Some GCC NOCs accelerated their sustainability targets after the 28th Conference of the Parties (COP28), which took place in the fourth quarter of 2023. Even so, we expect the overall shift in strategies to adapt to the energy transition will remain gradual as NOCs continue to prioritize their core operations--oil exploration and production. GCC NOCs are as exposed to energy transition risks as their global listed peers, but their financial positions are generally stronger and benefit from operating costs per barrel of less than $10 on average.

To assess the potential credit implications of GCC NOCs' incremental low-carbon investments, we updated our hypothetical stress scenario (see "National Oil Companies In GCC Can Absorb The Energy Transition Impact For Now," published March 8, 2023). Under this scenario, we assume GCC NOCs' capital expenditure (capex) could increase by $15 billion-$25 billion annually because of investments in sustainability-related projects over 2023-2030. We expect most GCC NOCs' debt to EBITDA will continue to average less than 2.0x at least through 2026.

GCC NOCs Are Committed To Reducing Emissions

Most GCC NOCs committed to net-zero targets for scope 1 and 2 emissions by 2045 (Abu Dhabi National Oil Company [ADNOC]; not rated), 2050 (Saudi Aramco; not rated, Energy Development Oman SAOC; BB+/Positive/--, Kuwait Petroleum Corporation; not rated), and 2060 (Bapco Energies; not rated) to help the respective governments meet national sustainability targets (see chart 1). In line with global listed peers, GCC NOCs' pathways to reducing emissions focus on decarbonizing operations--through improving electrification, increasing carbon capture, and reducing upstream methane emissions--increasing investments in renewable energy and the green hydrogen supply chain, and advancing biodiversity and nature-based solutions. We note, however, that NOCs do not have targets for scope 3 emissions, which constitute most of their carbon footprint and include all indirect emissions that occur in the value chain, including upstream and downstream operations. According to S&P Global Sustainable1, scope 3 emissions constituted about 85%-90% of the sector's total emissions globally in 2021.

ESG disclosures are on the up

GCC NOCs have ramped up their environmental, social, and governance (ESG) disclosures, which are mainly based on voluntary guidelines. In our opinion, however, GCC NOCs' sustainability-related disclosures fall short of those of global listed peers. Yet we note some improvements, for example in the form of some GCC NOCs' disclosure of market-based scope 2 emissions, as opposed to location-based scope 2 emissions. The former include indirect emissions from energy providers, based on direct arrangements with these providers, while the latter focus on emissions that result from local grid conditions. Most GCC NOCs do not disclose scope 3 emissions yet.

GCC Countries' Climate Adaptation Measures Require Financing

According to the UN Adaptation Gap Report 2023, countries in the Middle East and North Africa (MENA) would need to spend an average of about $27 billion annually over 2021-2030--or about 0.7% of the region's GDP--to finance climate adaptation measures (see chart 2). These measures focus on adjusting to the current and future effects of climate change, such as storms or droughts, and differ from climate mitigation measures, which primarily aim to reduce emissions. Based on our expectation of 2%-4% real annual GDP growth in rated GCC countries over 2024-2026 and considering the UN Adaptation Gap Report's estimate for the region's funding needs, we extrapolate that GCC countries annual adaptation financing needs could reach about $25 billion-$35 billion on average (see chart 3). This estimate is for illustrative purposes and is derived from our expectation of GCC countries' contribution to total GDP in the Middle East and North Africa (MENA), the UN Adaptation Report Gap 2023 expectations for adaptation financing requirements for the MENA region, and potential growth expectations for the GCC region.

Chart 2

Chart 3

Financing needs for climate adaptation measures exceed expectations

In our view, financing needs for climate adaptation are slightly higher than GCC NOCs' estimates. ADNOC allocated $23 billion to low-carbon investments in January 2024. Based on our calculation, low-carbon investments average about 20% of total investments, or capex, of globally listed oil companies over 2024-2026, although the contribution varies among different companies.

