More financial institutions are joining a worldwide alliance that is committed to reduce or cut funding of fossil fuel operations, including making no new direct investments in upstream production. This means oil and gas businesses are likely to find fundraising trickier, particularly to support fresh capacity, suggests the report.

‘Lenders, bond investors and other finance facilitators need to change their policies significantly to fulfill net zero commitments, at the same time aligning with the national net zero targets of their home countries,’ says Christina Ng, report co-author and IEEFA’s Research and Stakeholder Engagement Leader, Debt Markets. ‘Capital support to the oil and gas sector in the coming years, particularly on expansion plans, could thus become more elusive.’

The global grouping which is attracting an increasing number of climate and environmental-oriented members is the Glasgow Financial Alliance for Net Zero (GFANZ), formed during the United Nations Climate Change Conference in 2021 (COP26). To date, it represents more than 550 organisations from sectors including banking, insurance, asset ownership and asset management. Many are oil and gas capital and financial services providers that see a need to limit fossil fuel financing by 2050 and to meet intermediate targets for 2030 or sooner.

As GFANZ membership grows further and net zero targets are strengthened in the near future, capital raising for new oil and gas production capacity could become harder, says Ng and her co-authors.

The report notes that oil and gas companies in the Asia-Pacific region are falling behind because, compared to international peers, they rely more on fossil fuel revenue and have limited exposure to non-carbon assets.

The Asia-Pacific supplies 10–15% of global oil and gas needs, and at the same time it is the largest and second largest consumer of oil and gas respectively, creating opportunities for alternative energy sources.

‘Despite net zero commitments, the top 20 regional oil and gas producers generate an average of 96% of their revenue directly from oil and gas production and related activities, and many still adopt a wait-and-see approach to new energy investments, lagging global peers,’ comments Ng.

In fact, planned oil and gas capacity expansion is not uncommon across the Asia-Pacific. Just 10 regional oil and gas firms with significant growth ambitions in the Asia-Pacific represent 14% of global future planned capacity, and half of them are based in China and Australia.

Reliance on equity finance
Based on IEEFA’s analysis, oil and gas companies in the Asia-Pacific are on average more reliant on equity than debt financing as a critical source of capital, with the aggregate debt-to-total capital ratio of 259 companies at roughly 32%. Larger players exhibit high debt balances but more moderate gearing than their smaller peers, who are more highly geared, according to the research. As such, on a macro level, constraints on debt availability are unlikely to greatly affect production.

On the part of financiers, attempts to curb their funding of existing oil and gas operating assets may also run up against difficult choices, partly because pulling these funding lines too quickly risks affecting bank balance sheets and financial markets more widely, Ng adds.

In addition, many of the region’s largest oil and gas producers are state-owned, with oil and gas contributing significantly to national gross domestic product (GDP) outcomes. Government-owned or controlled companies generate around 77% of oil and gas production across the Asia-Pacific region.

‘Their business models rely on oil and gas for revenue generation more so than their industrial peers, and this is likely one of the drivers of slower transition investment in the Asia-Pacific compared to other markets,’ comments Ng.

Even so, the low gearing among oil and gas companies in the Asia-Pacific suggests that shareholder requirements, rather than lenders’ policies, may drive changes in their attitudes to environmental, social and governance (ESG) matters more effectively.

The report also identifies six regional companies under the combined criteria of high outstanding borrowings and significant investment plans for oil and gas production growth. They are India’s Oil and Natural Gas Corporation (ONGC), Santos and the Woodside Energy Group of Australia, as well as China National Offshore Oil Corporation (CNOOC), China Petroleum & Chemical Corporation (Sinopec), and PetroChina.

While these companies do not have high leverage levels, data shows an overwhelming use of bonds as a source of debt capital – the aggregate borrowing of the six companies is made up of 91% bond finance and 9% bank loans, according to the report.

Potential for regional GFANZ leadership
Just 27 of the 259 companies represent 80% of the oil and gas debt market in the Asia-Pacific region, meaning debt capital is concentrated within a select few entities. China and India make up most of the borrowers, with around $280bn in oil and gas indebtedness between them.

To put it another way, lenders and bond investors in China and India account for about two-thirds of the debt capital utilised by the top 27 borrowers in the Asia-Pacific.

Currently, GFANZ’s Asia-Pacific membership lacks representation from China and India, both of which have significant existing oil and gas operations and significant expansion plans in the region. ‘The size, scale and profile of these two economies suggest a need for their active participation in the global move away from fossil fuels, comments Ng.