Arctic oil & gas: left out in the cold

11 minute read

The Arctic produces 10% of global oil and 25% of global gas and is an ecosystem uniquely vulnerable to the damage from drilling, and disproportionately impacted by climate change.

MSCI recently made changes to the exclusion criteria of a range of ‘ESG-screened’ indexes, barring investments in companies generating over 5% of their revenue from Arctic oil and gas from a family of equity indexes.

Exclusions narrow the investor base, and so drive bond spreads wider. These exposures are therefore relevant for all investors who hold debt in the oil and gas sector.

This note analyses the exclusions and their possible impact. It considers the universe of potentially affected issuers and highlights the most relevant for fixed-income investors – the significant producers in the region with plans for further development.

Norway’s Equinor (ticker EQNR) currently generates 17% of its revenue from the Arctic, by producing 133.5 million barrels of oil equivalent (mmboe) in 2021. Norway is actively offering exploration licenses in the region, and so production is expected to increase.

With nearly $4bn of debt set to mature in the next two years, EQNR is a likely candidate for near-term new issuance. American multinational ConocoPhillips (ticker COP) generates 13% of its revenue from the Arctic, by producing 95.0 mmboe, and is expanding production via the approved “Willow Project”. Due to a bond issuance it may not raise new capital soon, unless needed directly in response to this Arctic expansion approval.

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