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National Oil Companies In GCC Can Absorb The Energy Transition Impact For Now

This report does not constitute a rating action.

Gulf nations have all announced new sustainability targets or renewed their commitment to the Paris Agreement in the past two years. Their respective NOCs are following suit. We see the GCC as highly exposed to the energy transition, since hydrocarbons contribute on average 70%-80% of central governments' revenue. Yet, compared with their global peers, NOCs in the GCC attract less direct pressure from shareholders, policymakers, and society to make rapid changes to their business models.

As such, we are not surprised by Gulf NOCs' approach to adapting to the energy transition. These companies are still focusing on core upstream production, but we see a slow shift in their overall strategies to align with sustainability targets and nationally determined contributions (NDCs). Gulf NOCs are essentially as exposed to energy transition risks as their global listed peers, but their financial positions are generally stronger, benefiting from operating costs per barrel of less than $10.

To assess the potential credit implications of the NDCs and sustainability targets on Gulf oil companies, we have devised a hypothetical stress scenario, in which the NOCs substantially increase capital expenditure (capex) on sustainability-related projects. Under this scenario, assuming $13 billion-$25 billion of additional capex annually on the energy transition until 2030, S&P Global Ratings estimates Gulf NOCs' debt-to-EBITDA ratio will continue to average less than 1x at least through 2025 (see chart 1).

Chart 1


How The Market Is Shifting

The energy transition will reshape the market for the GCC's main commodity export, potentially reducing demand for oil and putting pressure on prices over the coming years. S&P Global Commodity Insights anticipates that oil demand is likely to peak by the mid-2030s. Nonetheless, we expect oil and gas will remain key to the global energy mix for many years to come, contributing close to 50% of energy supply even until 2050, according to the International Energy Agency's (IEA) Stated Policies Scenario. In that respect, we believe the GCC will still attract demand for oil over the next decade, owing to their low-cost production profiles.

It's therefore not surprising that, although Gulf NOCs are aligning their strategies with governments' energy transition initiatives, meaningful investments are lagging. Abu Dhabi National Oil Company (ADNOC) and Saudi Aramco have announced plans to increase oil production capacity by 2027 to five million barrels per day (mb/d) and 13 mb/d, respectively. At the same time, they and their governments have announced sustainability targets; the United Arab Emirates (UAE) and Saudi Arabia have unveiled plans to achieve net-zero emissions by 2050 and 2060, respectively (see table).

Sustainability Targets--Selected Gulf Countries
Target Country Baseline 2030e 2050e 2060e
GHG emission reduction relative to BAU (%)
UAE 2016 31 Net zero N/A
Saudi Arabia 2019 278 mtpa N/A Net zero
Qatar 2019 25 N/A N/A
Clean energy's contribution to total target (%)
UAE 30 50 N/A
Saudi Arabia 50 N/A N/A
Qatar 20 N/A N/A
Installed clean power capacity (gigawatts)
UAE 14 N/A N/A
Saudi Arabia 59 N/A N/A
Qatar 2-4 N/A N/A
Source: Nationally Determined Contributions, Saudi Arabia's "Vision 2030" strategy, Qatar Sustainability Report (published May 2021). GHG--Greenhouse gas. Mtpa--Metric tons per annum. UAE--United Arab Emirates. e--Estimate. N/A--Not applicable.

Leverage Withstands Exaggerated Capex In Our Hypothetical Scenario

In our scenario, we assume the NOCs increase spending on sustainability-related projects such as low carbon and renewable-energy investments, and we gauge the impact on leverage (debt to EBITDA), one of our key credit ratios. We used international peers' announced capex plans for sustainability investments, greenhouse gas (GHG) targets, and track records as a base for our capex assumption. Those sustainability investments include projects to develop carbon capture, usage, and storage (CCUS) facilities, produce low carbon fuels, and increase renewable electricity generation capacity. We estimate that Gulf NOCs (including publicly listed operators we do not rate) would need to upsize their current capex by 15%-20% annually (an increase of $13 billion-$25 billion, in aggregate) until 2030 to try to meet GHG reduction targets and the region's net-zero ambitions.

Even under this hypothetical scenario of potentially overstated capex, we do not anticipate a material impact on the NOCs' credit metrics, at least for now. We estimate their debt to EBITDA will average well below 1x until at least 2025. After that, and despite likely continued oil price uncertainty, weaker demand for hydrocarbons and ongoing elevated capex related to the energy transition could start putting pressure on this credit metric, although less so than for international peers. This notwithstanding, we see our ratings on GCC NOCs as broadly aligned with those on the respective sovereigns.

Hydrocarbons Will Fuel Energy For The Next Decade

The energy transition will eventually change the global energy mix, but oil and gas will remain the largest elements well beyond 2030 under the IEA's Stated Policies Scenario (see chart 2). NOCs in the GCC stand to benefit from remaining demand for hydrocarbons in view of their vast reserves and the low cost of oil production compared with other regions.

