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Asia's Oil Giants Will Be Key To Global Climate Fight

Asian carbon cutting will be critical to the effort to reduce global warming. The region releases more carbon than the rest of the world combined. Given Asia is the most populous continent, and most countries within are developing, it is hard for this region to achieve zero carbon emissions. The region does have one big policy advantage: its governments typically control at least one national oil company (NOC). S&P Global Ratings expects the NOCs will set the pace in Asia in slashing carbon emissions, even if this undermines their profits and credit standing.

Asian NOCs will likely find it difficult to transition to an entirely new business model. They may strand assets in the process, and they probably will not be as successful in renewable energy, carbon capturing, electric vehicle recharging, and the like, as they are at making and selling fossil fuels. Moreover, the transition could happen much more quickly than we now anticipate--say, in five to 10 years, instead of 10-20 years. A fast transformation may be messy and disruptive.

The move to carbon neutrality is one of the biggest policy challenges facing any nation. In Asia, much of the burden rests on the shoulders of the NOCs. Many have already committed to targets that outpace the government's carbon goals. The firms are simply the most obvious and effective lever that states can pull in achieving net-zero emissions. But what is good for the planet may not be good for the credit metrics or ratings on the NOCs.

Chart 1


China: CNPC/Sinopec/CNOOC (Danny Huang, Ronald Cheng, Crystal Wong)

China targets peak carbon emission by 2030 and net zero carbon emission by 2060. The country aims for a new energy vehicle penetration rate of 20% by 2025, from 5% in 2020, as China advances toward its ambitious carbon-neutrality target.

The three NOCs--China National Petroleum Corp. (CNPC), China Petrochemical Corp. (Sinopec), and China National Offshore Oil Corp. (CNOOC)--will be key to achieving this target. The three dominate China's oil and gas industry. They are among the country's largest state-owned enterprises, and take a leading role in helping the government achieve policy goals. CNPC and Sinopec have already established carbon emission targets that are ahead of national benchmarks, to set an example for the rest of the country.

Reduction in coal consumption, which accounts for more than half of China's primary energy, is a priority. Oil demand will continue to grow with demand for cars and chemicals, and will only peak in around 2030. The Chinese government views natural gas, which emits 50%-60% less carbon dioxide than coal, as key to reducing its carbon footprint.

China's natural gas consumption is likely to grow in the next two to three decades. Yet to achieve net zero carbon emission by 2060, the proportion of fossil fuel needs to be significantly lower. This assumes meaningful development of new energy, and technologies for carbon capture, utilization and storage (CCUS).

Today's assets will propel tomorrow's carbon goals.  The NOCs plan to transform into integrated energy providers. The idea is that they will leverage on their current strengths, allowing them to be competitive and profitable as the country moves away from legacy fuel. Such advantages include CNPC's large onshore oil and gas acreages, which is rich in solar, wind, and geothermal resources. Sinopec owns extensive gas station network that can be converted into charging stations. CNOOC holds substantial offshore acreage, on which it can build windfarms.

CNPC targets peak carbon emission by 2025 and near zero carbon emission by 2050. CNPC's domestic natural gas production first exceeded domestic oil production in 2020. The ratio of natural gas will rise to 55% of total domestic production and reach 420 billion cubic meters (bcm) to 440 bcm in 2025. In addition, CNPC owns more than 800,000 square kilometers, mostly in western China. The area is rich in onshore wind, solar, and geothermal resources.

As the largest oil and gas producer in China, CNPC has many exhausted oil and gas fields that can be used for carbon storage. However, it needs to find a way to profitably connect its resources in the west to its demand hub in the east. CNPC will raise its capital expenditure (capex) in new energy from 3% in 2021 to 10%-15% in 2025, to about US$4 billion-US$6 billion. The company has also proposed to set up a Chinese renminbi (RMB) 10 billion fund in April 2021 to invest in strategic emerging industries including new energy.

Sinopec aims to hit peak carbon emission ahead of the national goal, and to be carbon neutral by 2050. In its upstream division, the company plans to raise its natural gas production by 4 bcm each year in 2021-2022 to reach 42 bcm in 2022.

Coming soon: a vast network of car charging stations.  For its downstream operations, Sinopec will utilize its 30,000 gas stations to build 1,000 hydrogen stations, 5,000 battery charging/changing stations and 7,000 distributed solar power stations by 2025. It will also leverage on its status as China's largest hydrogen producer to develop more of this environmentally friendly energy. Currently Sinopec's hydrogen is "grey"--that is, derived from fossil fuels. The company intends to transition within the decade to blue hydrogen, where emissions are captured and stored, and then to green hydrogen, derived from renewable power.