If we extrapolate this for GCC NOCs, including unrated companies, and consider publicly available information, market consensus for listed companies, and our base case for rated NOCs' total capex needs, we expect GCC NOCs will need to earmark about $15 billion-$25 billion annually for low-carbon investments over 2023-2030, while still preserving their credit metrics. This forms a large part of the annual adaptation financing needs of $25 billion-$35 billion that we estimate for the GCC countries. This is in line with our previous expectation for 2022-2025 (see chart 4). We note that GCC NOCs' actual investment needs could exceed these estimates since the estimates are based on international recent trends, which might not be sufficient to achieve net zero. The figures are for illustrative purposes only and highlight the overall effect of climate adaptation measures on GCC NOCs' creditworthiness.

Chart 4

Banks' role in funding adaptation measures is limited for now

Typically, GCC NOCs benefit from solid balance sheets and strong credit metrics, with reported average debt to EBITDA below 2.0x. This means they can fund most of their projects without having to revert to external financing sources. At the same time, we think both banks and capital markets will play a role in funding the GCC countries' energy transition. Given the size of the GCC banking systems and their capitalization, we expect they will have the capacity to cater for the funding needs of the NOCs' low-carbon investments over the next few years if necessary. However, we observe that NOCs, which are generally among the largest and internally-focused corporates in the GCC countries, are typically financed outside the local banking systems.

The (Un)Availability Of Sustainable Financing For NOCs

Even though GCC NOCs are generally cash-rich, balancing cash calls with capex requirements is key. Sizeable cash calls from governments--the ultimate shareholders in most cases--in the form of royalties, income tax, and dividends, as well as high capex requirements in core businesses could exhaust NOCs' cash balances (see chart 5). Considering the planned low-carbon investments, it is therefore worth monitoring the stickiness of dividends and NOCs' commitment to their financial policies.

Chart 5

Sustainability-linked bonds take the lead in the oil and gas sector

Green, social, sustainable, and sustainability-linked bonds (GSSSB) of oil and gas issuers account for less than 1% of global GSSSB issuances (see chart 6). Most GSSSB in the sector are issued by companies that are based in Canada, Finland, and Italy, including Enbridge, Neste Oyj, and Eni, with GSSSB issuances in these three countries totaling about $8.4 billion in 2023. Sustainability-linked bonds represented 78% of oil and gas companies' GSSSB issuances globally in 2023, while green use-of-proceeds bonds accounted for 22% of issuances. The prevalence of sustainability-linked bonds over green bonds in the oil and gas sector deviates from GSSSB issuance trends in the Middle East and globally (see chart 7). At the same time, we expect green bonds will prevail sustainability-linked instruments in the GSSSB market. This is because market participants doubt that sustainability-linked bonds will meet their performance targets, not least since pricing incentives to reach these targets do not exist.

Chart 6

Chart 7

GSSSB issuances could increase in GCC countries

Given the relatively small share of renewable energy sources in GCC countries' electricity generation, compared with other regions (see chart 8), and GCC countries' net-zero targets, we expect investments in renewable energy will increase. This spells opportunity for GSSSB. For instance, the UAE target to increase its renewable energy capacity by 14.2 gigawatt (GW) by 2030, while Saudi Arabia aims for 100 GW by the same year. As per Saudi Arabia's nationally determined contributions, renewable energy technologies include photovoltaic and concentrated solar power systems, wind and geothermal energy, waste-to-energy, and green hydrogen.

Chart 8

GCC NOCs Must Clear Some Hurdles To Continue Reducing Their Carbon Footprints

The final agreement of COP28, the UAE Consensus, calls for countries to transition away from fossil fuels, triple renewable energy generation, and double energy efficiency globally by 2030. As a result, we expect NOCs will focus on three main areas:

• Introducing measures to reduce emissions from traditional operations;
• Increasing renewable energy investments; and
• Changing the production mix to increase exposure to natural gas and hydrogen-based solutions, even though the latter are not yet available at scale.

