Key Takeaways
- Gulf Cooperation Council (GCC) energy players' spending on sustainability is picking up, but will not contribute materially to cash flow over the next five years, in our view, despite a greater focus on environmental targets in the region.
- We believe the slower spending pace stems largely from regional energy companies being significantly more shielded than global peers' to energy transition risks as well as the currently lower returns on green and renewable projects.
- The sector's sustainable debt issuance is also unlikely to see a strong uptick, in our view, due in part to fewer suitable projects being undertaken by the sector.
S&P Global Ratings believes that GCC carbon-heavy energy players, namely oil and gas and chemical companies, are unlikely to meaningfully adjust their strategies and spending in the next five years in the face of the accelerating energy transition. Many are aware of the risks and opportunities ahead and some are making real commitments to environmental targets, however timelines to achieve these are longer than global peers' and we don't expect to see shifts in asset profiles in the short-to-medium term.
National Environmental Targets Haven't Yet Translated Into Ambitious Corporate Commitments
Some GCC countries, notably the United Arab Emirates (UAE), Saudi Arabia, and Bahrain, have announced commitments to net-zero carbon emissions (see Table 1). To achieve net zero, governments would need to ensure that any carbon dioxide released into the atmosphere from domestic corporate activities is offset by an equivalent amount being removed. These policy shifts underline that the region's oil-rich countries are increasingly considering the energy transition in their long-term objectives. More so than in other regions, large domestic energy firms, which contribute materially to overall economies, will be critical to meeting government objectives, due to their large size and environmental footprint.
Table 1
| GCC Net-Zero Commitments | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Country | Net-zero commitment | Target date | Climate-related investment commitments | Renewables contribution to electricity | ||||||
| Saudi Arabia | Yes | 2060 | $187 billion in climate action by 2030 | 50% by 2030 | ||||||
| United Arab Emirates | Yes | 2050 | $163 billion in clean and renewable energy by 2050 | 50% by 2050 | ||||||
| Bahrain | Yes | 2060 | N/A | 5% by 2025 | ||||||
| Oman | Considering | 2050 | N/A | 20% by 2027 | ||||||
| Kuwait | No | N/A | N/A | N/A | ||||||
| Qatar | No* | N/A | N/A | N/A | ||||||
| N/A--Not available. Source: S&P Global Ratings, UAE government portal, Reuters, Enerdata, The National, Al Arabiya. *Member of Net-Zero Producers Forum. | ||||||||||
Government objectives are starting to filter down to the energy sector. Specifically, large government-related entities, such as the national oil companies (NOCs) and large chemical players with very strong links to the governments, are aligning their sustainability strategies with national sustainability goals. A few of the big players--including Aramco (not rated) and Saudi Basic Industries Corp. (SABIC; A-/Positive/A-2) in Saudi Arabia--have committed to net-zero targets, which will aid in meeting the Paris Agreement commitments of their respective countries. Additionally, a number of other large players, including Abu Dhabi National Oil Co. (ADNOC; not rated) in the UAE and QatarEnergy (AA-/Stable/--) in Qatar, have set targets to reducing carbon emissions, including by committing to eliminate routine flaring (the practice of burning off large unwanted quantities of gas during crude oil extraction) and carbon intensity reduction.
That said, it remains somewhat unclear how GCC energy companies with environmental targets are defining these targets. Most notably, the extent to which Scope 3 emissions--that is emissions produced from the use of a company's products by end users--are included in corporate targets and will be addressed is still elusive. This is an extremely important detail, given that the Scope 3 emissions account for the largest share of the total emissions footprint of many entities operating in the region. By comparison, BP PLC (A-/Stable/A-2) in the U.K., one of the industry leaders in energy transition, has been reporting Scope 3 emissions since 2019 and its target to become a net-zero company by 2050 or earlier includes Scope 1 and Scope 2 across its entire operations and Scope 3 emissions for carbon in upstream oil and gas production.