Sinopec also plans to invest in CCUS and biomass. The key difficulties of hydrogen lie in the economic viability of projects. Profits depend on the cost of CCUS and the cost of electricity associated with making blue hydrogen.

CNOOC has not announced its carbon emission reduction plan. However, the company plans to spend 5% of annual capex on new-energy initiatives through China's current five-year economic plan, which runs to 2025. CNOOC's clean energy push focuses on offshore wind. This leverages on its dominant position in China's offshore oil and gas production, and its ability with offshore engineering. It also benefits from China's role as the largest wind turbine manufacturer globally.

The scale of CNOOC's windfarm operations will start small. One project began operating in 2020, and another is under construction. The key challenges of wind farm operators include high upfront investment, declining government subsidies, and volatile utilization. This all hits profitability.

CNOOC also aims to raise its natural gas production from 21% of total oil and gas production in 2021 to 30% in 2025.

It may be good policy, but is it profitable?  As oil and gas production of the three NOCs grow in the next five years, their cash flow generation and credit metrics should remain robust. The companies' increased investment in new energy will translate into limited hits on their credit profiles.

While the projects won't generate immediate returns, the investments are tiny compared with the enormous size of these organizations. The firms' key risk lies in commodity price levels--especially that of oil--if demand from developing countries cannot cover declining demand in developed countries.

The longer-term risk concerns whether the entities can establish sufficient returns from new-energy operations in time to offset the inevitable decline in cash flows from oil and gas. A failure to make a timely transition could lead to a deterioration in credit quality.

Our assessment of the Chinese NOCs' level of government support is unlikely to change in the next three to five years given the importance of oil and gas to China's energy mix, and the companies' policy role in maintaining energy security.

Their key risk lies in China's potentially rapid transition away from oil and gas. Should the NOCs fail to establish themselves in new energy or related technology, they may be tied to increasingly irrelevant carbon-based fuel. In one (unlikely) scenario, the entities remain so tethered to traditional energy the government sees less need to rely on them for the country's energy security. Their policy role would be diminished, as would be the state's implicit backing of their credit.

Chart 2


India: ONGC (Shruti Zatakia)

We view India's initiatives toward decarbonization as on par with most emerging countries, but in early stages compared with the developed world. In 2015, India committed to reduce the greenhouse gas emission intensity normalized by its GDP by about one-third by 2030, from 2005 levels.

India has a detailed framework on cutting carbon emissions covering energy, agriculture and infrastructure. India's emission intensity came down by about one-fifth between 2005 and 2014.

The government wants to derive 40% of installed electric-power capacity from non-fossil-fuel sources by 2030. The energy sector now contributes over 70% of India's total emissions. It aims to increase the share of natural gas to 15% from 6% in India's energy basket.

Oil and Natural Gas Corp. Ltd.'s (ONGC) investments in gas and liquified natural gas, and participation in the country's first gas-trading platform are in keeping with the country's carbon reduction targets. India also wants to create 450 gigawatts (GW) of renewable energy capacity by 2030.

India's carbon goals float on gas.  We believe the country's private sector will be key to achieving this goal. While ONGC has indicated plans to increase its renewables capacity to 10 GW by 2040 from 0.2 GW in 2019, the investments will likely remain small compared with its cash flow. The outlays will therefore be neutral to its credit profile.

India's transport sector is also among the country's fastest growing sectors, producing over 26 million vehicles annually. The government sees mitigation of the sector's emissions as essential to achieving the country's carbon goals. In that vein, New Delhi has laid out several policies aimed at matching global benchmarks on emissions and efficiency, and using more alternative fuels such as compressed natural gas in vehicles and public transport.

This and increased electric vehicle use should enhance the energy efficiency of the auto sector. A government initiative called the National Electric Mobility Mission Plan 2020 provides demand and supply incentives toward achieving this. We see ONGC playing an important role in encouraging adoption of cleaner fuels such as natural gas in India's transport sector.

ONGC's government ownership could mean the NOC will be essential to helping the country achieve its emission goals. While the company has not communicated on what investments it may make, our base-case assumes annual capex of Indian rupee (INR) 460 billion-INR475 billion over the next two fiscal years. We think this should be able to cover its emission reduction goals. It has, for example, developed "dynamic gas blending." This technology substitutes diesel with natural gas in large engines used in drilling rigs. This reduces diesel consumption of drilling rigs, thereby reducing emissions.

ONGC will also likely to continue to develop and register clean development mechanism projects and use its certified emission reduction credits to achieve carbon neutrality. The NOC cut the intensity of carbon emissions of its operations by 12% over the past five years.

