Near-, Medium- and Long-Term Risks
As described in the Risk Management section, we evaluate and track our climate-related risk through our SD Risk Register and Climate Change Action Plan. Those risks broadly fall into four categories:
- GHG related policy.
- Emissions and emissions management.
- Climate-related disclosure and reporting.
- Physical climate-related impacts.
The time horizons we use for climate-related issues are based on the time taken for the risks to manifest themselves, our planning time horizons and the time required to realize the majority of the net present value of our projects.
Near-Term Risks
Our near-term time horizon is one to five years, during which we can complete short-cycle drilling campaigns and small projects. Our GHG forecasting and financial planning processes are used to determine risks and opportunities that could have a material financial impact for that period. Our near-term climate-related risks are generally government policy-related and managed at the business unit level through policy advocacy and technology to reduce emissions.
Regulations to address climate-related risk, including GHG emissions, are a near-term risk for several of our businesses. For example, regulations issued by the Alberta government under the Emissions Management and Climate Resilience Act require any facility existing in 2016, with emissions equal to or greater than 100,000 metric tons of carbon dioxide or equivalent per year, to reduce its net emissions intensity, with reduction increases over time. The cost of compliance and investment in emissions intensity reduction technologies influence investment decisions for the Canada business unit, where we are purchasing carbon offsets while evaluating and developing technology opportunities to reduce emissions for existing and new facilities. Good examples of technology developments that decrease GHG intensity are our commercialization of non-condensable gas co-injection at our oil sands operations which improves our steam-to-oil ratios by 20-30%, and the piloting of steam additives which has the potential for a 20% improvement to our steam-to-oil ratio.
GHG emissions costs, or carbon costs, are another near-term risk in some jurisdictions where we operate. For example, in Norway, we are managing carbon cost risk with specific actions to study operational emissions reduction opportunities and evaluate project economics with the Norwegian carbon fee and European Union CO2 emissions costs included.
While a price on carbon in the U.S. will increase our costs and decrease demand for our product, we support a well-designed pricing regime on carbon emissions as the most effective and predictable policy action to reduce GHG emissions across the economy. By enacting a legislative requirement for a price on carbon, the U.S. would also maintain the energy advantage it currently has while at the same time building credibility with OECD countries and incentivizing other countries to also adopt a price on carbon. We are members of the Carbon Pricing Leadership Coalition (CPLC), a voluntary initiative working to catalyze action towards the successful implementation of carbon pricing around the world. We are a Founding Member of the Climate Leadership Council (CLC), a collaboration of business and environmental interests working to develop a carbon dividend plan for the U.S. The plan has four key pillars: a gradually increasing price on carbon, a carbon dividend, border carbon adjustments and regulatory simplification. Read more about the carbon dividend plan.
Medium-Term Risks
Our medium-term time horizon is six to 10 years, during which we can complete most major projects and revise our portfolio significantly if required. Our GHG forecasting and financial planning processes are used to determine the risks and opportunities that could have a material financial impact for that period. Medium-term risks take longer to impact our business and may include emerging policy that is not yet fully defined. These risks are managed by business unit planning but, if significant, may also be managed by corporate strategies and company-wide risk assessments.
Offset requirements have been identified as both a medium-term risk and as an opportunity for some business units where carbon offsets can be used for compliance with an emissions reduction program.
Chronic physical changes are a medium-term risk for some of our operations. Temperature extremes could impact facilities located in Arctic regions if warmer temperatures reduce the length of the ice road season and restrict well and facility construction times. Mitigation measures include pre-packing to extend the start the of the ice road season, and constructing and maintaining gravel roads to be resilient to permafrost thawing.
Long-Term Risks
Our long-term time horizon is 11 years and beyond. Generally, long-term risks are managed by our scenario analysis and Climate Risk Strategy, as they include long-term government policy, technology trends and consumer preferences that affect supply and demand. They may also include risks that align with long-term physical climate scenarios.
We recognize that our GHG intensity will be compared against peers, so we track this as a competitive risk at the corporate level. Investors, the financial sector and other stakeholders compare companies based on climate-related performance, and GHG intensity is a key indicator. For this reason, our GHG intensity target aligns with the long-term time horizon to ensure we manage the risk appropriately. It also demonstrates our goal to be a leader in managing climate-related risk.
Both chronic and acute physical climate risks are a long-term risk for our business. In some parts of the U.S. we have identified potential storm severity as a risk for future operations, based on previous storms and flooding. Consensus science suggests that future extreme weather events may become more intense or more frequent, thus potentially adding incremental risk to our operations in coastal regions and areas susceptible to typhoons or hurricanes. We have a crisis management system in place to manage that risk before, during and after a storm event.
Read more about our Risk Register and Climate Change Action Plan.