Assessing Climate-Related Risks
The diagram below illustrates how we assess climate-related physical and transition risk for operations, developments and new major projects.
To understand long-term risk and mitigation options, we have developed four scenarios. Depending on the deployment of carbon capture and storage and negative emissions technologies beyond 2050, we believe three of the scenarios may be capable of achieving an emissions trajectory consistent with the aims of the Paris Agreement. Utilizing this scenario approach helps us evaluate distinct outcomes related to the potential timing and intensity of government climate change policy development, the pace of alternative energy technology development and trends in consumer behavior. This information is then used to shape our analysis and consideration of various outcomes for policy, technology and market risk. Read more about our use of scenarios.
We periodically review emerging climate-related risks with our Executive Leadership Team as part of our scenario monitoring system. A cross-functional team enters events into a centralized database that is reviewed regularly for indications that risks are changing or developing. We use this “early warning” system to inform our strategies in a timely manner so that we can identify and implement effective mitigation measures. The scenario monitoring system helps us understand the pace and direction of the energy transition. For example, if regulations and technology were moving more quickly than in our scenarios, this would indicate that we might be moving to a 1.5-degree scenario similar to the range identified in the recent IPCC “1.5 degree” report, and we would take action accordingly. In our resiliency workshops, we use externally produced scenarios that describe the range of possible future physical risk.
SD Risk Management Process
As part of the annual risk management process mandated by our SD Risk Management Standard, we examine operated assets and major projects against the physical, social and political settings of our operations. Subject matter experts in each business unit (BU) and project identify and describe climate-related risks.
Each risk is then assessed using a matrix that evaluates both its likelihood and consequence. Risks rated significant or high are included in the corporate SD Risk Register. In evaluating the consequence level, we consider potential impacts on employee and public safety, socio-cultural and economic impacts to stakeholders, environmental impact, and reputational and financial implications. As part of the process, we examine the interdependence of risks and work to identify emerging risks such as new regulatory requirements and emerging greenhouse gas (GHG) pricing regimes.
Read more about our risk register and Climate Change Action Plan.
Resiliency Planning Workshops
We facilitate resiliency planning workshops in key BUs to identify and assess the risks and opportunities associated with the physical impacts of changing climate and the potential technology and solutions to mitigate risks and take advantage of opportunities. These workshops are conducted on a periodic basis to ensure that our operations have access to the most up-to-date science provided by qualified consultants to inform their engineering and infrastructure decisions. In 2019 we facilitated a workshop in Canada and produced a report on the resiliency risks around our new Montney development.
Climate-Related Risk Assessment
A climate-related risk assessment is conducted on any future project development that costs more than $50 million net and is expected to emit more than 25,000 metric tons CO₂ equivalent (CO₂(e)) net to ConocoPhillips during any year of its lifespan. This assessment is mandatory for investment approval. Project teams for qualifying projects are required to assess the potential risks and opportunities associated with GHG emissions, GHG regulation and a physically changing climate based on local jurisdictions and geographies as opposed to using our corporate scenarios. The climate risk assessment guideline provides a framework for project teams to:
- Forecast GHG emissions for the life of the project.
- Evaluate climate-related risks and opportunities, including physical and transition risks that apply to the project.
- Make decisions on GHG emissions control in project design, including energy efficiency solutions, power source selection, emissions management, carbon capture and storage/utilization, and external compliance options such as the purchase or origination of GHG offsets.
- Evaluate the potential cost of GHG emissions in project economics.
We assess climate-related risks early in the project engineering stage to better inform our investment decisions and facility design. The ConocoPhillips Health, Safety and Environment (HSE) Due Diligence Standard also provides further guidance on accounting for sustainable development issues for new acquisitions, new business ventures, joint ventures and real property transactions.
In 2019, our corporate authorization process required all qualifying projects to run a GHG pricing sensitivity using a price of $40 tonnes CO₂(e) (TeCO₂(e)), plus annual inflation, for all scope 1 and scope 2 GHG emissions produced in 2024 and later. Projects in jurisdictions with existing GHG pricing regimes incorporated that GHG price forecast into their base case economics. Where existing GHG price regulation is below the $40 TeCO₂(e) corporate price, the $40/TeCO₂(e) sensitivity is run from 2024 onward. This ensures that both existing and emerging regulatory requirements are considered in our decision-making.
Pricing sensitivity impact - We evaluated an international gas development opportunity in an existing field with high native CO₂ content. Testing it against the $40/tonne sensitivity price indicated it was economically challenged without the availability of offsets or the potential for carbon capture and storage. When we took the carbon price sensitivity into account with other risk factors, we decided not to pursue the project.