Gulf energy companies' paths to meet those environmental objectives in the coming years are less detailed and prescriptive than those of most global industry leaders, in our view. Even though environmental commitments are forming an increasing part of the GCC energy companies' overall strategies, bigger players' medium-term targets are more relaxed than those of most international peers and their strategies to achieve these goals are more ambiguous. For example, QatarEnergy and ADNOC target an upstream reduction of carbon intensity by 15% by 2030 and 25% by 2030 (QatarEnergy baseline is 2013; ADNOC baseline not provided), although their strategies to achieve these targets are not clear. Meanwhile, BP and Shell target net zero by 2050 and have set interim targets. For BP, this includes a 20% reduction (in Scope 1 and Scope 2) by 2025 and 50% by 2030 (baseline 2019); and Shell targets reducing its net carbon intensity by 20% by 2030 and 45% by 2035 (before The Hague ruling; baseline 2016). BP's strategy also includes cutting hydrocarbon production by 40% by 2030, while increasing its share of natural gas production and investing in renewable operations, for example. Shell's strategy includes reducing oil production, investing in carbon capture and storage, using emission offsets, and nurturing a net-zero culture by linking the remuneration of more than 16,500 staff to emission reductions, among other initiatives.
Green Capital Expenditure Is Rising, But Unlikely To Shift Asset Profiles Soon
In this context, we expect energy players' capital expenditure (capex) toward environmental efforts will rise in the next decade, but from a low base. There is a clear recognition from GCC energy firms of the opportunities and challenges posed by the energy transition. However, we believe it will take time before well-articulated (quantitively and qualitatively) sustainability strategies with meaningful spending behind them materialize.
Companies are participating in sustainability initiatives, but often only have minority stakes in these investments. Most of the NOCs in the region are investing in renewables, introducing blue and green hydrogen, as well as selling blue ammonia to increase the push for clean energy, but are doing so largely through partnerships with power and utilities or international players. Therefore, we don't expect this will materially impact the cash flows and overall capex of NOCs and chemical companies that we rate over the next five years.
That said, in the oil and gas sector, we have observed a couple of noteworthy investments in environmentally friendly projects:
- In December 2021, ADNOC and Abu Dhabi National Energy Co. PJSC (TAQA; not rated) announced a $3.6 billion strategic project to significantly decarbonize ADNOC's offshore production operations and lower the carbon footprint of ADNOC's offshore operations by more than 30%. ADNOC would own a 30% stake in the project.
- In December 2021, ADNOC and TAQA announced they will join Mubadala Investment Co. (100% shareholder of Mamoura Diversified Global Holding PJSC [AA/Stable/A-1+]) to become shareholders in Masdar, a government-owned renewable energy company, to support the UAE's role in the energy transition, which combines the companies' renewable energy and green hydrogen portfolios into Masdar. This translates into a combined current, committed, and exclusive capacity of 23 gigawatts (GW) of renewable energy (with plans to reach at least 50 GW by 2030), with TAQA owning a 43% shareholding in Masdar's renewable energy business with Mubadala retaining a 33% share and ADNOC holding a 24% stake upon completion of the transaction. At the same time, ADNOC will take a 43% stake in Masdar's green hydrogen business, with Mubadala and TAQA retaining 33% and 24%, respectively.
- In January 2022, Masdar announced investments in various programs to determine commercial viability of hydrogen.
Similarly, we have noted the following transactions in the chemicals sector:
- In March 2022, SABIC announced a new collaboration with Kraton to deliver certified renewable butadiene from its Trucircle portfolio for use in Kraton's certified renewable styrenic block copolymers. The company also announced that it secured 300 GW-hours (GWh) of wind power for its petrochemicals site in the Netherlands. As a note, SABIC plans to add 4 GWh of wind and solar energy at each of its global sites by 2025.
- In September 2021, EQUATE's (BBB/Positive/A-2) wholly owned subsidiary MEGlobal announced that it entered into a five-year agreement with Calpine Energy Solutions to purchase more than 1.5 megawatt-hours of renewable electricity to fulfill 100% of expected needs of its Oyster Creek site in the U.S. from 2023.
Investment Pace Illustrates Longer Timeframe To Adapt To The Energy Transition
We believe there are several reasons why GCC energy firms may have less incentive to accelerate spending on environmental goals.
