GCC energy companies step up green investments to meet long-term sustainability targets

Energy companies in the Gulf Cooperation Council (GCC) states have significantly ramped up their spending on sustainability, but lower returns on green and renewable projects is a key reason why their investments will not contribute materially to cash flow over the next five years, according to a new report by S&P Global Ratings.

According to the agency, carbon-heavy energy players in the Gulf – mainly oil and gas and chemical companies – are more likely to continue with their current strategies and spending in the next five years than their global peers in the face of the accelerating energy transition.

“Many are aware of the risks and opportunities ahead and some are making real commitments to environmental targets, 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,” S&P Global Ratings said in comments published on Monday.

The energy sector’s sustainable debt issuance is also unlikely to see a strong uptick, due in part to fewer suitable projects being undertaken by the sector, the agency said.

The report noted that government objectives in the GCC 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 said.

It cited some of the region’s biggest companies – including Aramco, and Saudi Basic Industries Corp. (SABIC) in Saudi Arabia – as having 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 Abu Dhabi National Oil Co. (ADNOC) in the UAE and QatarEnergy in Qatar, have also set targets to reduce carbon emissions, including by committing to eliminate routine flaring and carbon intensity reduction.

However, it said that in many cases, national environmental targets had not yet translated into ambitious corporate commitments, or if it did, the pathways of achieving those targets were not clearly mapped.

“In this context, we expect energy players’ capital expenditure 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. However, we believe it will take time before well-articulated (quantitatively and qualitatively) sustainability strategies with meaningful spending behind them materialise,” S&P Global Ratings said.

According to the report, 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 said.