India unlikely to see meaningful change in NOCs capital structure: Moody's

National oil companies face more credit risk due to energy transition than private ones, according to Moody's Investors Service

National oil companies (NOCs) are less prepared than their private counterparts to deal with the credit risk arising out of energy transition even though sovereign linkage provides some competitive advantages, according to Moody’s Investors Service.

A new report says that energy transition poses varying degrees of credit risk to the world’s largest such companies but NOCs in oil importing countries, where consumption will keep growing, are less exposed to carbon transition risk than those in oil exporting countries. Though India falls under the first category, NOCs dominate the upstream and marketing segments with 20 per cent of the government’s indirect tax revenue coming from marketing of products. "Retail selling prices in India for transportation fuel are high because of these indirect taxes, which somewhat serves as a substitute for carbon tax in other countries," says Sweta Patodia, analyst, corporate finance group.

The report says the Indian government has also been extracting large shareholder payouts from its NOCs leaving little cash surplus for them to meaningfully invest in low carbon alternatives. "While there has been a significant increase in investment in renewables in India, this has been done by government-owned and privately owned utility companies rather than the NOCs," says Patodia.

According to the report, given that the country expects its consumption of oil and gas to continue to increase, the government is unlikely to authorise a meaningful change in the business model of its NOCs away from their original mandates. "If the prices of oil and gas decline, following an accelerated or disorderly carbon transition, to such an extent that makes capital structures of these companies unsustainable, we expect the NOCs to rely on support from the government," it says.

India that is rated Baa3 negative is the world’s third-largest consumer of crude oil comprising about 5 per cent of global consumption and is heavily dependent on imports. India’s energy strategy aims to reduce imports through the increased use of renewables and improving energy efficiency. "However, India’s consumption of fossil fuels, under its stated policies, will continue to increase (including for coal) and so will its imports of oil and gas until at least 2040."

Hui Ting Sim, an analyst with Moody's, says NOCs play a critical role in the world’s energy markets, dwarfing their counterparts in the private sector – the international oil companies – in terms of global oil and gas production and reserves. “Against the backdrop of slowing oil and gas consumption over the next few decades, with the potential for a more abrupt disruption in demand, the NOCs’ sovereign sponsors will increasingly impact credit profiles by either providing support or acting as a drag,” adds Sim.

In an energy transition scenario, the sovereign can provide support or act as a drag depending on its ability and willingness to provide support even when oil consumption is declining, the degree of its reliance on the NOC for its revenue and whether it is rated above or below the NOC rating. Out of the 22 global integrated oil and gas companies that have government related issues, five are rated above the sovereign and six are rated at the same level as the sovereign. Another six are rated at par with the sovereign with an average uplift of 1.7 notches from sovereign support. Another five are rated below the rating of their respective sovereign with an average uplift of three notches.

Characteristics such as low production costs, a high proportion of natural gas or liquefied natural gas (LNG) assets, low leverage and social obligations also imply lower risk. The impact of sovereign support on NOC credit profiles depends on its ability and willingness to provide support even when oil consumption is declining, the degree of its reliance on the NOC for its revenue, and whether it is rated above or below the NOC’s rating. And while some NOCs are changing for business reasons or to align with government climate change policies, the ability of others to make the transition to less carbon-intensive models is constrained by fiscal obligations or social objectives.

Exposure to prolonged low oil prices for NOCs in countries that rely materially on oil export revenues to cover public spending, such as those in the GCC region, will be particularly at risk.

Supply and demand dynamics for hydrocarbons globally and how they will evolve over time at regional and country levels as the world transitions to a lower carbon future will have implications for the strategies sovereigns adopt in response — and by extension their NOCs. Asia-Pacific is currently the largest consumer of crude oil, while the Middle East is the largest producer. However, the picture is more concentrated in terms of exports and imports. The Middle East and Russia combined account for around 75 per cent of net crude oil exports. On the demand side, China alone accounts for about 25 per cent of net crude imports and if Europe and India are added the combined share rises to about 60 per cent of the total.  

Rehan Akbar, vice-president – senior credit officer, corporate finance group In the Gulf Cooperation Council (GCC) economies says the NOCs are large sources of funding for their sovereign sponsors, so their investment strategies are influenced by their sponsors’ fiscal and socioeconomic needs. Government revenues for Kuwait (A1 stable) are the most reliant on hydrocarbon revenues (89 per cent), while the United Arab Emirates (UAE, Aa2 stable) is the least (46 per cent).