Scenarios represent plausible potential future states of the world. We use scenarios in our strategic planning process to:
- Gain better understanding of external factors that impact our business.
- Test robustness of our strategy across different business environments.
- Communicate risks appropriately.
- Adjust prudently to changes in the business environment.
Using scenarios enables us to understand a range of risks around commodity prices, and the potential price risk associated with various greenhouse gas (GHG) reduction scenarios. To assist our capital allocation decisions, we can test our current portfolio of assets and investment opportunities against these future possibilities and identify where weaknesses may exist.
Analyzing and modeling potential outcomes is not the end of the process, as we also need to understand the probability of the world moving toward a specific scenario. We use a scenario monitoring system to identify crucial signposts that would indicate whether we are moving toward one scenario or another. This analysis is presented to executive management and the board of directors to assist in strategic decision-making.
Our scenario-planning framework includes corporate scenarios for oil and natural gas supply and demand and climate-related risk scenarios that reflect possible pathways to a 2-degree Celsius (C) future through technology development and the introduction of government policies.
The corporate scenario with low demand and low supply has been used to reflect a world with carbon constraints. Our climate-related risk scenarios characterize possible pathways that could result from a mix of technology advancement and government policy actions. Technology development encompasses a wide variety of lower-carbon advances that influence demand for energy or ways to supply energy, including electric vehicle battery technology, designs for windmill turbines, carbon capture use and storage, and other innovations. Government policies include any local, state, federal or international actions that could correlate to reductions in future demand for oil or natural gas or to restrictions on carbon emissions.
Each of these plausible pathways is designed to stretch our thinking about potential rates of new technology adoption and policy development. Three of the four climate-related risk scenarios achieved a pathway in line with the Intergovernmental Panel on Climate Change (IPCC)’s scenario of achieving a 50% chance of limiting the increase in global average temperature to 2-degree C above the pre-industrial average.
Scenario 1 includes rapid technology development with a low carbon price introduced by governments to kick-start technology advancement. The technological progress accelerates the development and uptake of electric cars, battery storage, smart grids and renewable power, all of which reduce GHG emissions. The technological transformation is so rapid that CO₂ capture and storage is not required. Breakthroughs in technology, such as power storage, drive the adoption of alternatives to oil and natural gas together with energy efficiency improvements.
In Scenario 2, legislation takes the form of global agreements to limit GHG emissions primarily through linked carbon pricing mechanisms assisted by technological innovations. This could drive the development of lower-cost alternative energy and carbon capture and storage. In situations with an increasing carbon price, coal-to-gas fuel switching, efficiency improvement and renewables would be expected. This could also increase natural gas demand through 2030 before it is offset by increased use of renewables in power generation.
Scenario 3 envisions a world in which national trade and energy security are considered more urgent than emissions reductions and new technology adoption is slower. In this scenario, there could be expansion of energy efficiency, existing renewable technologies and nuclear power in countries that do not have access to domestic energy sources, and in those with abundant domestic supply, the use of fossil fuels, especially coal.
Scenario 4 is one in which governments respond to slower development of technology and costlier alternatives by introducing command and control measures, such as renewable portfolio standards, to force higher-cost technologies into the mix. Demand for natural gas stays higher for longer given the need to rapidly reduce the use of coal for power generation.
Our current climate-related risk scenarios were modeled with an end date of 2030. We are currently revising our global primary energy model and extending it to 2040, before rerunning our scenarios and reviewing our climate-risk strategy to gain new insights and further align with the TCFD recommendations. We will update this section following completion of that work.
Key Strategic Linkages to our Scenario Planning
Our corporate strategy and Climate Change Action Plan reflect several findings from our scenario analyses. We have acted to:
- Use a “fully loaded” cost of supply, including cost of carbon where legislation exists, as an important metric in our project authorization process. Our portfolio changes have created a resource base of 16 billion barrels of oil equivalent with less than a $40 per barrel cost of supply and an average cost of supply of less than $30 per barrel. Our strategic objective is to provide resilience in lower price environments, with any oil price above our cost of supply generating an after-tax fully burdened return greater than 10%.
- Prepare for diverse portfolio and policy environments by maintaining a less than $40 per barrel of oil equivalent sustaining price that will generate the cash to fund capital expenditure to keep production flat over time and generate a dividend to shareholders.
- Maintain diversification in our portfolio to be able to balance our production and capital expenditures, as commodity prices become more volatile.
- Provide a distinctive payout of cash flows to investors via both dividends and share repurchases.
- Identify and fund profitable emissions reduction projects, including methane emissions reductions. Reducing our Scope 1 and Scope 2 emissions intensity reduces the impact of any future regulations, or the introduction of carbon prices or taxes and helps maintain our low cost of supply into the future. We have upgraded the use of a marginal abatement cost curve (MACC) in Long-Range Planning to identify the most cost-effective emissions-reduction opportunities available to the company globally.
- Introduce a proxy cost of carbon into qualifying project sensitivities to help us be more resilient to climate-related risk in the short to medium term and provide the flexibility to remain resilient in the long term.
- Focus near-term technology investments on reducing both costs and emissions where feasible.
- Monitor for potential disruptive technologies that might impact the market for natural gas or oil, enabling us to take advantage of our capital flexibility and reduce our exposure to lower commodity prices at an early point in time.
- Monitor global regulatory and legislative developments and engage in development of pragmatic policies aligned with the climate policy principles outlined in our Global Climate Change Position.