- We revised our risk assessment for the upstream oil and gas producers to moderately high from intermediate in January, flagging the industry's changing investment landscape.
- We expect to see sustained pressure on oil and gas producers' core cash engines from many stakeholders, including shareholders and courts.
- Uncertainties about rates of change in demand and the energy industry as a whole, present some of the most significant challenges for companies and their credit profiles.
If the latest news reports about the effects of environmental, social, and governance (ESG) trends and climate change on the oil and gas sector is any indication of what may be in store, some companies may be in for a rough ride. The events of last week underscore and highlight the threats the oil and gas (O&G) industry will face as renewable energy and measures to counter climate change take hold. Last January, S&P Global Ratings anticipated this risk and changed its industry risk assessment for oil and gas producers to moderately high from intermediate.
O&G Producers Take Several Hits
Shell ordered to deepen carbon cuts
Environmental activists in the Netherlands won a startling victory in May in the Hague District Court. The court ruled that Royal Dutch Shell PLC (Shell), must reduce its greenhouse gas emissions by 45% by 2030. Shell argued that its own target of net-zero emissions by 2050 was in line with the Paris Climate Accord but the ruling orders faster progress. The court held that Shell's timeline was insufficient and violated its duty-of-care to reduce emissions. Not only does the ruling apply to Shell but it applies to Shell's suppliers and customers of its products--Scope 3 emissions. The landmark ruling could pave the way for additional lawsuits against other global oil and gas producers, as well as other industries that are known heavy polluters. Indeed, there is a similar case against TotalEnergies pending in France. Moreover, there are about 425 pending climate lawsuits in various countries and about 1,375 lawsuits in U.S. courts, according to the Sabin Center for Change Law at Columbia Law School.
Shareholder activists take aim
The events in the Hague were followed by news that at Chevron Corp.'s annual shareholder meeting, 61% of shareholders approved a shareholder proposal from a Dutch activist group called Follow This, to force Chevron into cutting its carbon emissions. Although the vote is nonbinding, it applies to both reducing emissions in its production processes and in the products it sells to its customers. The activist group's win against Chevron follows on the heels of its victory earlier in the month against ConocoPhillips Co. and Phillips 66 Co. to reduce their carbon footprint.
Meanwhile, at the ExxonMobil's annual shareholder meeting, Engine No. 1, an activist hedge fund with a diminimus 0.02% of Exxon's stock, successfully won two of the 12 board of director seats and a third seat was decided as of June 2. Shareholders also were successful in garnering greater transparency from Exxon on climate change and its role. The hedge fund had been unsuccessful in its discussions with Exxon executives since December to commit Exxon into reducing its emissions to zero by 2050. The proxy fight was successful in garnering three of the four seats targeted and underscores the growing sentiment among investors and capital markets toward a future based on renewables rather than fossil fuels.
Pension fund and others agree
Pension funds and investment managers have also lent their support to ESG-related investment changes. Indeed, it's been reported that the nation's three largest pension funds, the New York State Common Retirement Pension Fund, the California State Teachers Retirement System, and the California Public Employees Retirement System have supported Engine No. 1's new board seats. Moreover, some of Exxon's largest shareholders like State Street, Vanguard, and BlackRock have all been extremely vocal and supportive of net-zero carbon by 2050. Losing three board seats, could also make it more difficult for Exxon executives to enact their strategies and the development of fossil fuels.
IEA issues dire warning
These events followed on the heels of the May 18 report issued by the International Energy Agency claiming that to reach net-zero carbon emissions by 2050 and commitments set out in the Paris Accord, there must be no new immediate investment in fossil fuel supply projects.
Problems Are Intensifying
These events regarding climate change underscores what has become a global concern among sovereign nations and investors and could serve as a wakeup call for an industry that is perceived by many to be slow to adjust to climate change and emission mandates. In our opinion, stricter regulations, substitution, and secular shifts in industry supply and demand fundamentals will contribute to a more difficult operating environment for fossil fuel producers and will likely augment the risk of stranded assets and significant asset writedowns. The events signal that oil and gas companies will likely face greater scrutiny from public stakeholders, potentially forcing oil and gas companies to reconsider where to allocate and deploy existing and future resources. Indeed, several large integrated oil and gas companies based in Europe have made strategic decisions to alter their business models to become more of an energy company rather than just an oil and gas company recognizing the threat posed by climate change and renewable energy. However, at this juncture we don't see these strategies as providing material credit differentiation.
The events also raise the specter that oil and gas companies could possibly be held legally responsible for their role in climate change while executives who choose to ignore climate change or don't act quick enough, could stand to lose their positions.
Industry Risk Remains Heightened
In a somewhat prescient move, S&P Global Ratings in January, revised the risk assessment for the oil and gas integrated, exploration and production (E&P) industry to moderately high risk (4) from intermediate risk (3) as well as the Midstream sector to an intermediate risk (3) from low risk(2). The revision, which led to downgrades of several E&P companies including Exxon, Shell, and Chevron, reflected our concerns about the trajectory of oil and gas supply and demand and the impact on producers of fossil fuels, given the increasing adoption of and transition to renewable energy alternatives to address climate change. We highlighted that market share encroachment of renewable energy over time will have broad implications for hydrocarbon demand, prices, and producers of both fossil fuels. We noted that due to the social and economic risks posed from global warming, sovereign and local governments globally have been enacting stricter policies and regulations while providing industry subsidies aimed at reducing greenhouse gas and carbon dioxide emissions from the burning of fossil fuels.
The transition and the timing of peak hydrocarbon demand in our view, has and will continue to accelerate due to COVID-19 and the growing adoption of ESG investment mandates amongst global investors and financial institutions. We also cited that the risk of disinvestment and capital market access may become more challenging and costly for hydrocarbon producers.
- Royal Dutch Shell PLC Downgraded To 'A+/A-1' On Heightened Industry Risk Assessment; Outlook Stable, Feb. 18, 2021
- Chevron Corp. Downgraded To 'AA-' On Change In Industry Risk Assessment; Outlook Stable, Feb. 11, 2021
- Exxon Mobil Corp. Ratings Lowered To 'AA-' On Revised Industry Risk Assessment; Outlook Negative, Feb. 11, 2021
- Ratings On Nine EMEA Oil And Gas Producers Affirmed Amid Increased Industry Risks, Jan. 28, 2021
- The Change To The Industry Risk Assessment For Exploration & Production Companies And What It Means For Issuer Ratings, Jan. 25, 2021
This report does not constitute a rating action.
|Primary Credit Analyst:||Thomas A Watters, New York + 1 (212) 438 7818;|
|Secondary Contact:||Simon Redmond, London + 44 20 7176 3683;|
No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.
Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.
To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw or suspend such acknowledgment at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.
S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process.
S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.standardandpoors.com (free of charge), and www.ratingsdirect.com and www.globalcreditportal.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.standardandpoors.com/usratingsfees.
Any Passwords/user IDs issued by S&P to users are single user-dedicated and may ONLY be used by the individual to whom they have been assigned. No sharing of passwords/user IDs and no simultaneous access via the same password/user ID is permitted. To reprint, translate, or use the data or information other than as provided herein, contact S&P Global Ratings, Client Services, 55 Water Street, New York, NY 10041; (1) 212-438-7280 or by e-mail to: firstname.lastname@example.org.