A vice president at Moody's, John Thieroff said on Thursday carbon transition risk poses a substantial threat to the oil and gas industry in that carbon is the industry's product, not merely an undesirable byproduct.
He said due to the clear commitments in the Paris Agreement to reduce emissions, it was inevitable that policy implementation will materially impact the sector as it is one of the most significant sources of emissions.
The credit rating agency uses a baseline scenario based on emission reductions agreed to in the Paris Agreement for considering the credit implications of carbon transition risk.
While the US's future energy and environmental policies are unclear at this time, Moody's does not believes that the pathway to lower global emissions will be derailed in the coming decade.
Other policies that pose material challenges for the oil and gas sector include fuel efficiency standards for the auto sector, global carbon pricing initiatives and significant renewable electricity generation targets in many jurisdictions.
Demand for oil and gas is also threatened by advances in automotive and energy storage technology, as well as the development of clean fuels and renewable energy.
Such technologies are still in the early stages of adoption, but consumer preferences have begun to shift, with increased interest in alternative fuel passenger vehicles and clean electricity.
Natural gas is better positioned than oil in the baseline scenario to stave off demand destruction given its lower CO2 emissions than coal, a primary competing fuel in electricity generation.
In a declining demand environment, the potential for oversupply augments the potential for low commodity prices, increased pricing volatility and weaker profitability and cash flow for oil and gas companies.
"High cost, long-lead-time projects could be at risk of becoming stranded, causing significant challenges for long-range strategic planning and investment for companies involved in large-scale frontier exploration and development projects," Thieroff said.
The report "Environmental risks: Oil and gas industry faces significant credit risks from carbon transition," says the ability to respond to these risks will vary for oil and gas companies.
When assessing the relative exposure of individual oil and gas companies, Moody's says it will consider a company's profitability and leverage, its asset mix and strategy and its ability to adjust its financial profile.