managing climate change risks
All business units incorporate carbon costs and anticipated capital and operating expenditures related to carbon issues in multiple ways:
Business plans: Business plans are generated to forecast cash flows. In jurisdictions where regulations that impose a carbon price currently exist, they are included in business plans; in jurisdictions where they do not yet exist, but are projected to be implemented in the future, they are included in the year the costs are forecasted to start.
Carbon-management plans: Business units in jurisdictions with regulations that impose a carbon price go through an annual compliance-planning process with the goal of achieving the most efficient manner of compliance. Where we have multiple assets in a single jurisdiction, integrated plans are developed to optimize total compliance costs across the business. We develop marginal abatement cost curves for our facilities and compare the cost of internal reduction options with paying the tax or fees and purchasing offsets or allowances. The anticipated compliance costs, including investments to generate internal reductions, are included in business plans.
Impairment reviews: When triggering events arise, we perform impairment reviews to determine whether any write-down in the carrying value of an asset is required. Impairments could occur, for example, due to changes in national, state and local environmental laws, including those designed to stop or slow the production of oil and gas. Impairment reviews are based on assumptions that are consistent with the company’s business plans and long-term investment decisions.
Reserves: When calculating reserves, we incorporate a cost of carbon in jurisdictions with enacted carbon pricing regulations.the “stranded assets” theory
There has been recent public debate regarding a “carbon bubble” related to oil and gas reserves, which refers to the theory that some assets may become “stranded” as unproduced reserves become uneconomical due to potential future regulations. Although it is possible that not all oil and gas assets will get produced, as explained throughout this report, we take carbon prices into account where appropriate in our business planning to avoid having stranded assets. Additionally, the U.S. Securities and Exchange Commission’s definition of “reserves” requires those assets to be economically producible as of a given date. The commodity price used in these calculations is the average of the first-of-the-month pricing of the prior year, projected forward as a “flat” unescalated price for the life of the field. For example, the 2017 commodity price used in reserve calculations is similar to the lower price indicated in the IEA’s SDS; thus, current reserves estimates indicate that assets would not be stranded and there would not be a “carbon bubble” even in an aggressive climate change–response scenario such as the IEA’s SDS.capital project approvals
Individual investments are developed, approved and implemented in the context of the strategic plan, segment-specific business plans and commodity price forecasts. Investment proposals are evaluated by management and, as appropriate, reported to the Executive Committee and the Board of Directors. The company’s final investment decisions are guided by a strategic assessment of the business landscape.
Our internal carbon price outlook is considered in the economic evaluations supporting major capital project appropriations. In addition, a number of GHG-related factors are considered in project-appropriation assessments, such as:
- The annual profile of anticipated project GHG emissions (both Scope 1 and Scope 2)
- The assessment of the options for reducing GHG emissions and optimizing energy efficiency
chevron employs long-standing risk management processes in assessing risks to its business, including risks related to climate change
Chevron faces a broad array of risks relating to its business, including market, operational, strategic, legal, regulatory, political and financial. Risks that could materially impact the company’s operations and financial condition are discussed in the Risk Factors section of the company’s Annual Report on Form 10-K.
Chevron’s Enterprise Risk Management (ERM) process provides corporate oversight for identifying major risks to the company and ensuring that appropriate mitigation plans are in place. The ERM process includes an annual risk review with executive leadership and the Board of Directors. As part of this annual risk review, the Strategy and Planning Committee (S&PC) of Chevron’s Executive Committee evaluates categories of risks to Chevron’s business and their potential consequences, financial or otherwise, and identifies and assesses the effectiveness of safeguards and mitigations in place to manage each risk category. When necessary, the S&PC develops and implements improvement actions to strengthen the company’s safeguards. Following endorsement by the S&PC, the annual ERM assessment is reviewed by the Board of Directors.
integration of climate change into chevron risk management
Potential climate change risks are integrated into multiple ERM risk categories because a truly global challenge like climate change requires a comprehensive review strategy. The Board of Directors and executive leadership believe this integrated approach is appropriate because it enables climate change risks to be examined in connection with other broad-ranging risks affecting Chevron.
Climate change presents different potential risks to different segments of our business. Our management of operational risk is aided by several systems and processes across the enterprise. Through application of our risk management processes, Chevron approaches operational risks in a consistent manner.