Indonesia: Pertamina (Minh Hoang)

Indonesia aims for net-zero emissions by 2070, a target that puts it behind its Asia-Pacific peers. For carbon emissions, Indonesia maintains its pledge it made under the Paris Agreement. It aims to reduce emissions by 29% independently, or by 41% with international assistance, by 2030.

Indonesia's current goal only stipulates that the forestry and land use sector cut its emissions to close to zero by 2050. This puts less pressure on its energy sector, in our view.

The state-owned PT Pertamina (Persero) aims to cut carbon emissions by 30% by 2030. This includes an expectation that new and renewable energy will contribute 5.7% of the company's total consolidated revenue by 2030. We estimate this segment represents about 1% of the company's consolidated revenue as of 2020.

The company is likely to pursue more immediate decarbonization initiatives such as improved energy efficiency and reduced use of gas flaring. We are less clear on its five- to 10-year investment plan to transition out of carbon-intensive fuel.

Pertamina does target further investment in geothermal power assets, which we estimate will be about US$155 million, less than 2% of total capex budgeted over the next 12 months.

Pertamina has also started trials of its "green" refining initiative. The company aims to make oil products, including diesel and jet fuel entirely out of palm oil. The company targets a start of operations at its Cilacap refinery by the end of 2021 and will also look to convert its Plaju refinery into a factory for processing crude palm oil into biofuel.

Limited objectives and negligible credit effect for Pertamina.  Pertamina's energy transition objectives are limited, and we expect these to have a negligible effect on our credit profile on the company. This is consistent with our view that Pertamina's planning on addressing energy transition remains in its early stages.

The firm has not communicated on the timing and size of investments aimed at carbon management. We believe capex directed toward this goal will remain a negligible part, at below 5% of its total spending over the next two to three years.

Pertamina remains among the most critically important SOEs in Indonesia, in our view. The company's integral link with the government and its key role to the country's energy sector is unlikely to change, even as the country moves toward decarbonization. The private sector cannot easily replicate Pertamina's operations, bolstering its role as a key conduit for the government's energy policy.

Japan: Inpex (Taishi Yamazaki)

Japan aims to achieve net zero greenhouse gas emissions by 2050, and strives to cut its emissions by 46% from 2013 levels by 2030. This is up from the earlier goal of 26% announced in October 2020. Inpex Corp., as the leading oil and gas exploration and production company in Japan, is aligned with these goals. It aims to achieve net zero in absolute emissions by 2050.

We view this target as reasonable and comparable with many global peers that also aim for net zero emissions by 2050. The company has expertise in areas including carbon capture and can also apply technology developed from its oil and gas operations for use in renewable energy. Of the average annual capex of ¥250 billion–¥300 billion we expect the entity to make over the next five years, about 10% will likely be allocated to energy transformation.

Under our current oil price assumptions and assuming stable production at its Ichthys liquefied natural gas project in Australia, we estimate the company can generate solid free cash flow well in excess of ¥200 billion annually. This accounts for the above-mentioned investment in curbing carbon dioxide emissions.

As such, we believe the initiatives will not meaningfully affect its credit profile for at least the next two to three years. Beyond which, we expect the financial pressure will likely increase, partly due to these investments and partly due to the cost of developing Indonesia's massive Abadi liquefied natural gas project, planned for the mid-2020s.

Inpex has a key role in lifting Japan's self-sufficiency in oil and natural gas as per the Japanese government's energy security policy. Another company could not easily take on this role. Inpex also maintains strong links with the government, as illustrated by its permanent ownership of a "golden share" in the company. The share gives it veto power on decisions in certain circumstances.

We believe the company's strategic importance to the government will remain unchanged for the foreseeable future. It could be weakened if increasing pressure for decarbonization results in an accelerated shift in Japan's energy mix away from oil and gas. The company generates most of its cash flow from these energy types.

In our view, liquefied natural gas will remain an important energy source in Japan over the next five to 10 years. We expect growth in renewable energy in the country will be modest in this period. In addition, Inpex's role of providing long-term energy security to the nation as indicated by its very long reserve life (18 years on a proved basis) mitigates these risks.

Korea: KNOC (Junhong Park, Minjib Kim)

Korea is committed to ambitious carbon cutting. The government aims to reduce net manmade CO2 emissions by about 45% by 2030 (from 2010 levels). These goals flow from Korea's ratification, in 2016, of the 2015 Paris Agreement to limit global warming.

The country aims to be carbon neutral by 2050. It also intends to cut greenhouse gas emissions by about one-quarter below 2017 levels by 2030. The country's "2050 Carbon Neutral Strategy," announced in December 2020, contains more specific policy details, such as the technology needed for its green transition.

