Daily Update: November 30, 2023

Start every business day with our analyses of the most pressing developments affecting markets today, alongside a curated selection of our latest and most important insights on the global economy.

Oil and Gas Funding in the Energy Transition Era

Erik Belz, head of private equity for investment firm Engine No. 1, expressed concern that a focus on climate and the energy transition was pulling funding away from oil and gas exploration. Speaking on a panel during S&P Global’s CERAWeek energy conference in March, Belz sounded an alarm: “The energy transition is being driven by ideology. We live in a world that does want to decarbonize, but we are going to need traditional resources for years to come. This requires a change in the narrative around natural resource systems.” 

While it is possible that funding for oil and gas projects may decline due to investors’ Scope 3 emissions reductions goals, an analysis by researchers at S&P Global Ratings and S&P Global Commodity Insights found that current funding remains robust in the energy sector. Climate goals have yet to seriously impact investor appetite for oil and gas.

According to S&P Global Commodity Insights, the energy sector will begin to gradually decarbonize during the next decade, and global oil demand will peak in the early 2030s. In S&P Global Commodity Insights’ base-case scenario, oil demand for countries of the Organisation for Economic Co-operation and Development will peak as early as 2025, with a steeper decline thereafter. Natural gas demand is forecast to peak and decline more slowly, since it is often viewed as a bridge fuel on the path to full decarbonization. Based on these projections, S&P Global does not expect funding for oil and gas projects to tighten until the latter half of this decade. 

Many banks and financial institutions have made high-profile commitments to reduce their emissions over the next few decades. While this is a concern for the energy sector, a closer look at these commitments reveals that they are less effective than they appear. An encouraging 42% of banks have committed to reducing Scope 1 and Scope 2 emissions. These commitments cover emissions that are generally produced during normal business. Such emissions are low for financial service providers. However, only 20% of financial institutions have committed to reducing Scope 3 emissions, which are defined as greenhouse gas emissions linked to investment and lending activities. These would be the only emissions reduction commitments that could affect funding for the energy sector.

A recent analysis of the $16.4 trillion of equity managed by 45 of the world’s largest asset managers found that 95% of portfolios are misaligned with the goals of the Paris Agreement on climate change. Bond issuances for the oil and gas sector have remained remarkably steady and well subscribed over the past decade. As for the funding that has fallen, it appears to be because oil and gas majors are using their substantial balance sheets to self-fund.

Banks in North America and Europe have historically been the primary financiers of the oil and gas industry. While bankers in both regions have set science-based targets on emissions reductions, the targeted reductions for European banks tend to be higher and more stringent. An impressive 90% of European banks that finance the oil and gas industry have adopted absolute emissions reductions, compared to about 20% of their North American counterparts. After 2030, funding conditions may grow tighter for oil and gas as investors seek to avoid stranded assets. But for now, the energy sector has not experienced a notable decline in interest.

Today is Thursday, November 30, 2023, and here is today’s essential intelligence.

Written by Nathan Hunt.

Economy

Economic Research: Economic Outlook Eurozone Q1 2024: Headed For A Soft Landing

In an environment of high interest rates, S&P Global Ratings still believes that a soft landing of the European economy remains the most likely scenario for the rest of 2023 and the first half of 2024. The International Monetary Fund (IMF), the World Bank and the Institute of International Finance (IIF) endorsed this scenario at their annual meetings in Marrakech in October this year. The European Commission's autumn economic forecasts point in the same direction.

—Read the report from S&P Global Ratings

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Capital Markets

Credit Conditions Asia-Pacific Q1 2024: China Slows, India Grows

S&P Global Ratings expects Asia-Pacific's growth engine to shift from China to South and Southeast Asia. It projects China's GDP growth to slow to 4.6% in 2024 (2023: 5.4%), edge up to 4.8% in 2025, and return to 4.6% in 2026. It sees India reaching 7.0% in 2026 (6.4%); Vietnam, 6.8% (4.9%); Philippines, 6.4% (5.4%); and Indonesia remaining steady at 5%.

—Read the report from S&P Global Ratings

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Global Trade

Russia's Arctic Oil Exports Surge But Risks Still Hamper New Trade Route

Russian crude exports to China via its Arctic shipping route shortcut surged to a record high in 2023 as Moscow continued to pivot east to find buyers for oil shunned by Western refiners, according to tanker tracking data. But the so-called Northern Sea Route's ice-prone, unpredictable voyage times remain a key hurdle to further expansion of the precarious trade route that Russia is so keen to promote.

—Read the article from S&P Global Commodity Insights

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Sustainability

Sustainability Insights Research: Lost GDP: Potential Impacts Of Physical Climate Risks

By 2050, if global warming does not stay well below 2 degrees Celsius, up to 4.4% of the world's GDP could be lost annually, absent adaptation. This will test countries' adaptation plans, particularly those of lower-income nations that are disproportionately exposed and less able to prevent permanent losses. The rising likelihood of compound climate events adds to the challenges of climate analytics. Understanding these non-linear dynamics appears crucial to assessing specific risks each country faces and may help policymakers pursue more-targeted policies.

—Read the article from S&P Global Ratings

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Energy & Commodities

VCMI Releases 'Ready To Use' Guidance For Buyers Of Carbon Credits

The Voluntary Carbon Markets Integrity Initiative released an updated set of guardrails Nov. 27 to help buyers make high-integrity claims on their use of carbon credits, as the market remained mired in a credibility crisis. The new guidance includes a Monitoring, Reporting and Assurance (MRA) Framework and a Carbon Integrity Claims brand, encouraging corporates to increase their participation in the voluntary carbon markets.

—Read the article from S&P Global Commodity Insights

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Technology & Media

Watch: COP28: The Technologies

The phaseout of fossil fuels is one of the most important themes for the UN Climate Change Conference (COP28), and also one of the most contentious. In the second of three videos, S&P Global Commodity Insights adds context on how the parties will approach this topic at the upcoming talks and what’s at stake.

—Watch the full video from S&P Global Commodity Insights

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