The lack of urgency to step up environmental efforts reflects that GCC NOCs may be significantly more shielded than global peers' to near-term energy transition risks. We think larger GCC players are likely to face the inevitable business and financial impacts of the energy transition at a later stage than oil major peers in other regions, given their large and abundant reserves, good cash flow visibility, and attractive cost-competitive profiles, which could leave them as the last ones standing among oil producers. These companies are also largely government owned, and therefore are less pushed by active shareholders to accelerate investments in the energy transition and make tough strategic choices that could have long-term environmental benefits, but would probably translate into lower profitability and dividends in the short term. As such, we believe that these features that underpin GCC energy players' currently very strong credit quality are also slowing down the inclusion of ambitious and medium-term sustainability performance targets within their corporate strategies.
Additionally, GCC players also benefit from low-intensity gas-based feedstock like methane and ethane for downstream production with very low lifting costs. This means regional energy players are already better positioned from a greenhouse gas emission perspective than most global peers, even low-cost players such as those in Russia. For more details, see "GCC Low-Cost Producers May Be Better Placed Than Most Oil And Gas Majors As The Energy Transition Heats Up," published Sept. 27, 2021.
Chart 1
The typically lower profitability of renewables projects is another factor that could explain so-far modest investments. This is especially true given the financial strength and size of many local energy firms. Interestingly, when comparing the average return on capital of integrated oil companies with those for renewable companies (specifically electricity renewables), we see an obvious differential, which could be one of several factors behind the delayed and limited investment in the renewable sector, in our view. GCC NOCs averaged a return close to 30%, over the past two-to-three years, while European listed renewable companies averaged less than 5% in 2021 (see Chart 1). So, while we expect GCC players will make sizeable capex investments over the next five years exceeding $70 billion on average, we estimate only a minimal proportion will be in the renewable segment (see Chart 2).
Chart 2
We also note that renewable projects may be subject to substantial engineering costs overruns or inflation of raw materials costs, all of which are not easy to predict and anticipate. Large energy players in the region (oil and gas, or chemicals) have generally strong profitability and ample cash flows and can afford adding relatively less profitable but more environmentally friendly segments, to the operating model. We believe this is an inevitable strategic arbitrage for those players, but it will take some time. Smaller and less profitable players may wait even longer before moving.
Sustainable Issuance Is Unlikely To See A Sudden Surge
The energy sector will continue to only make up a small fraction of total sustainable debt issuance volumes in the GCC in the short term, in our view. This is despite the GCC's total sustainable debt issuance--including green bonds, green loans, sustainability bonds, sustainability-linked loans, and sustainability-linked bonds--reaching a record $14.5 billion in 2021 for all sectors, according to data from Bloomberg and the Environmental Finance Bond Database (see Chart 3). While the financial sector has been the driving force behind higher issuance, the energy sector's volumes have hovered around the $2.0 billion mark for the past two years.
Chart 3
The sector's lower issuance volumes reflect a lack of suitable projects, especially for oil and gas as well as larger chemical companies that are owned by the NOCs. We believe this can be traced back to many of the same factors holding back Gulf energy players from adapting their spending and strategies:
- Players enjoy strong returns from core business and green and sustainable projects tend to offer lower returns. As such, existing capex and debt issuance plans still predominantly revolve around the core hydrocarbon business and projects that have a high environmental footprint. Given the lack of projects in the pipeline that investors would consider green, there is a limited focus on green debt issuances. Over time, some issuers in these hard to abate sectors may choose to issue sustainability-linked debt instead, since sustainability-linked instruments are more flexible than green bonds given proceeds may be used for general corporate purposes.
- GCC energy firms also have more time than international peers to focus on the energy transition, in our view, and to issue green debt to support those strategies. This is supported by existing government ownership structures, competitive cost positioning, as well as relatively lower greenhouse gas intensity levels given gas-based feedstock.
We also note lower sector participation in capital markets. With the exception of Aramco, none of the NOCs in the region are publicly listed. This is in contrast with local financial institutions. Most of the local banks in the GCC are publicly listed on domestic exchanges, and contribute to a significant portion of stock market indices, which leaves room for more investor scrutiny, including for green and sustainable debt instruments.
The prevalence of joint ventures to develop renewables and environmentally friendly projects may also mask some issuance. As mentioned above, issuance tends to happen more at the project or joint-venture level, and not directly at the oil and gas or chemical companies. Many transactions classified in utilities and renewables are indeed from joint ventures with a NOC partner. These will not be factored into energy companies' issuance levels.