OPEC currently estimates that 80.4% of the world's proven oil reserves are located in OPEC member countries, of which 67.1% are in the Middle East. In 2021, Saudi Arabia, the UAE, and Kuwait together accounted for about 38% of OPEC's total proven oil reserves. We expect global demand for oil will continue to increase during the next decade before peaking in the mid-2030s. However, the IEA assumes OPEC's share of the oil supply in the net-zero pathway will strengthen to more than 50% by 2050, from 34% in 2020 (see chart 3). This in turn should benefit the region's NOCs more than international players and those outside the Gulf.

Chart 2


Chart 3


Strong Balance Sheets Buy Time For Change

Some GCC countries are setting sustainability targets, but NOCs are yet to experience the implications. We estimate that NOCs have sufficient financial headroom to absorb strategic changes, including higher capex, and maintain credit quality for years to come. We consider their balance sheets able to withstand the financial impact, due to their competitive strengths compared with international peers. Gulf NOCs have abundant reserves and a cost advantage with operating costs lower than $10 per barrel. What's more, they enjoy overall shareholder oversight and support because the majority owners are highly rated sovereign nations, where NOCs are large revenue contributors and employers. NOCs already benefit from low upstream GHG intensity, since their reservoirs have low flaring rates and production releases a relatively small amount of water, thereby requiring less energy (see chart 4).

Chart 4


Combined, these factors provide a buffer against changes brought about by the energy transition and allow time for the companies to absorb the financial consequences. NOCs are embedding the energy transition in their long-term strategies, with announced targets and commitments that we view as positive for their credit profiles.

For NOCs and their governments, the time challenge is twofold: 

  • How to monetize large hydrocarbon reserves until global demand declines substantially, leading to stranded or less financially valuable assets; and
  • How to ensure NOCs remain leading energy suppliers (and not just for oil and/or gas) in the coming decades and maintain a competitive advantage in a world where hydrocarbons will be less important.

While some NOCs, such as ADNOC and Saudi Aramco, have already announced net-zero commitments for their scopes 1 and 2 emissions by 2050, their paths to achieving these targets remain somewhat unclear. Nevertheless, we observe a ramp-up of announcements and initiatives, especially in the UAE, and government partnerships to drive sustainability initiatives forward. NOCs are taking steps to increase renewable power generation and adopt low carbon technologies, and there is still room for further initiatives to achieve these targets, in our view. GCC NOCs are yet to address the scope 3 emissions that relate to the use of oil and gas, while some of their international listed peers, notably oil majors, have made net-zero commitments that cover scope 3. Investments related to scope 3 emissions differ in intent from those only targeting scopes 1 and 2. For example, investing in solar to decarbonize oil production is not the same as investing in solar to provide renewables to the grid.

We anticipate that the increasing focus on sustainability targets--and how to achieve them--will translate into higher investment needs for NOCs, leading to higher capex. We understand that regional NOCs are investing in several initiatives such as CCUS, renewable energy capacity expansion, and other ways to reduce emissions and achieve targets. Some of the CCUS-related investment is in enhanced oil recovery (EOR).

Some recent CCUS investments (see chart 5) include:

  • ADNOC awarding a $227 million contract for EOR to recover more reserves from its largest onshore oilfield, announced in March 2022.
  • ADNOC announcing in January this year that it has already started work on the world's first fully sequestered carbon dioxide (CO2) injection well, and agreeing to acquire 100% of its grid power from the Emirates Water and Electricity Company's nuclear and solar sources.
  • ADNOC, Qatar Energy, and Saudi Aramco announcing plans to expand CCUS capacity by 2030 and 2035.
  • Saudi Aramco also has a joint agreement with SLB (formerly Schlumberger) and Linde to establish a carbon capture storage hub that could store up to 9 million tons of CO2 per year by 2027, with Aramco contributing about 6 million tons. This follows Saudi Arabia's announcement of a carbon capture target of 44 million tons per year by 2035. Based on publicly available information, some of the CO2 captured in Jubail would reportedly be used to maximize production at certain Aramco fields (through EOR) to meet the company's increased production targets by 2027.

Chart 5


Chart 6


Investments In Low Carbon Technologies Will Eventually Rise

Compared with peers, GCC sovereigns and NOCs have more headroom to adapt to the energy transition given their lower exposure to shareholder activism, higher operational resilience, and abundant reserves. We believe these provide a greater range of financial options than for many peers, notably those in Europe, to tackle energy transition risks. This means their credit ratios should remain resilient.

