Can investors spur national oil companies toward methane action?

The crucial role of national oil companies (NOCs) in reducing global methane emissions is becoming evident. At the 2023 United Nations Climate Change Conference COP28 in 2023, over 50 oil and gas companies, including 30 NOCs, pledged to cut methane emissions to near zero and end routine flaring by 2030. NOCs, which produce half of the world’s oil and gas and hold two-thirds of global reserves, had largely been absent from the methane discussion until now.

Despite these pledges, implementation is challenging due to NOCs’ diverse priorities, such as generating revenue for host governments, providing jobs, and funding social services. Finance could be a motivating factor, as lenders and investors with decarbonization goals can influence the companies they support.

We analyzed the financials of 20 large NOCs using public data to help investors identify key points for methane engagement and essential characteristics to consider.

Just as their priorities and challenges are varied and complex, so are the NOCs with comparable financial information hard to find. In general, the availability of public information correlates with the companies’ exposure to capital markets. The host government’s desire to be more business-friendly and attract foreign capital also affects its NOC’s transparency.

The companies' public reports and presentations were the starting point. Stock exchange filings and credit rating reports can also provide detailed and comprehensive information.

We also looked at news articles, bulletins from the Organization of the Petroleum Exporting Countries, the US Energy Information Administration, the US Securities and Exchange Commission, the International Energy Agency, International Monetary Fund country reports and various reports by asset managers, national oil company partners and governments.

NOCs vary in terms of operations, strategic focus and governance and structure themselves very differently regarding finances. Some look like sophisticated multinational enterprises with full access to global capital markets. Others are akin to oil ministries, with most financial flows occurring through the host governments.

Placed along a continuum, you have companies such as Petrobras (Brazil), YPF (Argentina) or PTTEP (Thailand) that have a significant free float (over 35%). This means minority shareholders have some influence on corporate strategy and can appoint independent board directors and vote on shareholder resolutions.

Many other NOCs are 100% owned by the state. In such cases, the financial sector has less opportunity to engage with company management.

Some NOCs, such as Pemex (Mexico) and KMG (Kazakhstan), have significant financial leverage, so access to bond markets is important for their refinancing needs. Other companies – e.g. Aramco (Saudi Arabia) and Qatar Energy (Qatar) – have large absolute amounts of bonds listed but net debt is insignificant relative to company size and debt servicing needs.

Sonangol (Angola) and Sonatrach (Algeria) have no listed equity or bonds and have very low levels of debt, which, coupled with the lack of listed equity, make them relatively isolated from capital markets.

There is a perception that most NOCs are fortresses tightly controlled by their host governments and with limited interactions with the outside world. With respect to finance, this is rarely the case.

NOCs have issued $1 trillion of debt – twice that outstanding of the seven Western oil majors or international oil companies (IOCs). They have also issued $3 trillion of public equity. True, a significant proportion of this equity was issued by a single company (Saudi Aramco, which has a $2 trillion market cap), much of which is held by the governments where the companies are located. Still, the free float of those listed is about $600 billion, which is not inconsequential.

Eleven of the 20 NOCs we analysed have listed their equity on financial markets. The biggest of them just saw its market exposure rise, with the Saudi government recently raising $11 billion in a secondary sale of Aramco stock.

Even when a national oil company does not have listed equity or debt, its host country will often have issued sovereign debt. Given that most NOCs are significant contributors to national revenues, their financial performance has a material impact on the sovereign’s access to capital and ability to service debt.

Though some NOCs have taken steps to develop clean energy strategies – such as ADNOC (UAE) through Masdar, in which it holds a strategic stake or PetroChina, with its efforts to develop carbon capture and storage – few are talking about a major move away from fossil fuels in the medium term.

However, we found two common investment themes: 1) a shift from liquids to gas; and 2) growth in petrochemicals. Both are likely to require capital expenditure that could increase NOCs’ openness to external sources of finance. In addition, sometimes governments may see NOCs as a source of capital to fund ambitions outside the oil and gas sector.

Some NOCs have limited engagement with Western financial institutions but this can change at certain points. The restructuring of China’s oil industry to create a new midstream player, PipeChina, from assets owned by CNPC, CNOOC and Sinopec, involved a range of international advisors and lenders.

In Nigeria, the government is reportedly considering an initial public offering of its national oil company, NNPC, driven by investment needs and at least nominally, an intention to transform it into a more independent business enterprise.

Exposure to capital markets tends to be associated with greater action on methane.

We looked at the companies’ adoption of the four major emissions reduction initiatives (Oil & Gas Methane Partnership, Oil & Gas Decarbonization Charter, Oil & Gas Climate Initiative and Methane Guiding Principles) and found that NOCs with no exposure to equity and bond markets typically have either joined only one of them or none at all.

Companies that have joined two or more of these initiatives all have meaningful exposure to capital markets. We also noticed that the three NOCs with the largest methane emissions intensity have either no or very little exposure to capital markets. This looks like another indicator of the importance of public investors and bondholders and their impact on companies’ behaviour.

Investors have limited opportunities to directly influence the “worst offenders” of methane emissions. To do that, we need to be creative and find leverage through other channels.

Though thorough, our assessment should be one of many attempts to crack the complicated challenge NOCs present to the oil and gas industry.

We encourage others to share their thoughts about how investors can engage with NOCs to reduce the industry’s total climate exposure. It’s not going to happen without them.