Noble as more exposed to environmental and safety risks than the broader industry because it provides offshore drilling services that are highly technical, often operating in harsh conditions around the world. Potential oil spills, while unlikely, are generally more difficult to contain and repair in offshore wells than onshore wells. Clean-up costs, in addition to potential fines, can have a material negative financial impact on offshore drillers. In addition, some of the company's offshore rigs operate in harsh environments or could be hit by hurricanes, which could damage the equipment, harm employees, or cause oil spills. While Noble has insurance, it may be affected by larger-than-anticipated financial obligations, high deductibles, or increased regulatory scrutiny, which could increase costs or hurt demand for offshore drilling services. | Carin Dehne-Kiley | |
| Pacific Drilling S.A. | ||
| We see Pacific Drilling as more exposed than the broader oil industry to environmental risks because it provides offshore drilling services, which are highly technical, often operating in challenging conditions around the world. The offshore drillers are more exposed to environmental risks compared with their onshore counterparts given the greater potential magnitude that an offshore environmental incident can have. Operating offshore brings the added risk of well blowouts, oil leaks, and spills of other hazardous substances, which can be difficult to contain offshore and can result in severe water pollution. This risk exposes Pacific Drilling--in extreme cases--to potentially ruinous financial penalties, loss of contracts, and operating licenses being suspended or revoked. | Paul O'Donnell | |
| Petrofac Ltd.(BBB-/Negative/A-3) | ||
| We assess Petrofac as being more exposed to governance than U.K. entities and oil peers. In May 2017, the Serious Fraud Office (SFO) confirmed that it was investigating Petrofac's activities, its subsidiaries, and their officers, employees, and agents. In February 2019, a former employee pleaded guilty to offering corrupt payments in an attempt to secure contracts in Saudi Arabia and Iraq. As of today, the SFO has not brought any charges against Petrofac. As reflected in our negative outlook, it is difficult for us to assess the potential financial implications of the investigation and the timing of developments. Our main concern remains the potential impact on Petrofac's business, including bidding for and winning new contracts. In 2019, for example, Petrofac was not part of about $10 billion worth of bids from clients in Saudi Arabia and Iraq in the first half of 2019. As an engineering and construction oil service provider, safety is a critical social factor. In 2019 the company continued to show good safety records with low lost time injury frequency rate (taking into account its direct and indirect employees). The company's core markets include the Middle East and Africa, where pressure from communities is less pronounced and would target project owners rather than constructors. As for environmental risks, the company's divestment of its E&P operations in the past few years implies much less exposure. | Elad Jelasko | |
| Schlumberger Ltd.(A+/Negative/A-1) | ||
| We believe Schlumberger's exposure to environmental and social risks is similar to that of its oilfield services peers, with regulatory risks mitigated by the company's ethics and compliance program as well as its global footprint. We are not aware of any material liabilities incurred by the Company resulting from product deficiencies or safety. The company is working to strengthen and increase transparency around its ESG efforts; to that end, in 2019 Schlumberger became the first company in upstream E&P services to commit to setting a science-based target in emissions reduction in line with the Science Based Targets initiative. We assess Schlumberger's management and governance as strong, based on its history of favorably managing the business through commodity cycles, and its organizational depth and breadth. However, given its broad global operations (less than 30% of its revenue is tied to U.S. operations), the company manages a complex range of multinational, environmental, regulatory, and social issues. In 2015, a non-U.S. subsidiary of Schlumberger entered into a plea agreement with the Department of Justice (DOJ) related to violations of U.S. sanctions against Sudan and Iran, as a result of which that subsidiary paid approximately $233 million in fines. Before entering into the plea agreement, Schlumberger ceased oilfield service operations in those two countries. The plea agreement expired on April 30, 2019. As a result, the matter with the DOJ is closed. Internationally, the oilfield services industry's operations are potentially subject to the FCPA, the U.K. Bribery Act, and other anticorruption laws. | Carin Dehne-Kiley | |
| Seadrill Partners LLC(CCC/Negative/C) | ||
| Seadrill Partners' operations in the offshore, ultra-deep, and harsh water subsegments of the oil and gas drilling industry expose the company to more environmental risks comparatively. Due to its higher complexity and offshore nature, any spills could lead to substantial and difficult-to-predict penalties and litigation costs. That said, we are not aware of any recent substantial environmental litigations involving Seadrill Partners and believe the company has processes to minimize such risk. Social factors are comparable with those of peers in the sector, with a focus on safety in operations. | Ivan Tiutiunnikov | |
| Shelf Drilling Holdings Ltd.(B-/Stable/--) | ||
| We assess Shelf Drilling's management and governance as weak following its decision to distribute US$100 million to its parent in August 2016. The dividend was paid from cash generated by the business in 2016. The dividend upstream was utilized for an exchange offer, which temporarily weakened the company's liquidity position. We note, however, that since then, the company has been addressing its governance structure, especially given the transparency requirements following its listing on the Oslo Stock Exchange in 2018. Regarding environmental risk, we view Shelf Drilling as being broadly in line with oil and gas peers: while its operations are offshore, they are mainly in shallow waters and in emerging markets without harsh environmental exposure, limiting risks compared to drillers in deep and ultra-deep water. | Rawan Oueidat | |