Utilities and renewables will likely continue to be more active in sustainable issuance than the broader oil and gas and commodity chemical players (see below table). In 2022, Abu Dhabi-based Sweihan PV Power Co. PJSC (SPPC) issued $700.8 million of 3.625% fixed-rate senior secured green bonds (BBB+/Stable/--) due 2049 in January 2022, and news circulated in February 2022 relating to ADNOC contemplating green bond issuance or sustainability-linked bonds. In total, overall corporate sustainable debt financing contribution stood at about 10% of total GCC corporate issuances in 2021, compared with the global average of 13% (excluding loans)(see "Global Sustainable Bond Issuance To Surpass $1.5 Trillion In 2022," published Feb. 7, 2022), and we estimate the contribution is a bit smaller for oil and gas, or chemicals sectors.
Table 2
| GCC Energy Sector's Sustainable Issuance (Bil. $) | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Country | Asset type | Issuer | 2017 | 2018 | 2019 | 2020 | 2021 | |||||||||
| Qatar | Green loan | Siraj 1 Qpsc | -- | -- | -- | 0.0 | -- | |||||||||
| Saudi Arabia | Green loan | Dammam West Co. For Water | -- | -- | -- | 0.1 | -- | |||||||||
| Saudi Arabia | Green loan | Dumat Al Jandal Wind Co. | -- | -- | 0.3 | -- | -- | |||||||||
| Saudi Arabia | Green loan | Haya Pow & Desalination | -- | -- | 0.2 | -- | -- | |||||||||
| Saudi Arabia | Green loan | Sakaka Solar Energy Co. | -- | 0.2 | -- | -- | -- | |||||||||
| Saudi Arabia | Green loan | Saudi Electricity Co. | -- | -- | -- | -- | 0.5 | |||||||||
| Saudi Arabia | Green bonds | Saudi Electricity Co. | -- | -- | -- | 1.3 | -- | |||||||||
| Saudi Arabia | Green loan | Sudair One Renewable Energy | -- | -- | -- | -- | 0.6 | |||||||||
| UAE | Green loan | Dhafrah Pv2 Energy Co. | -- | -- | -- | 0.9 | ||||||||||
| UAE | Green loan | Dubai Waste Management | -- | -- | -- | -- | 0.5 | |||||||||
| UAE | Green loan | Masdar Abu Dhabi | -- | -- | -- | -- | 0.1 | |||||||||
| UAE | Green loan | Mohammed Bin Rashid Al M | -- | 1.5 | -- | -- | -- | |||||||||
| UAE | Green loan | Noor Energy 1 Psc | -- | 0.4 | 2.5 | -- | -- | |||||||||
| UAE | Green loan | Nur Navoi Solar Foreign | -- | -- | -- | 0.0 | -- | |||||||||
| UAE | Green loan | Shuaa Energy 2 Psc | 0.7 | -- | -- | -- | -- | |||||||||
| UAE | Green loan | Sweihan Pv Power Co Pjsc | 0.7 | -- | -- | -- | -- | |||||||||
| Total | 0.1 | 2.1 | 3.0 | 2.3 | 1.7 | |||||||||||
| Source: Source: S&P Global Ratings, Bloomberg, Environmental Finance Bond Database. | ||||||||||||||||
We expect green transactions within the energy sector should increase, albeit very gradually. This reflects our expectation of investors increasing scrutiny on ESG targets within overall strategies and that local regulations will come into effect and increase need for these transactions.
Related Research
- Qatar Could Gain As Europe Diversifies From Russian Gas, March 16, 2022
- Global Sustainable Bond Issuance To Surpass $1.5 Trillion In 2022, Feb. 7, 2022
- ESG Credit Indicator Report Card: Oil And Gas Upstream And Refining, Nov. 23, 2021
- GCC Low-Cost Producers May Be Better Placed Than Most Oil And Gas Majors As The Energy Transition Heats Up, Sept. 27, 2021
This report does not constitute a rating action.
| Primary Credit Analyst: | Rawan Oueidat, CFA, Dubai + 971(0)43727196; rawan.oueidat@spglobal.com |
| Secondary Contact: | Simon Redmond, London + 44 20 7176 3683; simon.redmond@spglobal.com |
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