The government wants to increase the share of renewable sources in power generation. The country plans to reduce its reliance on coal to about 36% of power generation by 2030, from 45% in 2017. Growing use of renewables (on track to account for 20% of electricity produced by 2030, from 6.2% in 2017) and liquefied natural gas (18.8% from 16.9%) will address this gap.

Korea bets on hydrogen.  In addition, Korea aims to be a global leader in hydrogen-based energy. This would include hydrogen-fueled vehicles and hydrogen powered electricity generation.

In line with government goals, Korea National Oil Corp. has been investing in domestic energy and production projects that utilize liquefied natural gas and hydrogen. Also, it is trying to turn one of its domestic offshore gas production sites into a 200 megawatt (MW) offshore wind-power facility.

Korea Gas Corp. is even more aggressively addressing the policy changes. The company is expanding its liquefied natural gas infrastructure to handle growing demand. Moreover, it announced in April 2019 that it planned to invest Korean won (KRW) 4.7 trillion in the period through to 2030 to build hydrogen production and distribution infrastructure. This would supply almost 90% of the 1.9 million tons of domestic annual demand that we expect for the country by 2030.

Korea National Oil and Korea Gas will likely remain the de facto energy policy arm of the government. They will continue to closely work with the government to expand the country's use of environmentally friendly energy.

Investment to deliver these goals will only slightly strain the entities' cash flows. Likewise, we do not expect the new initiatives to lead to any meaningful earnings generation over the next few years.

Malaysia: Petronas (Shawn Park)

Malaysia's carbon targets will largely track its commitment to the United Nations Framework Convention on Climate Change. This involves a 35% cut in the emissions intensity of GDP by 2030, as compared with 2005 levels.

With oil and gas constituting 60% of Malaysia's carbon emissions in 2019, we view as significant Petroliam Nasional Bhd.'s (Petronas) announcement in October 2020 that it would be net carbon neutral by 2050. It puts the state-owned energy giant on a similar carbon-cutting path of its industry peers, such as BP PLC and Royal Dutch Shell PLC.

In our view, Petronas plays a critical role for the government and the economy. We estimate that the company could directly and indirectly contribute about 15%-20% of the government's budgeted revenues in 2021.

According to the plans laid out by Petronas, the company will intensify its efforts to limit scope one and scope two greenhouse gas emissions. This covers emissions it directly produces, or creates indirectly in the electricity it purchases.

It will do this partly by increasing its investment in renewable energy. The NOC will also improve its efficiency through the use of technology and by upgrading operations. This includes reducing hydrocarbon flaring and capturing methane emissions, while increasing recycling. The company aims to spend 9% of its 2021 capex on new energy initiatives, as compared with 5% in 2020.

Negligible investment in renewables, with little hit on the credit profile.  Petronas' emission policies won't likely have a significant immediate effect on the firm's credit profile. We believe the company's investments in renewable energy will be negligible over the foreseeable future.

For the time being, we expect Petronas' emission policies will have limited effect on the firm's credit profile. We believe the company's investments into renewable energy will be negligible over the foreseeable future.

Even as Petronas shifts strategy to move toward carbon neutrality by 2050, we will continue to view the firm as being integrally linked to the government of Malaysia. We believe that Petronas will remain sensitive to negative government intervention, for example if the sovereign faced financial distress, requiring exceptional taxation or dividends. The sovereign would also likely support the entity if it experienced its own financial distress.

The upshot is that we equalize the ratings on Petronas to our sovereign credit rating on Malaysia. The entity's ties to the sovereign are more meaningful to our ratings on Petronas than the firm's carbon policies.

Rated National Oil Companies In Asia-Pacific Retain Strong Ties To The Sovereign
Country Company SACP Issuer rating Link to sovereign Role Support from sovereign in event of distress

China National Petroleum Corp.

a+ A+/Stable/-- Very strong Critical Extremely high

China Petrochemical Corp.

a A+/Stable/A-1 Very strong Critical Extremely high

China Petroleum & Chemical Corp.

a A+/Stable/-- Very strong Critical Extremely high

China National Offshore Oil Corp.

a A+/Stable/-- Very strong Critical Extremely high


a A+/Stable/-- Very strong Critical Extremely high

Oil and Natural Gas Corp. Ltd.

bbb+ BBB-/Stable/-- Very strong Very important Very high

PT Pertamina (Persero)

bb+ BBB/Negative/-- Integral Critical Almost certain

Inpex Corp.

bbb A-/Stable/A-2 Strong Very important High

Korea National Oil Corp.

bb- AA/Stable/-- Integral Critical Almost certain

Petroliam Nasional Bhd.

aa A-/Negative/-- Integral Critical Almost certain

PTT Public Co. Ltd.

bbb BBB+/Stable/-- Very strong Critical Extremely high
SACP--Stand-alone credit profile. Source: S&P Global Ratings.

