Despite projections that natural gas demand would climb steeply in the first decade of a carbon-constrained future, America's natural gas producers were largely silent about whether President Donald Trump should move the U.S. out of the Paris Agreement on climate change.
After integrated oil companies like Exxon Mobil Corp., which is the nation's top natural gas producer and placed a $41 billion bet on shale gas with the purchase of XTO Energy Inc. at the height of the shale gas boom, none of the independent exploration and production companies contacted by S&P Global Market Intelligence wanted to comment on a withdrawal from the climate change agreement.
ExxonMobil has reaffirmed its support for U.S. participation in the Paris agreement, as have fellow supermajors such as Chevron Corp. BP plc and Royal Dutch Shell plc. The distinguishing feature of all is a history of loading up on natural gas reserves and infrastructure to grab portions of an expanding global market for gas that will be fed in part by methane from U.S. shale plays.
"What you characterize as resounding silence among industry groups could be explained by the challenges of balancing diverse corporate constituencies," veteran energy and politics analyst Kevin Book, managing director at Clearview Energy Partners in Washington, D.C., said on May 30. President Trump is expected to announce his decision on whether to stay or leave the Paris agreement at 3 p.m. ET on June 1.
"Different companies with different priorities emphasize different policies," Book said. "U.S. E&P companies may oppose extranational governance, especially rules that could increase costs. Culture matters, too. U.S. supermajors grew up in American oilfields and they tend to be engineers at heart. By contrast, European supermajors from resource-poor home states have entrenched trading cultures. Traders may be willing to play in new markets faster than engineers."
"Climate activism can sell more natural gas. Companies with more methane on their balance sheets may have economic incentives for climate activism," Book said.
Ratings agency Moody's noted in a study of E&P risks that "more methane on the balance sheet" is a decisive factor in calculating how much of a credit risk an oil and gas producer will be in carbon-constrained world.
"Global policy ambition to reduce carbon emissions represents a substantial threat to the oil and gas industry," a team led by a team led by Senior Analyst John Thieroff said in an April 26 note. "While the speed and scope of policy implementation remains uncertain, its intent and direction is not, and it is already affecting the sector. The industry's product cannot be changed and no technology exists at scale to mitigate its carbon emissions."
While crude oil reserves and production are most immediately at risk of becoming sidelined by carbon constraints, the risk that natural gas reserves do the same increases after 2040, Moody's said. For at least the next 20 years, however, companies skewed toward gas have opportunity as the fuel takes the place of coal before being replaced by renewables, according to Moody's.
The E&P's carrying the most of what Moody's calls "carbon transition risk," or CTR, have production mixes that are 25% gas or less and have 50% of their 3P (proved, possible and probable) reserves in high cost oil projects, such as oil sands, arctic or offshore.
At the opposite end of the spectrum, the least risky E&P's sound much like U.S. pure-play shale operators: 75% or more of reserves in gas, less than 10% in offshore or frontier plays such as the Arctic and low extraction costs.
"Although we don't expect CTR to have an immediate effect on ratings, we do anticipate negative pressure on ratings related to CTR to increase over time," Moody's said.
According to Book, the Big Three credit rating agencies — Fitch, S&P, and Moody's — may end up becoming hall monitors for carbon compliance in the future. "Ratings agencies have not, as a bloc, moved to incorporate the Paris scenario as their base case," Book said. "Ratings agencies and international regulators stand out as stakeholders to the climate debate given the history of the 2008 financial crisis. They were the fall guys and they want to repair the public trust. As a result, they could impose de facto climate strictures even without the Paris Agreement."