The credit impact of carbon transition, i.e. the global shift towards lower reliance on carbon-intensive products, is manageable for most sovereign oil and gas exporters, although a more ambitious transition would increase credit pressure on a number of sovereigns, according to a new report.
In a new report, ratings agency Moody's said such a scenario, which is its base case, is consistent with still-rising, albeit slower, growth in global hydrocarbon demand and prices, which would dampen the credit impact of carbon transition for sovereign hydrocarbon exporters.
However, Steffen Dyck, Vice President and Senior Credit Officer at Moody's, noted that carbon transition would complicate efforts by lower-rated sovereigns to strengthen their fiscal and liquidity positions. "Notably, Oman's (rated by Moody’s at Baa3 negative) and Papua New Guinea's (B2 negative) fiscal strengths would erode. And carbon transition would add pressure to Bahrain's (B1 negative) already very low fiscal strength and high external vulnerability."
The agency’s central scenario, which underpins its assessment of the credit risks resulting from carbon transition, is the International Energy Agency's (IEA) New Policies Scenario, which assumes that all countries implement their Nationally Determined Contributions (NDCs) as agreed under the Paris Agreement on Climate Change.
Specifically, the scenario involves global oil and gas demand and prices continuing to increase over the next two decades, albeit at a slower pace.
Moody's uses the IEA's projections for hydrocarbon demand and prices to assess the credit impact on a sovereign's credit profile through three main channels - economic strength, fiscal strength and external vulnerability - and assuming no policy changes or other adjustments in the economy or public finances. In practice, some adjustment would be likely to occur. The scenarios illustrate the scale of the challenge facing each sovereign.
As indicated, for Oman and Papua New Guinea, deteriorating fiscal strength would exacerbate the credit-negative impact of the slower growth implied by carbon transition. Also, Bahrain's fiscal strength is already very low and its external vulnerability high, and carbon transition would add to this pressure.
Elsewhere, the adjustments would be smaller, although carbon transition would add to the challenges for the lower-rated sovereigns to strengthen their creditworthiness.
The IEA's Sustainable Development Scenario - which assumes energy consumption and production patterns consistent with fulfilling sustainable development goals - would see a more pronounced shift, with a fall in global oil, and later gas, demand and prices.
The policy measures and technological changes that would deliver the more ambitious transformation of energy sectors implied by this scenario have not materialised yet, making it, at this stage, a lower probability case.
If it materialised, this scenario would raise greater and more widespread credit challenges, according to Moody's analysis, in particular for Oman and Saudi Arabia (A1 stable). The United Arab Emirates (Aa2 stable) and Qatar (Aa3 negative) would also face pressure, although only over the long term and with sizeable buffers to provide support.
In this scenario, an erosion in fiscal strength and, in some cases, a rise in external vulnerability, would also put pressure on Azerbaijan (Ba2 stable) and Kazakhstan's (Baa3 stable) creditworthiness, and on Angola (B3 stable), Nigeria (B2 stable) and Papua New Guinea's at the lower end of the rating spectrum.