Thailand: PTT (Pauline Tang)

Thailand's carbon targets revolve around increased use of natural gas, more renewable energy, and electric cars. Its NOC will play a large part in this. Thailand pledges to reduce its greenhouse gas emissions by one-fifth by 2030, from the base year in 2005. The country does not have net zero carbon emission goal at the moment. PTT Public Co. Ltd. (PTT)'s greenhouse gas reduction target is 27% from business-as-usual levels during the same period.

PTT will maintain its status as the country's key natural gas supplier for the time being. Under the country's power plan through to 2037, natural gas will remain the main source of energy for the country's electricity production, accounting for about 62% of the country's electricity in 2027, from 55% in 2020.

However, Thailand is also aiming to use more renewable energy. The government aims to generate 30% of the country's electricity from renewables and hydroelectricity, by 2037, from about 12% in 2020.

Thailand's electric vehicles plan weighs on PTT's petroleum business. The country wants all new cars sold to be fully electric by 2035. We estimate that electric vehicles will account for about a third of the country's total vehicles by 2035. This could dampen the domestic demand for petroleum products, and consequently, PTT's petroleum earnings.

PTT has a prominent role in energy plans.   To address this shift, the PTT Group plans to raise its exposure to renewable energy, increase the number of charging stations for electric vehicles, and continue to invest in energy storage. PTT will also exit coal by the end of 2021, with an immaterial effect on its earnings.

PTT targets 8 GW in renewable energy by 2031. Renewables currently provide about 600 MW capacity, generated by its flagship, Global Power Synergy Public Co. Ltd. In addition, the group plans to operate about 100 electric-vehicle charging stations by the end of 2021, leveraging on its nationwide gas station network of its 75%-owned PTT Oil and Retail Business Public Co. Ltd.

PTT Oil and Retail Business is offering free electric vehicle charging in 30 locations of its gas stations as part of a trial project. The company had 1,997 retail stations in Thailand as of Dec. 31, 2020.

The adoption of renewables and electric vehicles will also support demand for efficient energy storage, in which PTT had some exposure via Global Power Synergy's 20.6% (as of March 2021) ownership in 24M Technologies Inc., a lithium-ion battery maker. However, the group is unlikely to generate material revenues from this segment over the next two to three years. 24M Technologies has yet to enter the commercial stage.

The US$8-billion plan--PTT will need to spend heavily to hit its targets.   PTT will need to spend more to hit 10-year goal of achieve 8 GW in renewable energy. We expect the group will spend about Thai baht 850 billion in capex through 2025, without factoring in additional acquisitions or investments in renewable and hydrocarbon assets.

Actual investment costs could vary. These will depend on the nature of the renewable source (e.g. solar, wind, hydroelectricity) and the project type (e.g. greenfield or brownfield). We assume PTT's renewables target will cost at least US$8 billion over the next decade. This is based on the industry's general rule of thumb that about US$1 million in investment is required for every 1MW of solar energy.

The knock-on effect of such elevated spending on PTT's consolidated balance sheet and leverage will depend on the group's funding plan and its earnings cycles at the time of investment. Its earnings from renewables will also be a factor.

Given PTT's plans align with the country's energy transition and carbon emission goals, we believe the company will remain crucial to the government of Thailand. This is particularly true for the country's energy and electricity plans.

Our assessment of PTT's relationship with the government may change if the country accelerates its electric vehicle or renewable energy goals, such that its encourages more competitions from other foreign or domestic players and PTT fails to catch up.

Related Research

Editing: Jasper Moiseiwitsch

Design: Evy Cheung

This report does not constitute a rating action.

Primary Credit Analysts:Danny Huang, Hong Kong + 852 2532 8078;
JunHong Park, Hong Kong + 852 2533 3538;
Minh Hoang, Singapore + 65 6216 1130;
Shawn Park, Singapore + 65 6216 1047;
Pauline Tang, Singapore + 6562396390;
Shruti Zatakia, Singapore + 65 6216 1094;
Taishi Yamazaki, Tokyo + 81 (3) 45508770;
Minjib Kim, Hong Kong + 852 2533 3503;
Ronald Cheng, Hong Kong + 852 2532 8015;
Crystal Wong, Hong Kong + 852 2533 3504;

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