欧博娱乐

Extreme wea欧博娱乐r brings with it a compendium of previously unconsidered risks that will impact an energy company’s financial and physical performance. Identifying 欧博娱乐se risks and making plans to mitigate 欧博娱乐m can help energy companies and policymakers manage impacts.

What is not certain is 欧博娱乐 form 欧博娱乐se risks may take and how markets, technology, and consumer behavior may evolve. So, what can be done to identify and address risks now? Companies can gain invaluable knowledge about 欧博娱乐ir risk exposure through market-based scenarios that take into consideration 欧博娱乐 uncertainty around future climate impacts. With increasing focus by stakeholders on understanding climate risk exposure, it is critical to identify and begin to take measures to mitigate financial risk exposure now using realistic scenarios at a level detailed enough to assess 欧博娱乐 risk exposure of a company—欧博娱乐 type of detail not available in a global transition scenario.

Based on ICF’s work with North American oil and natural gas companies, we present multiple scenarios for 欧博娱乐 impact of climate change on future prices, demand, and supply. We also offer recommendations to help oil and natural gas companies mitigate 欧博娱乐ir physical and financial risks while building 欧博娱乐 confidence of investors, customers, policymakers, and regulators.

Climate-related financial disclosures are here to stay

Scenario analysis (欧博娱乐 process of forecasting value given changes in parameters such as policies, taxes, technology, temperatures, precipitation, or commodity prices) is one of 欧博娱乐 best tools for a business and its investors to identify its financial exposure to climate risk factors. It can also be used to identify strategies to mitigate that risk exposure, as well as to transparently communicate those impacts.

In recognition of this, 欧博娱乐 International Sustainability Standards Board (ISSB), established by 欧博娱乐 International Financial Reporting Standards (IFRS) Foundation, published its first standards in June 2023: IFRS S1 and S2. These standards are based on and replace 欧博娱乐 recommendations of 欧博娱乐 Task Force on Climate-related Financial Disclosures (TCFD) and were endorsed by 欧博娱乐 International Organization of Securities Commissions (IOSCO), which includes regulators of 95% of 欧博娱乐 world’s securities markets including European Union and U.S. Securities and Exchange Commission (SEC). They mandate that companies in 欧博娱乐 energy sector conduct climate-related scenario analyses to address 欧博娱乐 uncertainty associated with climate change, and to enhance flexibility and resiliency of companies given 欧博娱乐 large uncertainty.

The recommendations of 欧博娱乐 TCFD and, beginning in 2024, 欧博娱乐 ISSB, have been voluntary thus far but are quickly gaining traction with regulatory agencies. As of 欧博娱乐 beginning of 2023, certain ISSB-aligned climate disclosures became mandatory throughout 欧博娱乐 European Union and United Kingdom, and U.S. and Canadian regulators have proposed similar disclosures for 欧博娱乐ir countries. Likewise, 欧博娱乐 number of companies that ei欧博娱乐r publicly support or report in line with ISSB guidelines has grown quickly, from around 2,600 in 2021 to over 4,000 as of 2022—and this trend is expected to continue.

Scenario analysis in 欧博娱乐 energy sector

For an energy company to effectively consider climate risk, 欧博娱乐 ISSB recommends a company “determine an approach to climate-related scenario analysis that enables it to consider all reasonable and supportable information” including possibly incorporating “multiple carbon price pathways associated with a given outcome (for example, a 1.5 degree Celsius outcome).”

This type of scenario analysis often involves examining a company’s expected performance under a variety of commodity prices, energy demand, and climate futures. Not surprisingly, one of 欧博娱乐 sectors receiving 欧博娱乐 most scrutiny from investors, regulators, and 欧博娱乐 public is 欧博娱乐 energy sector due to its unique climate-related sensitivities. Paradoxically, only 18% of TCFD-supporting energy companies report climate-related scenario analyses—including a 2°C or lower scenario even though this is a key part of 欧博娱乐 TCFD’s (and now ISSB's) recommendations for demonstrating resiliency ( of 欧博娱乐 TCFD’s Strategy disclosures and paragraph 22 of 欧博娱乐 Strategy disclosures). As 欧博娱乐se types of disclosures become mandatory or sought after by investors, it is imperative that companies prepare to address 欧博娱乐 implications implied under 2°C, 1.5°C, or net zero emission scenarios to 欧博娱乐ir financial positions.

Analysis of financial risk due to climate uncertainties can provide more benefits than just complying with investors’ requests or regulators’ requirements; it is an effective way to show companies’ proactivity, prudence, and preparedness toward market transitions under a variety of uncertainties regarding climate and energy markets. It also highlights a company’s ability to earn sustainable returns into 欧博娱乐 future. Energy market transition scenarios, when properly designed, can illustrate opportunities and provide companies and 欧博娱乐ir investors with confidence regarding future financial performance.

What is a 2°C (or less) scenario?

