If global regulation and policies change and/or investors exit the hydrocarbon sector significantly faster than Moody's expects, credit pressures will be particularly large for Iraq, Kuwait and Oman, and – longer-term – also for Azerbaijan, Qatar, Abu Dhabi and Saudi Arabia, Moody's Investors Service said in a report today.
"The most likely carbon transition scenarios offer some time for adjustment, with fiscal pressures starting to build mainly in the 2030s," said Alexander Perjessy, VP-Senior Analyst at Moody's. "Based on currently stated climate policies – Moody's baseline carbon transition scenario – the energy transition will remain very gradual, exerting only limited negative pressure on hydrocarbon-reliant sovereigns' credit profiles during the current decade."
"Sovereigns with the strongest institutions and largest financial buffers are best positioned to mitigate longer-term carbon transition risks," said Perjessy. "Abu Dhabi, Qatar and Saudi Arabia have the strongest capacity to adjust policies from an institutional and governance perspective. Kuwait, Abu Dhabi, Qatar and Azerbaijan have the largest sovereign wealth fund assets, which will provide financial means to facilitate and buffer the adjustment."
According to the report, sovereigns that rely heavily on the hydrocarbon sector will face financial pressures when governments and businesses accelerate their transition to alternative, cleaner energy sources, precipitating an eventual structural decline in global demand for oil and gas.
"Climate pledges from financial institutions mean that declines in hydrocarbon demand will likely be accompanied, if not preceded, by weaker demand for hydrocarbon-related financial assets, adding an important credit transmission channel for hydrocarbon-reliant sovereigns," the report said.
According to Moody's, all hydrocarbon-reliant sovereigns face credit risks on the prospect of the faster energy transition, but some have more time.