Operational Excellence Management System (OEMS)
Through application of the OEMS, Chevron assesses risks, identifies safeguards and implements programs to ensure that those safeguards are effective. Chevron has put in place a number of enterprisewide processes and standards as well as technical guidance to meet our goals and expectations for operational excellence (OE). The OE Risk Management process sets expectations for the assessment of risk across the OE focus areas of process, safety, reliability and integrity, workforce safety and health, the environment, stakeholders and security, and includes specific standards for performance of those assessments.
Potential climate change risks are considered when conducting risk assessments at the business unit, operating company and enterprise levels. These risk assessments include structured identification of potential risk scenarios, evaluation of the adequacy of safeguards to manage those scenarios and, as needed, identification of risk mitigations. For example, in areas of water scarcity, we identified freshwater use as a potential risk. As a result, we actively work to reduce our freshwater use in areas of water scarcity.
We make continual improvements to our environmental performance by following our OEMS and Environmental Stewardship OE processes, which require our businesses to identify, assess and prioritize environmental risk and improvement opportunities. Our approach to environmental stewardship includes an environmental, social and health impact assessment designed to identify and manage potentially significant project-related impacts and opportunities in a consistent manner.
For decades, Chevron has managed risks associated with the impact of ambient conditions on our operations. Long-standing practices developed to manage these impacts are being applied and extended to reflect possible effects of climate change and to ensure the ongoing resilience of our infrastructure, both for current operations and for those being developed and considered. For example, to protect the facilities against possible storm surges, we spent $120 million on raising a dike at our Pascagoula, Mississippi, refinery and $16.2 million to construct a seawall at our Port Arthur, Texas, lubricants plant. As another example, the Chevron Engineering Standard for Metocean Design and Operating Conditions was recently updated based on the assessment of future potential impacts to Chevron’s marine facilities, such as potential changes in storm intensity, changes to sea level and changing water currents.
Business Continuity Plans
With global operations subject to diverse microclimates and weather phenomena, Chevron stays prepared for the possibility of natural disasters. Based on risk evaluations and business impact analyses, business units develop and implement a Business Continuity Plan to ensure continuous availability – or prompt recovery of – critical business processes, resources and facility operations.
Business units use their Business Continuity Plan to manage operations with a reduced workforce, to direct employees to alternate work locations – such as working from home or alternate office locations – and to overcome localized IT outages. For example, personnel from our Supply and Trading group in Houston identified business-critical employees to deploy to alternative work locations in the event the Houston office is unavailable. The plan, process and alternative facilities are regularly reviewed and tested to ensure business continuity.
geopolitical and legislative risk
Chevron’s ERM process targets a broad range of geopolitical risks, including legislative, regulatory and legal risks, to ensure that they are appropriately assessed and reviewed. In the years ahead, companies in the energy industry, including Chevron, may face an increase in international and domestic regulation of greenhouse gas (GHG) emissions. Such regulations could impose additional costs on the oil and gas sector. To the extent the market allows for pass-through of any direct costs to consumers, the potential impact of such regulations would be reduced.
Chevron’s Strategy & Planning Committee and Global Issues Committee receive regular updates on climate policy trends, which may forecast increased or decreased stringency, and their potential implications. Chevron engages in ongoing efforts to understand the potential impact of policy on the different parts of our business – particularly supply, demand and pricing – and works with governments to ensure that they fully understand the perspectives of a major participant in the industry. These efforts help us better evaluate how GHG/climate regulation may unfold in jurisdictions where we operate. Changes in anticipated demand, pricing, competitiveness and regulation become apparent over time, and Chevron takes these factors into account in revising our capital allocation and redirecting our portfolio as needed.
Climate Change Litigation
Chevron, along with many other companies in the oil and gas industry, is named in lawsuits brought by various cities and counties that seek to hold companies financially responsible for changes in climate and the effects of those changes. The claims are factually and legally without merit. Chevron welcomes meaningful efforts to address the issue of climate change, but litigation is not an appropriate or effective tool for accomplishing that objective. Reducing GHG emissions is a global issue that requires global engagement and careful consideration of broader policy, regulatory and economic priorities.
Chevron’s ERM process assists the Board of Directors and executive leadership in overseeing risks related to key strategic decisions for the company, including decisions related to commodity price forecasts and capital project approvals. The processes we use are discussed in detail in the Strategy section of Climate Change Resilience: A Framework for Decision Making.