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Fitch warns that an era of downgrades is ahead for oil and gas companies

2 November 2023

Most of the fossil fuel industry could face a period of downgrades if producers don’t quickly adapt to a low-carbon future, according to Fitch Ratings, Bloomberg reports.

According to the rating agency, which tried to assess how companies will respond to climate risks, such as increasingly strict regulations on polluting emissions, the most vulnerable are oil and gas companies.

More than a fifth of global companies face a significant risk of rating downgrades due to a “high” level of climate vulnerability in the next decade, Fitch estimates. Half of these issuers are in the oil and gas industry, while coal companies and utilities are particularly at risk of downgrading, according to Agerpres.

More importantly, more than half of the global issuers that could be downgraded due to climate risks currently benefit from an “investment grade” rating (-recommended for investments-no.), says Fitch, which analyzed a sample of 715 companies.

The International Energy Agency estimates that world oil demand will peak during this decade. But other researchers are of the opinion that the turning point will take place earlier. According to Inevitable Policy Response, a forecasting group whose data was also used in Fitch’s analysis, the peak in oil demand could occur in 2025, after which demand will collapse by more than 60% over the next 25 years.

The extent of the collapse in demand in the coming period “is a very large number”, says Sophie Coutaux, responsible for ESG in the corporate ratings division at Fitch. There is now “a very big question mark” over whether oil and gas producers “will be able to adapt”, added Sophie Coutaux.

The warning comes at a time when much of the oil industry is ramping up efforts on its core businesses after the war in Ukraine caused an energy crisis that drove up fossil fuel prices. Major oil producers used the cash they accumulated during the period of artificially inflated prices to reward shareholders and expand through acquisitions.

Some of the world’s major oil and gas producers hope to be able to reduce their polluting emissions in the future by using carbon capture technology when it is fully developed. But Fitch warns that some companies in the oil and gas industry may be pressed for time to come up with feasible plans to reduce emissions. Some issuers with an investment-grade rating “have started to invest in reducing carbon emissions” but “the pace must be accelerated,” says Sophie Coutaux.

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