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ESG momentum may influence oil, gas funding, midstream valuations: S&P Global Ratings

Highlights

Funding costs already higher for carbon-intensive borrowers

'Green' projects, capex allotments different for EU/UK and US majors

Midstream assets may become more valuable due to no newbuilds

Since around 2017 and especially in the past year, the energy transition to low-to-zero-carbon fuels has gained momentum among investors and likely will influence their actions on future project funding availability and costs, a panel of S&P Global Ratings analysts said June 16.

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During the last several years, investment-grade credit issuances have a maturity of more than 10 years as many companies have sought to lock in low funding costs, Evan Gunter, director-ratings performance analytics for S&P Global Ratings, said during an S&P Global Ratings webinar on the challenges ESG (environment, social and governance) poses for North American energy companies.

"Within the North American energy sector, we estimate funding costs were about 75 basis points higher for the most carbon-intensive borrowers compared with those that showed the lowest carbon intensity," Gunter said.

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Also, issuers in energy sectors with relatively lower carbon intensity have been able to offer longer-dated debt at lower financing costs than their more carbon intense peers, he said.

Panelists pointed to two recent annual meetings where ExxonMobil shareholders voted in two ESG-friendly board members and, separately, 61% of Chevron shareholder votes recommended the company not only reduce production-related emissions but also in products sold to consumers, known as SCOPE 3 emissions.

And although those two super-majors, along with Shell, BP and Total, have pledged support for the goals of the Paris Climate Agreement and are already targeting emissions reductions, there are differences among them, Carin Dehne-Kiley, S&P Global Ratings director for US oil and gas, said.

BP, Shell and Total have net-zero emissions targets by 2040, higher capital funding allocated to clean energy projects (over $2 billion/year each), and a greater focus on projects that transform their business models such as renewable power generation, Dehne-Kiley said.

US majors' ESG capex much lower

On the other hand, ExxonMobil and Chevron have no net-zero targets set, lower capex of $400 million-$600 million/year on average allocated to clean energy projects, and greater focus on projects that transform their operations – for instance, flaring reductions and carbon capture/storage projects, she said.

Canadian oil and gas producers have also made significant progress overall in reducing per-barrel emissions, but total greenhouse gas emissions from conventional oil and gas and oil sands development have increased substantially since 1990, Michelle Dathorne, director of Canadian oil and gas for S&P Global Ratings, said.

Earlier this month, Canada's largest oil sands producers announced they had formed the Oil Sands Pathways Net Zero Alliance, with the objective of reaching net-zero emissions by 2050, Dathorne noted, adding their coalition shows the group believes oil sands producers need to take actions on behalf of climate change goals.

On the other hand, "if investor concerns and a [general] retrenchment in the industry should continue, it suggests there could be financing issues for these companies" in the future, she said.

While funding costs have fallen below pre-pandemic levels, the risk in credit financing and increased investment-grade oil and gas credit spreads remain modestly "wider" than those of the broad market, she added.

Some 'won't participate' in oil sands

Michael Grande, S&P Global Ratings senior director for North American infrastructure, said the ratings team has heard of investors that "won't participate" with oil sands producers since that commodity is seen as more of a heavy-intensity emissions producer.

"We know ExxonMobil's largest shareholders, [giant investment funds and managers] BlackRock and Vanguard, have been extremely vocal on behalf of net-zero emissions," Grande said.

On the other hand, "midstream is at a crossroads," he said. "There's definitely going to be significant changes in the future that are starting now in terms of investment shifting from hydrocarbons to other forms of energy."

Currently, midstream is contracted and dependent on production, Grande said. But management of midstream companies understand their future growth will be lower than was predicted in 2019 or pre-coronavirus.

While the US Energy Information Administration predicts consumption of petroleum and natural gas will not change that much in the next few decades, even if it drops a significant 50% there will still be a need for midstream infrastructure, said Grande.

But any near-term ratings impact most likely won't be that significant in the next few years, he said.

"What I think we'll end up seeing...[is that midstream] assets will become more valuable because you can't really build anything," he added. "At the same time, we're somewhat concerned with stranded assets and recontracting shifts."