International oil and gas players (with stated sustainability commitments) plan to devote about 15%-20% on average of their consolidated capital investments to low carbon projects through to 2030. In the GCC, NOCs and listed companies do not disclose low carbon investments as separate line items from overall capex. We estimate, however, that the contribution is significantly below the international peer average, for now. The $15 billion of spending ADNOC has announced for clean energy and low carbon investment from now until 2028 implies this will represent about 10% of total spending. We note its planned capex of about $150 billion over 2023-2027 is likely to go toward increasing the capacity of its upstream operations by 2027.

GCC NOCs' lower investments than global peers in the energy transition, albeit at varying amounts across the region, could be a result of:

  • Differences in business mix. Some European players have significant refining exposures, which means they might need to make higher investments given the refining segment's higher GHG intensity; or
  • Macroeconomic and geopolitical factors. Elevated commodity prices, for gas specifically, coupled with inflationary pressures, could lead to a decline in returns from investments needed to develop low carbon energy sources. This could delay or discourage such investments. Global energy security concerns, given natural gas supply disruptions in 2022 and subsequent price volatility, have prompted countries to secure more LNG agreements with the GCC. To an extent, the energy transition has temporarily taken a back seat.

The lack of available technologies could also be delaying investments. GCC NOCs need technologies that are not yet available to meet decarbonization goals. Some, such as hydrogen projects, are still in nascent stages of development. This is not a differentiating factor, however, since it applies globally.

We examined the correlation between global oil majors that disclose carbon emissions data and the breakdown of capex by type (including low carbon investments), their historical low carbon energy-focused investments, and the corresponding GHG reductions (scopes 1 and 2) compared with baseline years. On average, low carbon investments for this group (BP, Shell, Total Energies, Suncor, and Petrobras) amounted to about 8% of total consolidated capex for 2019-2021. This is expected to increase, according to companies' public disclosures and sustainability reports, to about 15%-20% for 2022-2030. Some investments also address scope 3 emissions (from the use of oil) and, as such, the value of the additional capex overstates the actual requirements, in our view.

Applying the same ratio to GCC NOCs, we estimate cumulative incremental low carbon investment capex of $120 billion-$200 billion over 2022-2030 (implying an incremental aggregate annual spend of $15 billion-$25 billion per NOC). This is in addition to the capex we assume for the companies in our current base case and compares with aggregate capex of $70 billion as of year-end 2021 (For rated NOCs, we use S&P Global Ratings' adjustments; for publicly listed NOCs, we use reported data).

These amounts are not equally divided among the GCC NOCs. We also understand other factors come into consideration when companies assess low carbon investment needs and targets. As such, the relationship between an NOC's low carbon investments and its overall spending does not simply align with production volumes. There are also data challenges. The purpose of our estimates is to show that, even in our deliberately exaggerated scenario, regional NOCs' balance sheets appear to have some financial buffers. Two hypothetical approaches support our views.

Approach 1: Capex in line with international peers' planned spending on low carbon investments.  

  • In this scenario, we calculate additional required investments based on a contribution of low carbon investments as a share of consolidated capex, in line with those of international peers (15%-20%; see chart 7). We assume GCC NOCs will undertake spending on low carbon investments (as a share of total capex) that is similar to international peers, including Shell and BP. We do not, however, anticipate GCC NOCs will need to match global peers in terms of investment contribution, based on the factors mentioned in the previous section. As such, we think the value of additional capex (as stated in our scenario) needed for low carbon investments for GCC companies overstates the NOCs' actual investment requirements.
  • Under this scenario, we calculate that the GCC NOCs would need to spend an additional $60 billion-$65 billion in aggregate in 2022-2025 (see chart 7) and $130 billion-$136 billion for 2022-2030 on low carbon investments. If we conservatively assume this additional capex would be 100% debt funded--even though the majority of the GCC NOCs we rate have ample cash buffers with strong credit metrics--we anticipate it would add only marginal pressure to their debt-to-EBITDA ratios (less than 0.5x per year).

Chart 7


Chart 8


Approach 2: Capex based on international peers' GHG reduction targets and capex allocation.  

  • In this scenario, we calculate GCC NOCs' additional low carbon investments needed to meet their individual carbon-reduction targets between 2022 and 2030. In doing so, we derive a figure based on the ratio of international peers' aggregate planned capex and their emission reductions in the target year (typically 2030). We note that this ratio would not include future emissions related to business growth, and is based on public disclosures in companies' annual and sustainability reports. Our calculation incorporates companies' disclosed baseline year emissions (scopes 1 and 2) and reduction targets.
  • Most GCC NOCs have announced commitments to reduce scopes 1 and 2 emissions by 2030 and some to net zero by 2050 (Aramco and ADNOC). We calculate that the NOCs would each need to spend an additional $150 billion-$200 billion between 2022 and 2030 on low carbon investments to meet their stated goals. If we conservatively assume the additional capex would be 100% debt funded--even though the majority of NOCs we rate have cash buffers with strong credit metrics--we anticipate this would heighten the pressure on their debt to EBITDA ratios compared to our first approach, but only moderately. Under this second approach, we assume an average Brent oil price of $90/bbl and $80/bbl for the remainder of 2023 and 2024, and an average of $55/bbl for 2025 and beyond.

