Morgan Stanley Warned Russian Companies About Climate Risks
Warming in permafrost regions is becoming one of the main threats to the infrastructure of major corporations, analysts at Morgan Stanley Bank believe, and in the future may significantly affect their financial performance. The risk is most relevant for Gazprom, NOVATEK, Norilsk Nickel, and ALROSA, according to the Bank's analysts. The diesel spill in Norilsk has raised the issue of climate risks for Russian commodity companies, according to an analytical note by Morgan Stanley on Russian commodity markets.
The Bank conducted a stress test for major Russian commodity companies and assessed the potential impact of warming in permafrost regions on financial performance and dividend payments in 2022. The document emphasizes that Gazprom produces more than 90% of gas in permafrost regions, NOVATEK's production is concentrated in Yamal, and Norilsk Nickel and ALROSA have more than 90% of EBITDA generated in permafrost regions.
"Climate changes in permafrost areas, which account for about 60% of Russia's territory, lead to the release of large amounts of methane and carbon dioxide, reduce soil stability and create risks for infrastructure," Morgan Stanley notes.
The growth rate of average annual temperature in Russia since 1960 exceeds the world by 2.5 times and by 3-4 times over the past 20 years in permafrost areas. As a result, the bearing capacity of foundations in key regions of hydrocarbon production in Russia decreased by 25-75% compared to 1965-1975. Significant risks also exist in the electricity supply, and their implementation may lead, among other things, to a halt in production, analysts warn.
In Russia, 90% of gas, 30% of oil, 100% of palladium, and 90% of diamonds are produced in permafrost areas, so the impact of warming on the financial performance and capitalization of commodity companies may begin in the near future, the report says.
In terms of Free Cash Flow (FCF), the Bank recorded the biggest impact from Gazprom: the company's FCF in 2022 may be reduced by more than half compared to the forecast figure without taking into account climate risk: from $8.4 billion to $4 billion. Morgan Stanley analysts expect Norilsk Nickel to have the greatest impact on dividends: when climate risk is taken into account, the forecast dividend figure for 2022 will be halved to $1.1 billion.