Chart 9

Some investments could expand the lifetime of high-emitting assets

Reducing emissions in the oil and gas sector is vital to achieve an LCCR future since the sector is a major contributor to global warming. Considering whether investments create emission lock-ins--meaning perpetuating assets or processes that delay or prevent the transition to low-carbon alternatives, even though they aim to reduce emissions associated with fossil fuel extraction or refining--plays an important role in our Shades of Green assessments. Emission lock-ins include powering oil and gas production, as well as fossil fuel extraction, processing, or distribution at levels that are incompatible with the 2050 scenario outlined in the Paris Agreement. Our Shades of Green assessments consider emissions over the asset lifetime. NOCs' low-carbon projects reduce emissions in the short term but could expand the lifetime of high-emitting assets. As a result, we typically view any project, including NOCs' projects that are associated with oil and gas extractions, as 'Red' activities, which are not compatible with an LCCR future. These considerations also apply to enhanced oil recovery activities and carbon management measures that solely serve the needs of oil production and refinery processes.

Targets to increase renewable energy generation capacity in the GCC are ambitious

Renewable energy sources account for less than 1% of GCC countries' overall energy mix (see chart 10), but GCC countries aim to increase the share of renewable energy in their energy mix significantly over the medium term. Achieving these goals requires significant investments in renewable energy generation facilities. Renewable energy sources, including solar, wind, and geothermal energy, are key to a low-carbon future and contribute to mitigating climate change. We therefore typically assign Dark green shade to renewable energy-related activities, which implies that these activities directly correspond to the long-term vision of a future that is aligned with the Paris Agreement. However, we also take into account value chain context and, specifically, the potential consumers of produced energy into account. For renewable energy assets, we examine if a direct physical connection to oil and gas activities exists or if electricity is delivered to the grid. Additionally, we consider the lifecycle emission risks of renewable energy technologies' supply chains, including material sourcing, manufacturing, transportation, construction, and end-of-life treatment.

Chart 10

The production mix will change over the long term

Several GCC NOCs, such as Saudi Aramco, QatarEnergy, and ADNOC, have already started investing in hydrogen-based solutions, including blue ammonia and blue hydrogen production. Yet these solutions are still not available at scale. Hydrogen and ammonia will likely play a key role in the energy transition because of their ability to reduce emissions in power generation, heavy transport, heating, and industrial processes.

We expect NOCs will consider investing in retrofitting the existing natural gas infrastructure to adapt it to hydrogen. Retrofitting pipelines reduces the obsolescence risk and allows for the delivery of a cleaner fuel alternative. In any case, we would consider the potential climate impact of the retrofitted pipelines in our Shades of Green assessments. Previously, we assigned Light green to the financing of similar projects in Colombia and Romania.

The Ratings Impact Of NOCs' Decarbonization Efforts Will Be Limited

GCC countries are highly exposed to the energy transition. Even so, regional NOCs' investments in reducing emissions fall short of those of their global peers. We expect that GCC NOCs will have sufficient financial buffers and competitive advantages to absorb the incremental investments that are necessary to catch up with global peers and that they can preserve their credit ratios over the next five years. While NOCs' strategies and announced initiatives indicate their commitment to adapting to the energy transition, concrete adaptation measures remain unclear. We will therefore continue to monitor if GCC NOCs' climate targets become more tangible and how they balance energy efficiency with emission lock-in risks.

Related Research

• Sustainable Bond Issuance To Approach $1 Trillion In 2024, Feb. 13, 2024
• Second Party Opinion: Government of Romania's Green Bond Framework, Dec. 20, 2023
• Middle East Sustainable Bonds May Expand Further, Nov. 14, 2023
• Second Party Opinion: Saudi Awwal Bank's Sustainable Debt Framework, Oct. 31, 2023
• Second Party Opinion: Grupo Energía Bogotá (GEB) S.A. ESP's Sustainable Financing Framework, Oct. 30, 2023
• Analytical Approach: Shades Of Green Assessments, July 27, 2023
• National Oil Companies In GCC Can Absorb The Energy Transition Impact For Now, March 8, 2023