Chart 9


Our Rating Analysis Already Includes The Energy Transition

In assessing the credit quality of NOCs in the GCC, we already incorporate the companies' exposure to the energy transition and inevitable challenges to revenue, costs, and business prospects. Notably, we already consider the impact of energy transition risk into our assessment of the NOCs' stand-alone credit profiles, and our industry risk assessment caps business risk for the sector at the strong category. On Jan. 25, 2021, we revised our risk assessment for the integrated oil and gas exploration and production industry to moderately high ('4') from intermediate ('3') to reflect the energy transition, declining profitability, and the sector's overall increasing volatility. This revision reflected our view of the trajectory of supply and demand for oil and gas, and the effects on fossil fuel producers, given the increasing transition to renewables.

While we believe oil and gas will remain part of the global energy mix for years to come, its market share will decline. The adoption of renewables will have broad implications for hydrocarbon demand and prices, and for producers of fossil fuels. Governments are implementing stricter policies and regulations to tackle climate change and energy security, and offering industry subsidies to try to reduce GHG emissions related to fossil fuels. The timing of peak hydrocarbon demand has accelerated due to COVID-19 and will continue to do so, in our view. The adoption of sustainability-related investment mandates by many global investors and financial institutions has also gathered pace. As a result, hydrocarbon producers face risks of disinvestment and costlier, more difficult access to capital markets. This increases the risks of cyclicality and capital intensity inherent in the oil and gas industry. We also believe hydrocarbon prices will remain under pressure over the coming years and continue to show volatility.

GCC NOCs Are In The Race For Renewables

According to the International Renewable Energy Agency (IRENA), public investment in renewables in the Middle East totaled about $150 million-$200 million annually in 2018-2020 (see chart 10), while averaging $1.3 billion in the rest of the world over the same period. IRENA also reports that, as of 2021, renewables' share of electricity capacity was 7.4% and 0.6% in the UAE and Saudi Arabia, respectively, compared with a global average of 38.3%. We expect the GCC's sustainability commitments will continue to translate into higher investments in renewables to help meet increased capacity targets. In turn, we expect GCC NOCs will play a role in helping to achieve these targets. We expect the majority of renewables projects will be funded by private investors, including developers such as Engie, EDF, and Total (see "Gulf Nations Invest To Accelerate Deployment Of Renewable Energy," published Feb. 27, 2023).

Chart 10


We understand from publicly available information that the UAE's largest renewable energy producer plans to raise as much as $750 million in its first ever green bond sale. This will fund new solar, wind, and hydrogen projects domestically as well as internationally. Masdar will likely sell the bonds in the second half of 2023, according to CFO Niall Hannigan (in an interview in Abu Dhabi). Masdar has a green capacity target of up to 100 GW by the end of the decade for its total energy portfolio. We also understand the Saudi government is working with relevant stakeholders to increase power capacity from natural gas and solar PV, and plans to introduce wind for power generation. Saudi Arabia-based ACWA Power (not rated) has announced that it will not develop or invest in new coal- or oil-fired projects; it ended its participation in the coal-fired Nam Dinh 1 plant (1,200 MW) in 2021. While solar (PV in particular) is a main contributor to renewable energy technology, with ACWA recording the lowest PV tariff in Saudi Arabia in 2021, we also see an increasing focus on wind.

Credit Resilience Until 2030, All Else Being Equal

The GCC is highly exposed to the energy transition. Yet we expect the region's NOCs will have sufficient financial buffers and competitive advantages to absorb the incremental investments needed to adapt to the energy transition, and preserve their credit ratios, in the next three to five years.

While their strategies and announced initiatives indicate their commitment to adapting to the energy transition, how these NOCs will meet these targets remains unclear. The energy transition poses obvious financial and business challenges. Local stakeholders have reiterated the need for large financial buffers to preserve the NOCs' competitive advantages and transform them into renewables energy players while shifting away from oil and gas. Beyond the money to be invested, the measures of success will be in the execution of large projects and the accurate anticipation of global hydrocarbon demand trends, especially if demand peaks sooner.

Editors: Bernadette Stroeder and Julie Dillon

Related Research

Primary Credit Analyst:Rawan Oueidat, CFA, Dubai + 971(0)43727196;
Secondary Contacts:Simon Redmond, London + 44 20 7176 3683;
Benjamin J Young, Dubai +971 4 372 7191;
Research Contributor:Bedanta Roy, Pune;
Additional Contact:Corporate and IFR EMEA;

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