| Stena AB (B+/Stable/--) | ||
| The credit quality of Stena, a conglomerate, is more positively influenced than global peers by environmental factors, given its strong focus and investments in more energy-efficient assets in its shipping and real estate division. Stena is taking positive steps to improve its competitive position within the shipping industry by reducing its exposure to environmental risks. Specifically, Stena has invested in new boats (E-flexers), which reduce water resistance and increase efficiency, as well as have greater capacity. Although this type of investment is costly, over time it will improve profitability and safeguard the environment. The group continuously invests in its real estate portfolio to ensure high efficiency in residential units, keeping most important running costs down (heating) and ensuring a good living environment for tenants. With over 16,000 employees globally, Stena is exposed to several risks. While serious incidents do sometimes happen, the company reduced lost time to injury at Stena Line, its most exposed segment, to 1.1 (per million hour worked) in 2018, compared with 1.8 in 2015. In its oil and gas drilling segment, the same measure has been zero for the past two years. | Per Karlsson | |
| Transocean Ltd.(CCC+/Negative/--) | ||
| We consider Transocean Ltd.'s exposure to environmental risks as higher than its onshore-focused oilfield services peers given the greater potential operational and financial impact that an offshore environmental incident could have on the company. Potential oil spills, while unlikely, are generally more difficult to contain and repair in offshore wells than onshore wells. Clean-up costs, in addition to potential fines, can also have a material negative financial impact on offshore drillers. In addition, some of the company's offshore rigs operate in harsh environments, in areas subject to typhoons, hurricanes, or other extreme weather conditions. While Transocean has insurance, it may be affected by larger-than-anticipated financial obligations, high deductibles, or increased regulatory scrutiny, which could increase costs for offshore drilling services. As an example, in 2010, Transocean's Deepwater Horizon rig sank after a blow-out of the BP-operated Macondo well caused an explosion and fire. Transocean settled legal claims with the U.S. Department of Justice of approximately $1.4 billion and the incident resulted in a six-month moratorium on drilling in the Gulf of Mexico, as well as more stringent regulation of offshore oil and gas operations. We view Transocean's management and governance as fair, reflecting its complex capital structure, mitigated by management's extensive sector expertise and strong strategic planning processes. | Carin Dehne-Kiley | |
| Valaris PLC(CCC+/Negative/NR) | ||
| We view Valaris' environmental risk as high compared to peers in the oilfield services sector because of its focus on offshore drilling services. Potential oil spills, while unlikely, are generally more difficult to contain and repair in offshore wells than onshore wells. Clean-up and remediation costs, in addition to potential fines, for which E&P operators generally are primarily responsible, can also have a material negative financial impact on offshore drillers. In addition, some of the company's offshore rigs operate in harsh environment or can be hit by hurricanes, which could cause damage to the equipment, harm employees or cause oil spills. While the company has insurance, it may be affected by larger-than-anticipated financial obligations, high deductibles, or increased regulatory scrutiny, which could increase costs or hurt demand for offshore drilling services. We view Valaris' management and governance as satisfactory, reflecting the company's long and solid operational track record as one of the premier offshore driller worldwide and its experienced management team. | Christine besset | |
| Vantage Drilling International(CCC+/Stable/--) | ||
| As an offshore oil and gas drilling services provider, we view Vantage as more exposed to stringent environmental rules and regulations than the industry more broadly. We believe this leaves the company subject to additional risk given that failure to adequately comply with these requirements could result in significant fines, loss of contracts, or suspension of activity. Vantage's fleet includes jackup rigs that operate in shallower water depths and generally less technically challenging conditions. In addition, it also operates more technically advanced drillships, which are capable of operating in more complex ultra-deepwater situations. This exposes Vantage to potential environmental incidents such as an offshore oil spill or water contamination from other hazardous substances and could result in burdensome financial penalties, suspension of Vantage's activity, and in severe cases industrywide moratoriums on regional offshore activity, which would hurt Vantage. Furthermore, Vantage's operations could be suspended as a result of this type of event even when a third party is at fault. | Paul O'Donnell | |
| Ratings as of Feb. 11, 2020. | ||
This report does not constitute a rating action.
| Primary Credit Analysts: | Simon Redmond, London (44) 20-7176-3683; simon.redmond@spglobal.com |
| Thomas A Watters, New York (1) 212-438-7818; thomas.watters@spglobal.com | |
| Michael V Grande, New York (1) 212-438-2242; michael.grande@spglobal.com | |
| Secondary Contacts: | Christine Besset, Dallas + 1 (214) 765 5865; christine.besset@spglobal.com |
| Ben B Tsocanos, New York (1) 212-438-5014; ben.tsocanos@spglobal.com | |
| Danny Huang, Hong Kong (852) 2532-8078; danny.huang@spglobal.com | |
| Michelle S Dathorne, Toronto (1) 416-507-2563; michelle.dathorne@spglobal.com | |
| Edouard Okasmaa, Stockholm (46) 8-440-5936; edouard.okasmaa@spglobal.com | |
| Luisa Vilhena, Sao Paulo (55) 11-3039-9727; luisa.vilhena@spglobal.com | |
| Luis Manuel Martinez, Mexico City (52) 55-5081-4462; luis.martinez@spglobal.com |
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