A robust and flexible corporate strategy will be key to navigating the energy transition. The three key strategy components for an exploration and production company are portfolio, capital allocation and management of uncertainty. We manage uncertainty by focusing on the fundamental characteristics that drive competitive advantage in a commodity business — a low sustaining price, low cost of supply, low decline rates and low capital intensity that drive free cash flow, capital flexibility and a strong balance sheet. Based on our scenario analysis and monitoring of signposts, we decide when we should act and which actions to take.

Proved Reserves

The mix and location of the resources in our portfolio demonstrate flexibility and the ability to adapt to change as we monitor scenarios and global trends. Our short-cycle project times and capital flexibility enable us to redirect capital to the most competitive basins. Our extensive low cost of supply resource base allows us to divest higher cost assets to high-grade our portfolio as our strategy evolves. This applies not only to hydrocar­bon mix, but geographic region as well. If policy in a country or region significantly impacts cost of supply, we can shift capital to other opportunities. Examples include our presence in the oil sands business in Canada and in North American natural gas. Changing market fundamentals led us to significantly reduce our focus on both, while our portfolio diversity enabled expansion in other areas.

Percent of Proved Reserves Charts

Capital and Operating Spend

Our strategy is also made more robust by discipline in capital and operating costs. When oil prices started dropping in 2014, we could respond with changes to short- and long-term planning, as well as more cost-effective and efficient operations.

Capital and Operating Spend Charts

Cost of Supply

Cost of supply is the West Texas Intermediate (WTI) equivalent price necessary to generate a 10% after-tax return on a point-forward and fully burdened basis, including cost of carbon where legislation exists. In our definition, cost of supply is fully burdened with exploration, midstream infrastructure, facilities cost, price-related inflation and foreign exchange impact, and both regional and corporate general and administrative costs. Cost of supply is the primary metric that we use for capital allocation, and it has the advantage of being independent of price forecasts. Any oil price above the cost of supply will generate an after-tax fully burdened return that is greater than 10%.

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. In 2019, we had 15 billion barrels of resource below $40 per barrel diversified across four megatrends.
Cost of Supply graph

Decline Rate, Capital Intensity and Free Cash Flow

There are also a number of other key portfolio attributes that drive competitive advantage. The base decline rate is the rate at which producing wells at the end of any given year decline in production into the future. Our base decline rate is about 10% per year due to low-decline assets and a diverse portfolio. Capital intensity, which is driven by the base decline rate, is defined as capital expenditure divided by cash from operations. The three charts below demonstrate that low base decline results in a low capital intensity and produces a higher free cash flow yield compared to our peers, achieving a greater level of resiliency.  
Decline Rate, Capital Intensity and Free Cash Flow graphs charts

GHG Price

We use GHG pricing to navigate GHG regulations, change internal behavior, drive energy efficiency and low-carbon investment, and stress-test investments. The company uses a range of estimated future costs of GHG emissions for internal planning purposes, including an estimate of $40 per metric tonne applied beginning in the year 2024 as a sensitivity to evaluate certain future projects and opportunities. 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.

Cost of Compliance with Carbon Legislation

Climate Legislation 2019 Cost of Compliance, Net Share Before Tax (US$ approx) Operations Subject to Legislation Percent of 2019 Production*
European Emissions Trading Scheme (EUETS) $8 million U.K., Norway 13
Alberta Carbon Competitiveness Incentive Regulation (CCIR) $4 million Canada 4
Norwegian carbon tax $30 million Norway 10
British Columbia and Alberta carbon tax $0.8 million Canada 5

*2019 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.