Financial Planning
We take climate-related issues into account in our financial planning in several ways. In the short-to-medium term, we use a range of commodity prices derived from our scenario work. In the longer term our scenarios provide insight into the possibilities for future supply, demand and price of key commodities. This helps us understand a range of risk around commodity prices, and the potential price risk associated with various GHG reduction scenarios. History has shown an interdependency between commodity prices and operating and capital costs. In the past, lower commodity prices have driven down operating and capital costs, whereas the opposite has been true when commodity prices have risen. We have aligned a description of the potential impacts on financial planning with the recommendations of the TCFD.
Operating Costs and Revenues
New or changing climate-related policy can impact our costs, demand for fossil fuels, the cost and availability of capital and exposure to litigation. The long-term impact on our financial performance, either positive or negative, will depend on several factors, including:
- Extent and timing of policy.
- Implementation detail such as cap-and-trade or an emissions tax or fee system.
- GHG reductions required.
- Level of carbon price.
- Price, availability and allowability of offsets.
- Amount and allocation of allowances.
- Technological and scientific developments leading to new products or services.
- Potential physical climate effects, such as increased severe-weather events, changes in sea levels and changes in temperature.
- Extent to which increased compliance costs are reflected in the prices of our products and services.
The long-term financial impact from GHG regulations is impossible to predict accurately, but we expect the geographical reach of regulations and their associated costs to increase over time. We model such increases and test our portfolio in our long-term transitional scenarios.
Capital Expenditures and Capital Allocation
We test our current portfolio of assets and investment opportunities against the future prices generated our corporate scenarios and identify where weaknesses may exist, assisting with our capital allocation. As a result of our strategy and scenario work, we have focused capital on lower cost-of-supply resources, reducing our investments in oil sands and exiting deep water while increasing our investments in unconventional oil projects. Following acquisitions in the Permian in 2021, we have dramatically high-graded our portfolio on the basis of both cost of supply and GHG intensity and established capital allocation criteria that ensure investments are directed to resources that best match transition demand.
Acquisitions and Divestments
Business development decisions consider the impact to our portfolio from the financial, operational and sustainability perspectives. In our long-range planning process, we run sensitivities on our GHG emissions intensity based on possible acquisitions, divestments and project decisions. We focus on cost of supply to account for lower and more volatile product prices and possible introduction of carbon taxes. In recent years, we have divested assets with higher emissions intensity, such as oil sands and some older gas fields.
Access to Capital
In addition to cost of supply and carbon, we also strive to compete more effectively by earning the confidence and trust of the communities in which we operate, as well as our equity and debt holders. We consider how our relative environmental, social and governance performance could affect our standing with investors and the financial sector, including banks and credit-rating agencies. An important priority in our corporate strategy has been to pay down debt and target an “A” credit rating to maintain, facilitate and ensure access to capital through commodity price cycles.
Carbon Asset Risk
Scenario analysis and our Climate Risk Strategy help build optionality into our strategic plans to reduce the risk of stranded assets. Key elements of our climate-related risk management process include:
- Considering a range of possible future carbon-constraint scenarios.
- Developing strategic alternatives to manage shareholder value in a future with uncertain carbon constraints.
- Testing strategies and asset portfolios in various scenarios.
- Incorporating risk mitigation actions into the Long-Range Plan and Climate Change Action Plan.
We have taken action to reduce our cost of supply and are the only oil and natural gas company to transparently disclose the full cost of supply of our resource base. Combined with our belief that we have the lowest sustaining capital required to maintain flat production among our peers, this demonstrates a competitive advantage in reducing carbon asset risk. The cost of supply of our resource base supports our assertion that resources with the lowest cost of supply are most likely to be developed in scenarios with lower demand, such as the IEA’s Sustainable Development Scenario.
All U.S. publicly traded companies must adhere to a consistent set of regulations that enable investors to evaluate and compare investment choices. We fully comply with rules and regulations, including for reporting natural gas and oil reserves. In order to meet the Securities and Exchange Commission requirement that reserve estimates be based on current economic conditions, our reported reserves are determined by applying a carbon tax only in jurisdictions with existing carbon tax requirements. We have also increased our disclosure over the years to offer investors and stakeholders additional insights into the processes and procedures we use to manage climate-related risks, including carbon asset risk.
Cost of Compliance with Carbon Legislation
| CLIMATE LEGISLATION | 2021 COST OF COMPLIANCE, NET SHARE BEFORE TAX ($USD APPROX) | OPERATIONS SUBJECT TO LEGISLATION | PERCENT OF 2021 PRODUCTION1 |
|---|---|---|---|
| European Emissions Trading Scheme (EUETS) | $19 million | U.K., Norway | 9 |
| U.K. Emissions Trading Scheme (U.K. ETS) | $3 million | U.K. | 0 |
| Norwegian Carbon Fee | $35 million | Norway | 9 |
| Alberta Technology Innovation and Emissions Reduction (TIER) |
$1 million | Canada | 5 |
| British Columbia and Alberta Carbon Tax | $6 million | Canada | 6 |
1 2021 country production over total production; cost of GHG emissions may only apply to some of our assets or to a portion of our emissions over a set baseline.
GHG Price
We use GHG pricing to navigate GHG regulations, change internal behavior, drive energy efficiency and low-carbon investment, and stress test investments. In 2021, the company used a range of estimated future costs of GHG emissions for internal planning purposes, including an estimate of $60 per tonne CO2e applied beginning in the year 2024 as a sensitivity to evaluate certain future projects and opportunities. We have further developed the methodology by which qualifying projects will include GHG pricing in their project approval economics and long-term planning. The base case for project approval economics and planning will now include either the forecast of existing GHG pricing regulations or our current probability-weighted energy transition scenario for that jurisdiction, depending on which is higher. Where there is no GHG price regulation, we use the current transition scenario for that jurisdiction. We also run two sensitivities:
- With only existing carbon pricing regulations, to reflect near-term cash more accurately.
- With a sensitivity of $60 per tonne CO2e, increased from $40 per tonne, to act as a stress test to reduce the risk of stranded assets should climate regulation accelerate.
This ensures that both existing and emerging regulatory requirements are considered in our planning and decision making.
In accordance with SEC guidelines, the company does not use an estimated market cost of GHG emissions when assessing reserves in jurisdictions without existing GHG regulations.