ConocoPhillips

Taking Action on Climate Change

Worker in San Juan

Managing Risks and Opportunities

The effect of many current and potential greenhouse gas (GHG) regulations will be to establish a price or cost for a unit of avoided GHG emission. Such laws and regulations bring both risks and opportunities. The introduction of a cost of greenhouse gas emissions could also increase demand for less carbon-intensive energy sources and technologies such as natural gas and renewable energy. There are both risks and opportunities that we see developing in a lower carbon business environment.

A holistic description of our approach to climate change risk is contained within our ‘Climate Change Strategy’ section.

Opportunities in a Lower Carbon Business Environment

Potential business opportunities related to anticipated climate change regulatory requirements fall into fall into 2 broad categories:

  • Opportunities associated with increased demand, and value of lower carbon energy sources and technologies associated with our existing business such as natural gas exploration and production.
  • Opportunities to extend the life or increase the value of our existing assets and business, for example through the potential application of CO2 capture and storage.

There are potential opportunities in all these categories to increase revenues, decrease expenses, expedite business development, enhance our license to operate, and to grow our business.

Greenhouse Gas Regulatory Risk

There have been a broad range of proposed or promulgated state, national and international laws focusing on GHG reduction. These proposed or promulgated laws apply or could apply in countries where we have interests or may have interests in the future. Laws in this field continue to evolve, and while it is not possible to accurately estimate either a timetable for implementation or our future compliance costs relating to implementation, such laws, if enacted, could have a material impact on our results of operations and financial condition. Examples of legislation or precursors for possible regulation that do or could affect our operations include:

  • Federal mandatory GHG reporting (United States, Canada, EU, Australia).
  • The U.S. Supreme Court decision in Massachusetts v. EPA, 549 U.S. 497, 127 S.Ct. 1438 (2007), confirming that the Environmental Protection Agency (EPA) has the authority to regulate carbon dioxide as an “air pollutant” under the Federal Clean Air Act.
  • The U.S. EPA’s announcement on March 29, 2010 (published as “Interpretation of Regulations that Determine Pollutants Covered by Clean Air Act Permitting Programs,” 75 Fed. Reg. 17004 (April 2, 2010)), and the EPA’s and U.S. Department of Transportation’s joint promulgation of a Final Rule on April 1, 2010, that triggers regulation of GHGs under the Clean Air Act, may trigger more climate-based claims for damages, and may result in longer agency review time for development projects.
  • The U.S. EPA’s announcement on January 14, 2015, outlining a series of steps it plans to take to address methane and smog-forming volatile organic compound emissions from the oil and gas industry. A goal was established in 2015 of reducing the 2012 levels in methane emissions from the oil and gas industry by 40 to 45 percent by 2025.
  • European ETS, the program through which many of the European Union (EU) member states are implementing the Kyoto Protocol. Our cost of compliance with the EU ETS in 2015 was approximately US $0.4 million (pre-tax equity share).
  • In Canada during 2015, the Alberta government amended the regulations of the Climate Change and Emissions Act. The regulations now require any existing facility with emissions equal to or greater than 100,000 metric tonnes of carbon dioxide or equivalent per year to reduce its net emissions intensity from its baseline from the current 12 percent in 2015, to 15 percent in 2016 and to 20 percent in 2017. We also incur a carbon tax for emissions from fossil fuel combustion in our British Columbia operations. The total cost of compliance with these regulations in 2015 was approximately $5 million.
  • Norwegian Carbon Tax — Our cost of compliance with Norwegian carbon tax legislation in 2015 was approximately US $31 million (equity share pre-tax).
  • The agreement reached in Paris in December 2015 at the 21st Conference of the Parties to the United Nations Framework on Climate Change, that came into force Nov. 4, 2016, setting out a new process for achieving global emission reductions.

Compliance with changes in laws and regulations that create a GHG emission trading scheme or GHG reduction policies could significantly increase our costs, reduce demand for fossil energy derived products, impact the cost and availability of capital and increase our exposure to litigation. Such laws and regulations could also increase demand for less carbon intensive energy sources, including natural gas. The ultimate impact on our financial performance, either positive or negative, will depend on several factors, including but not limited to:

  • Whether and to what extent legislation or regulation is enacted.
  • The timing of the introduction of such legislation or regulation.
  • The nature of the legislation or regulation (such as a cap and trade system or a tax on emissions).
  • The GHG reductions required.
  • The price placed on GHG emissions (either by the market or through a tax).
  • The price and availability of offsets.
  • The amount and allocation of allowances.
  • Technological and scientific developments leading to new products or services.
  • Any potential significant physical effects of climate change (such as increased severe weather events, changes in sea levels and changes in temperature).
  • Whether, and the extent to which, increased compliance costs are ultimately reflected in the prices of our products and services.

