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Energy Transition: Competitive Advantages Shield GCC Sovereigns

This report does not constitute a rating action.

S&P Global Ratings doesn't consider the energy transition to be an imminent credit risk for most GCC sovereigns. The region is well placed to capture some of the remaining demand for hydrocarbons, even as oil's share of the energy mix declines, thanks to low production costs and the ability of the major producers to scale up production.

Our simplified scenario analysis includes the assumption that the supply of oil and gas into the global market from GCC nations will peak later than for other oil producing nations. Hydrocarbons currently account for an average 75% of GCC governments' revenue and will likely remain the main revenue source far beyond the next decade. Against that backdrop, we analyzed a selection of key GCC sovereigns' credit metrics at an oil price of $55 per barrel (bbl) and $90 bbl, and found that the results at both prices should, all else remaining equal, support broad rating stability, albeit to differing extents, through to the end of 2050.

Nonetheless, declining demand for oil and gas will eventually weigh on all economies that depend on earnings from hydrocarbon exports. To counter that threat, GCC countries are working to sustainably diversify into non-oil sectors. Success will depend partly on how soon the drop in hydrocarbon demand becomes apparent, and its impact on individual GCC sovereigns.

Demand For GCC Oil Should Peak Later Than In Other Markets

For the time being, we don't expect significant changes in the proportion of oil in sovereigns' GDP, fiscal revenue, or external revenue across the GCC. In large part, this is because we believe demand for the region's hydrocarbons will increase as global demand continues to grow. And we consider it likely that growth in demand for regional products will continue beyond the hypothetical point at which global oil production is at a maximum--so-called peak oil--which S&P Global Commodity Insights anticipates by the mid-2030s.

A regional delay to peak oil is particularly likely among the GCC's largest producers, namely Saudi Arabia, Abu Dhabi, Qatar, and to a lesser extent Kuwait, each of which have the capacity to increase their low-cost production in the coming years. These countries, which are some of the world's lowest cost producers, should avoid the initial effects of tapering global demand, which we expect will first force out higher-cost producers outside the GCC and in doing so reorient demand towards the region.

That premise underpins the production assumptions in our two hypothetical scenarios. This is exemplified by Qatar's production capacity for liquified natural gas (LNG), which we expect to be about 64% higher by 2027, compared to current levels. In both scenarios we assume total oil and gas production will increase to about 34 million barrels of oil equivalent per day (MMboed) in 2050, from about 30 MMboed in 2022, and peak at over 35 mb/d in 2043. Most of that increase is expected to come from Saudi Arabia, Abu Dhabi, and Qatar, while other GCC countries' contributions will be limited.

Chart 1


Oil price and simplified scenario assumptions

To assess the impact of demand dynamics under different prices on ratios that are core to our sovereign ratings analysis, we used two hypothetical, simplified scenarios.

  • Scenario 1: an average price of $55/bbl to the end of 2050, in-line with our long-term marginal cost of production price assumption.
  • Scenario 2: an average price of $90/bbl, which is our current base-case price assumption for 2023 and is equal to the average price over the past two years.
  • Both scenarios: Non-oil economic growth, and non-oil fiscal and external revenue will continue at the average pace of change recorded over the past three to five years.
  • Both scenarios: Fiscal expenditure growth equal to the average rate recorded in each country over 2012-2022, which was about 0.8% per year across the GCC.
  • Both scenarios: Central government deficits will be entirely financed by debt.

The Findings: Key Ratios Remain Relatively Stable

The scenarios reveal variations in some of the ratios we assess as part of our sovereign rating analysis. It should be noted that, in the simplified scenarios, changes in expenditure compound at a steady rate and that policy changes in response to price change are not accounted for. Therefore, some of these variations are generated through the extrapolation of GCC sovereigns' existing strengths and weaknesses. Still, in both scenarios, GDP per capita generally remained robust and, given the material weight of hydrocarbons in overall GDP creation, strengthened somewhat by 2050 in scenario 2, among the six countries in our sample (see charts 2 and 3).

The scenarios generate the strongest GDP growth in Saudi Arabia, Abu Dhabi, and Qatar--where production increases are largest. That increase in production accounts for their substantial GDP per capita growth, except for in Saudi Arabia, where metrics appear more muted because of its larger and increasing population. Bahrain and Oman show weaker GDP per capita results, mainly because of fairly-static or declining production assumptions through to 2050.

Chart 2


Chart 3


Except for Abu Dhabi and Qatar, the sovereigns' net general government asset positions weaken in scenario 1. This reflects the two nations' relatively low fiscal break-even thresholds and ability to scale up production over the scenario's horizon. In scenario 2, the higher oil price of $90/bbl results in most of the region showing improved net general government asset positions. The results for Bahrain and Oman are the exceptions to that trend (see charts 4 and 5), reflecting the countries' relatively stable or slightly declining production and higher break-even points. The same break-even and production factors affect external ratios across the region under the two scenarios, leaving Abu Dhabi and Qatar with limited downside and potentially material upside, while Bahrain and Oman show more sensitivity to lower prices (see charts 6 and 7, and their footnotes).

Meanwhile, variance in Saudi Arabia's ratios across the two scenarios is somewhat more limited. This reflects its position as the region's largest producer, it's significantly larger base-level of GDP, sizeable non-oil economy, large and growing population, and nominal fiscal revenue, all of which serve to mute the effects of the scenario changes.

Chart 4


Chart 5


Chart 6


Chart 7


The results also illustrate a degree of ratio polarization across the GCC, with larger oil producers benefitting more from the upside scenario, and smaller producers struggling more in the lower price scenario. Further, larger producers are shielded in the downside price scenario because demand for their output continues to increase. The actual impact on creditworthiness would also depend on the ratios' proximity to the upside and downside score thresholds in the criteria. The current outlooks on four of our six GCC sovereign ratings are stable and two are positive.

Credit Resilience Is Implied But Not Assured

Our study uses a simplified view of a hypothetical environment for GCC sovereigns in the two scenarios. Nevertheless, the results indicate that, even in the lower price scenario, with expenditure growth held steady, larger oil producers can maintain strong core ratios compared with sovereigns we rate globally.

Variations among the GCC sovereigns are not surprising given the distribution of resources production costs, and expenditure-side policies. But those differences serve to highlight that, while the energy transition will bring change for all GCC countries, it will arrive at different speeds, and thus with different consequences.

Among the region's sovereigns, Oman and the United Arab Emirates have announced commitments to net-zero economies by 2050, while Saudi Arabia and Bahrain have targeted 2060. Several projects and initiatives indicate that plans to diversify GCC economies are well underway. However, progress and momentum on these efforts are not uniform. Generating new revenue streams usually takes time, even when such initiatives are backed by ample government cash reserves. There is still time to act, but the window of opportunity is starting to close.

Related Research

Primary Credit Analysts:Benjamin J Young, Dubai +971 4 372 7191;
Juili Pargaonkar, Dubai +971-4-372-7167;
Secondary Contacts:Rawan Oueidat, CFA, Dubai + 971(0)43727196;
Dhruv Roy, Dubai + 971(0)56 413 3480;

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