Energy players in the Gulf Cooperation Council (GCC) nations, namely oil and gas and chemical companies, are unlikely to meaningfully adjust their strategies and spending in the next five years, despite a greater focus on environmental targets in the region, according to a recent report published by S&P Global Ratings.
The report states that the slower spending pace stems largely from regional energy companies being significantly more shielded than global peers’ to energy transition risks as well as the currently lower returns on green and renewable projects.
Some GCC countries, notably the UAE, Saudi Arabia, and Bahrain, have announced commitments to net-zero carbon emissions. To achieve net zero, the governments would need to ensure that any carbon dioxide released into the atmosphere from domestic corporate activities is offset by an equivalent amount being removed.
These policy shifts underline that the region’s oil-rich countries are increasingly considering the energy transition in their long-term objectives.
More so than in other regions, large domestic energy firms, which contribute materially to overall economies, will be critical to meeting government objectives, due to their large size and environmental footprint.
“Many players are aware of the risks and opportunities ahead and some are making real commitments to environmental targets,” said S&P Global Ratings analyst Rawan Oueidat.
“However, timelines to achieve these are longer than global peers’ and we don’t expect to see shifts in asset profiles in the short-to-medium term.”
Lack of clarity in GCC energy companies’ environmental targets
Government objectives are starting to filter down to the energy sector.
Specifically, large government-related entities, such as the national oil companies (NOCs) and large chemical players with very strong links to the governments, are aligning their sustainability strategies with national sustainability goals, the report stated.
A few of the big players – including Aramco and SABIC in Saudi Arabia – have committed to net-zero targets, which will aid in meeting the Paris Agreement commitments of their respective countries.
Additionally, a number of other large players, including ADNOC in the UAE and QatarEnergy in Qatar, have set targets to reduce carbon emissions, including by committing to eliminate routine flaring (the practice of burning off large unwanted quantities of gas during crude oil extraction) and carbon intensity reduction.
That said, it remains somewhat unclear how GCC energy companies with environmental targets are defining these targets, the S&P Global Ratings report added.
Most notably, the extent to which Scope 3 emissions – which refers to emissions produced from the use of a company’s products by end users – are included in corporate targets and will be addressed is still elusive.
This is an extremely important detail, given that the Scope 3 emissions account for the largest share of the total emissions footprint of many entities operating in the region.
By comparison, BP PLC in the U.K., one of the industry leaders in energy transition, has been reporting Scope 3 emissions since 2019 and its target to become a net-zero company by 2050 or earlier includes Scope 1 and Scope 2 across its entire operations and Scope 3 emissions for carbon in upstream oil and gas production.
Gulf energy companies’ paths to meet those environmental objectives in the coming years are less detailed and prescriptive than those of most global industry leaders, the report states.
Even though environmental commitments are forming an increasing part of the GCC energy companies’ overall strategies, bigger players’ medium-term targets are more relaxed than those of most international peers and their strategies to achieve these goals are more ambiguous.
For example, QatarEnergy and ADNOC target an upstream reduction of carbon intensity by 15 percent by 2030 and 25 percent by 2030 (QatarEnergy baseline is 2013; ADNOC baseline not provided), although their strategies to achieve these targets are not clear, according to the report.
Meanwhile, BP and Shell target net zero by 2050 and have set interim targets. For BP, this includes a 20 percent reduction (in Scope 1 and Scope 2) by 2025 and 50 percent by 2030 (baseline 2019); and Shell targets reducing its net carbon intensity by 20 percent by 2030 and 45 percent by 2035 (before The Hague ruling; baseline 2016).
“In this context, we expect energy players’ capital expenditure (capex) toward environmental efforts will rise in the next decade, but from a low base. There is a clear recognition from GCC energy firms of the opportunities and challenges posed by the energy transition,” the reports states.
“However, we believe it will take time before well-articulated (quantitively and qualitatively) sustainability strategies with meaningful spending behind them materialise. Companies are participating in sustainability initiatives, but often only have minority stakes in these investments.”
Most of the NOCs in the region are investing in renewables, introducing blue and green hydrogen, as well as selling blue ammonia to increase the push for clean energy, but are
doing so largely through partnerships with power and utilities or international players.
“Therefore, we don’t expect this will materially impact the cash flows and overall capex of NOCs and chemical companies that we rate over the next five years,” the report concludes.
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