Climate related business risk and portfolio resilience
Our business needs to be resilient to the multiple risks – both upside and downside – posed by climate change. These include potential stricter climate regulations, changing demand for oil and gas, technologies that could disrupt our market, as well as physical effects of climate change.
Climate-related risks and opportunities, and our strategic response to these, is high on the agenda for our corporate executive committee and Board of Directors.
Management of climate-related risk is embedded in Equinor’s enterprise risk management process. We use internal carbon pricing, scenario analysis and sensitivity analysis to assess and manage climate-related risk. We monitor technology developments and changes in regulation and assess how these might impact the demand for oil and gas, the cost of developing new assets and opportunities for low-carbon technologies.
Climate-related risk factors are identified by considering main sources of change – market, policy and regulatory, technology, physical and reputational. Climate-related risk factors are assumed to indirectly influence Equinor’s cash flow risk via effects on revenues or cost. This relationship is integrated into our risk assessment of revenues and costs and corresponding actions. As an example, climate-related risks could influence oil, gas and carbon price assumptions. Risk adjusting actions are evaluated, decided and implemented as relevant. An overview of relevant risk factors and how we manage these, is provided below.
See page 17 in our Susainability report
Our strategic response to climate-related risk
Our strategy and Climate Roadmap form the basis for how we respond to climate-related risks and opportunities. As part of this we have embedded climate considerations into our incentives, reporting and decision-making, and have targets in place to measure progress and incentivise performance across the entire company – starting at the top. CO2 intensity (upstream) is a key performance indicator and influences executive pay.
Investment principles
Our investment principles take climate into account. We require all potential projects to be assessed for carbon intensity and emission reduction opportunities, at every decision phase – from exploration and business development to project development and operations. We apply an internal carbon price of at least USD 55 (real 2018) per tonne of CO2 in investment analysis. In countries where the actual or predicted carbon price is higher than USD 55, we apply the actual or expected cost, such as in Norway where both a CO2 tax and the EU Emission Trading System (EU ETS) apply.
Energy scenarios
Our energy scenarios inform the economic planning assumptions used in our investment decisions and the formulation of our strategy. Our Energy Perspectives 2018 report illustrates that there is significant uncertainty around the future energy mix and the exact pace and scale of the energy transition. In that report we also assess sensitivities to our Renewal scenario related to potential disruptive technologies, CCS and climate policy action.
Portfolio stress test
Equinor annually conducts a price sensitivity analysis for our project and asset portfolio against the assumptions regarding commodity and carbon prices in the range of energy scenarios of the International Energy Agency (IEA), as presented in their World Energy Outlook report. This analysis is used to assess energy transition-related risks. The practice is in accordance with a shareholder resolution passed in 2015, suggesting that stress testing should be done against third-party scenarios to allow for comparability.
The “project and asset portfolio” entails equity production, excluding exploration activities1. However, our investment decision criteria, including the internal carbon price and discount rates, apply also to exploration projects.
In 2018 we tested our portfolio against the IEA’s Current Policies, New Policies and Sustainable Development scenarios. The scenarios and assumptions are presented in the World Energy Outlook 2018 report (IEA). Equinor has not tested our portfolio against a 1.5°C scenario, as the IEA has so far not published such a scenario with corresponding oil, gas and carbon price assumptions. The four illustrative model pathways presented in the International Panel on Climate Change’s special report on the impacts of global warming of 1.5°C2 indicate that oil and gas demand would have to be significantly lower than in a 2°C scenario, and as such the potential downside for Equinor in a sensitivity analysis could be expected to be more significant. However, our sensitivity analysis does not take into account the fact that our portfolio would change to be more robust as the different scenarios unfold and materialise.
1. Exploration activities are not included due to significant uncertainty regarding discoveries and development solutions. This is a change from previous years’ analysis, which have included exploration activities.
2. IPCC (2018): Special Report: Global Warming of 1.5ºC
See page 19 in our Susainability report