Carrots and Sticks: How Oil and Gas Companies Are Responding To Energy Transition Policies

This commentary compares policy approaches in North America and Europe meant to incentivise the green industrial transition and assesses how oil and gas majors are responding. Countries committed to delivering energy decarbonisation policies early on wielded more of a 'stick' approach, reliant on rules and penalties, principally by placing a price on carbon emissions. Recently, policymakers have offered more 'carrots,' by relaxing regulations and offering subsidies and incentives to encourage the transition to cleaner energy. Irrespective of the approach, recent political and climate crises have laid bare two forces at play in the energy sector: governments and corporates must move forward to decarbonize and to develop more renewable energy, while minimising the risk to energy security.

Oil and gas majors in Europe and North America, such as BP Plc, Shell Plc, TotalEnergies SE, Chevron Corp, and ExxonMobil Corp are making strategic adjustments to reflect both the regulatory changes towards the energy transition and the market demands for legacy forms of energy. Oil and gas corporates are directing an increasingly larger share of capital expenditures towards decarbonization initiatives, by investing in low carbon business segments, investing in ways to reduce emissions of traditional business, or both. From a credit perspective, the costs associated with the energy transition could weigh on corporate balance sheets. However, the transition will take numerous years to complete and costs will likely be shared between governments, corporates, and consumers. Thus in the near to medium term, energy transition policies have modest implications for DBRS Morningstar rated companies in the oil and gas sector.

-- The recent energy crisis illustrates the need for countries to accelerate the energy transition often via 'stick' and 'carrot' policy approaches, while also minimising risks to energy security.
-- In response to both market demands and regulatory changes, oil and gas majors in Europe and North America are investing in low carbon business segments, investing in ways to reduce emissions of traditional business, or both.
-- Energy transition policies for now have modest rating implications for corporates in the oil and gas sector.

“The consequences of climate change have required countries across Europe and North America to ramp up policies designed to reorient economies away from greenhouse gas emitting forms of energy,” said Jason Graffam, Vice President, Global Sovereign Ratings at DBRS Morningstar. “At the same time, the longstanding recognition that fossil fuels, especially natural gas, will for the foreseeable future continue to play a key role in the energy supply mix was made more apparent following the pandemic and Russia's invasion of Ukraine. The challenge for governments and corporates alike is to balance the medium-term imperative to decarbonize the energy supply against the near-term demands for affordable and consistently available energy.”

“Corporates in the oil and gas sector will continue to be affected by policies and regulatory changes,” said Chris Mikrovas, Senior Analyst, Energy, Utilities, and Natural Resources at DBRS Morningstar. “Over the longer term, this could increase credit risks. However, companies can share the costs of the transition to green energy by taking advantage of available government subsidies or tax breaks, and many corporates have the technical expertise and ready capital to maintain leading market positions.”