'We expect that refiners will be disproportionately impacted by GHG legislation, as their large carbon footprint and relatively small allowance pool could translate into significant costs for the industry,' said Mark Sadeghian, Senior Director at Fitch. 'For the intermediate and long terms, negative rating actions could result if companies are unable to maintain healthy liquidity and strong cash flows following legislation.'
In other segments, the impact is likely to be mixed. Within E&P, Enhanced Oil Recovery (EOR) producers that use CO2 in carbon floods are likely to benefit from a dramatically increased supply of industrial CO2 which may allow for the expansion of domestic oil recovery. Natural gas producers are similarly likely to benefit from the relatively favorable emissions profile for their product, as well as an increased price linkage to oil through the expansion of plug-in and natural gas vehicles. By contrast, GHG legislation poses issues for Oil Sands and other heavy oil producers, whose more energy intensive extraction processes will likely be penalized.
The impact on utilities and power generators is also likely to be mixed, as those utilities with low carbon generation already in place will likely benefit while those with more carbon-heavy footprints (i.e. coal, higher-heat rate thermal units) are expected to face additional free cash flow pressures as they seek to transition to more carbon-friendly forms of generation. Independent power producers (IPPs) with carbon-heavy footprints are expected to be more significantly affected as they lack the safety net of regulation and cannot apply for stranded cost recovery in the event that they are unable to fully recover the value of existing investments through market rates.
In the project finance space, GHG legislation has the potential to create a list of haves and have-nots, with the haves defined as projects which include contractual protections for bondholders against environmentally driven cost-increases, and the have-nots defined as those projects which lack such protections and would need to absorb any GHG cost increases without offsetting revenue adjustments.
In the chemicals space, Fitch anticipates that only a small portion of U.S. ethylene production capacity would be at direct risk of seeing its costs rise out of line with peers given that most capacity has feedstock flexibility to run on naphtha or NGLs. However, a permanent increase in feedstock-related emissions costs would likely reduce the option value of flexible crackers by placing oil-based feedstocks 'out of the money.'