The ultimate financial impact arising from environmental laws and regulations is neither clearly known nor easily determinable as new standards, such as air emission standards, water quality standards and stricter fuel regulations continue to evolve. However, environmental laws and regulations, including those that may arise to address concerns about global climate change, are expected to continue to have an increasing impact on our operations in the U. S. and in other countries in which we operate. Notable areas of potential impacts include air emission compliance and remediation obligations in the United States.

Operating in a Physically Changing World

We are an independent exploration and production company operating in countries around the world with physical assets in many of them. So, we can be exposed to impacts related to a changing physical environment caused by various factors in a number of locations. Several years ago, we co-led the development and publication of the World Business Council for Sustainable Development (WBCSD) report Adaptation — An Issue Brief for Business. The report concluded that changes in the Earth’s climate system could have repercussions on how business operates. The magnitude and frequency of impacts are uncertain, but consequences with negative effects on business could include:

  • Higher temperatures, which could affect the location, design, efficiency, operation and marketing of business infrastructure, products and services.
  • Water scarcity, which could disrupt business operations, particularly those of water-dependent industries.
  • Rising sea levels, which could affect the location of business operations, submerge or complicate access to raw materials or natural and human resources.
  • Increased frequency of extreme weather events, which could damage business infrastructure, disrupt logistics, and affect business continuity and costs.
  • Changes in the distribution of vector-borne disease (e.g., malaria) and greater population migration, with their attendant socioeconomic impacts on workforces and markets.

Our business operations are designed and operated to accommodate expected climatic conditions. To the extent there are significant changes in the Earth’s climate, such as more severe or frequent weather conditions in the markets we serve or the areas where our assets reside, we could incur increased expenses, our operations could be materially impacted, and demand for our products could fall. Our business operations are designed and operated to accommodate expected climatic conditions. To the extent there are significant changes in the Earth’s climate, such as more severe or frequent weather conditions in the markets we serve or the areas where our assets reside, we could incur increased expenses, our operations could be materially impacted, and demand for our products could fall.

Given the uncertainty regarding future physical impacts associated with changing local, regional or global climate, it is not possible to determine at this time whether future physical impacts of climate change represent significant opportunities for our company.

Building Resiliency to Climate Change

Business resiliency planning is a process that helps us prepare to mitigate potential impacts of a changing climate in a cost-effective manner. The key elements of this process include:

  • Identifying the risks and business opportunities associated with the physical impacts of changing climate.
  • Identifying physical impacts of greatest concern.
  • Identifying potential technologies and solutions to mitigate risks and take advantage of opportunities.

Adaptation will not reduce the frequency or magnitude of events related to a changing climate, but will increase the resiliency of our business to events such as drought, hurricanes and flooding.

We conducted workshops on resiliency risks in key business units to establish future actions based on projected physical changes to the operating environment. Business units in Texas and the Gulf Coast, Arctic Canada, Canada Oil Sands, Australia North & West (including offshore) and North Slope Alaska participated. These business units are integrating results into their climate change management plans.

Progress on our multi-year plan includes:

  Managing Risks & Opportunities
Integrate resiliency planning throughout the company
1
Review non-operated asset climate change plans 1
​Revise and update business unit climate change management plans 4
Address stakeholder questions and concerns regarding climate change risks 4
​Develop corporate carbon scenarios to inform strategy options 4

Integrate resiliency – Workshops were held, risks documented, reports generated for review and comment, and mitigating actions are built into business unit (BU) climate change management plans.

 

Non-operated climate change plans – A risk analysis item was added to some business unit climate change management plans to determine whether non-operated assets carry unmitigated risks.  Some business units have developed plans to influence non-ConocoPhillips operators on addressing climate change issues.  Further work on this subject is expected over the next two years of the plan.

Revise and update business unit climate change management plans – Business units set a frequency for updates and revisions of their management plans ranging from annually to every three years. Progress against the corporate climate change action plan is updated when any BU management plan is revised. When the corporate plan action plan is revised, any actions arising are integrated into BU management plan updates. The review of BU management plans is tied into the Long Range Planning process to ensure any actions or investments can be considered in the corporate budget and Long Range Planning cycle.

Climate Change Risk – We met with external consultants to consider management approaches and took part in the IPIECA task force to develop an industry response.  We developed a strategy to mitigate risks arising from our analysis of carbon asset risk and have expanded disclosure of our risk management approach in our Sustainability Report.

Develop GHG scenarios and strategy options – We have completed our plan to develop GHG scenarios, GHG strategy options and a Scenario Monitoring System.