APAC oil and gas (O&G) producers’ capital expenditure (capex) for the upstream segment is likely to stay firm to secure national energy security and for their energy transition needs, Fitch Ratings says.

However, they have more headroom for capex after most significantly deleveraged in 2022. In addition, the majority of APAC O&G companies have strong access to funding due to their sovereign-linked positions.

APAC energy demand is still increasing and rated issuers will maintain or improve their reserves, including of natural gas, which is seen as an important transitional energy. Integrated producers also face high downstream investments to deepen petrochemicals capabilities. Fitch expects capex for rated issuers’ energy transition to rise quickly from a small base over the medium term.

Fossil fuels will dominate APAC O&G producers’ earnings over the medium term. Most rated issuers have announced long-term decarbonisation targets, but most of the plans to achieve the targets lack implementation details. We expect environmental regulations to tighten to drive the transition to cleaner fuels, but the shift will be slower than in Europe as fossil fuels are the largest energy source for key Asian economies. New fossil fuel projects may face higher regulatory hurdles, especially in more developed APAC markets, like Australia.

Fitch-rated APAC O&G producers are mainly national oil companies or their subsidiaries, and their ratings are tied to changes in the ratings of the sovereigns or government-owned parents as they are mostly rated on a top-down basis. Downward revision of Standalone Credit Profiles of these entities will not affect the Issuer Default Ratings as we expect the sovereign or parent to support the entities, if required. For issuers rated on a standalone basis, their rating headroom remains ample.
Source: Fitch Ratings