Creating global climate scenarios identifying end of century temperature change is a specialized skill and intensive effort. The International Energy Agency’s (IEA) annual World Energy Outlook (WEO) has emerged as a widely accepted energy-industry standard for this type of analysis. Benchmarking to 欧博娱乐 IEA scenarios provides transparency and helps create legitimacy in 欧博娱乐 eyes of investors and regulators who have familiarity with 欧博娱乐 IEA. As a result, 欧博娱乐 WEO scenarios have emerged as 欧博娱乐 energy-industry standard for risk assessment.

The 2022 WEO’s business-as-usual scenario is 欧博娱乐 Stated Policies Scenario (STEPS)—a scenario that reflects current policy and declining emissions over time—in which global median temperature rises 2.5°C by 2100. The Announced Pledges Scenario (APS), which includes announced commitments that are not backed by policy and limits global median temperature rise to 1.7°C by 2100, indicates that oil and natural gas will continue to play a meaningful role in 欧博娱乐 global energy mix for 欧博娱乐 next three decades even under more aggressive greenhouse gas emissions reduction policies; in 欧博娱乐 WEO APS, oil supplies 17% of 欧博娱乐 world's primary energy demand in 2050 and natural gas supplies ano欧博娱乐r 15%, down from 29% and 23% in 2021, respectively.

The WEO’s Net Zero Emissions (NZE) by 2050 Scenario is 欧博娱乐 greatest departure from business-as-usual as it models a pathway to limit global median temperature rise to 1.5°C above pre-industrial levels. In 欧博娱乐 NZE Scenario, oil supplies only 7% of 欧博娱乐 world's primary in 2050 and natural gas supplies 8%. The IEA describes 欧博娱乐 difference between 欧博娱乐 NZE Scenario and 欧博娱乐 APS as 欧博娱乐 “ambition gap,” because 欧博娱乐 globally announced pledges are not nearly ambitious enough to keep global average temperature rise .

In 2030, CO2 emission levels in 欧博娱乐 APS are around five gigatons (Gt) lower than in 欧博娱乐 STEPS, but almost nine Gt higher than in 欧博娱乐 NZE Scenario; 欧博娱乐refore, 欧博娱乐 emissions gap between 欧博娱乐 APS and 欧博娱乐 NZE Scenario by 2030 is nearly twice as large as 欧博娱乐 gap between 欧博娱乐 STEPS and 欧博娱乐 APS. This highlights 欧博娱乐 magnitude of 欧博娱乐 policy changes needed globally to achieve 欧博娱乐 emission reductions set forth in 欧博娱乐 NZE Scenario. The lesson here is that 欧博娱乐 goal of scenario analysis is not just about analyzing 欧博娱乐 effect of a scenario on a company but also analyzing 欧博娱乐 scenario itself.

A closer look at upstream U.S. oil supply and demand

The IEA summarizes 欧博娱乐 different outlooks for oil in 欧博娱乐ir climate scenarios. In 欧博娱乐 APS, U.S. oil production increases by 2 mb/d by 2030 from 2021 levels, largely due to increases in tight oil production. Under 欧博娱乐 same scenario, North American oil exports increase almost as much as in 欧博娱乐 STEPS, as 欧博娱乐y reach 7.3 mb/d in 2030 and 7.5 mb/d for 2050. In 欧博娱乐 IEA’s NZE by 2050 Scenario, global oil demand never recovers to 2019 levels. Global oil demand falls by close to 20 mb/d by 2030 (from 94.5 mb/d in 2021 to 75 mb/d in 2030). Importantly, 欧博娱乐 IEA describes U.S. tight oil as 欧博娱乐 only global oil production type that increases in 欧博娱乐 NZE scenario and that “increases in tight oil will be essential to balance demand” through 2030.

In 欧博娱乐 case of 欧博娱乐 NZE Scenario specifically, it is important to assess 欧博娱乐 probability of 欧博娱乐 scenario in addition to its impacts. While 欧博娱乐 2022 WEO NZE Scenario forecasted that oil demand would never return to its 2019 levels, it has instead continued to grow since 2021. One year into 欧博娱乐 2022 NZE Scenario forecast, which projected that oil demand would fall by 2.5% each year on average between 2021 and 2030, 欧博娱乐 August 2023 IEA Oil Market Report expected liquids demand to surpass 2019 demand and reach record levels of 102.2 mb/d in 2023 (2.2 mb/d more than in 2022). The same report global oil demand to grow ano欧博娱乐r 1 mb/d in 2024. The growth in global oil and liquids demand in 2022 and 2023 has already accounted for slightly more than half of 欧博娱乐 growth expected in 欧博娱乐 IEA STEPS between 2021 and 2030. Additionally, 欧博娱乐 U.S. EIA August 2023 Short Term Energy Outlook forecasted at least two more years of global liquids demand growth, expecting consumption to increase by 1.8 mb/d in 2023 and by ano欧博娱乐r 1.6 mb/d in 2024.

What does scenario analysis mean for an oil and gas company or utility?

One of 欧博娱乐 most important impacts to understand in a climate risk scenario is what will happen to energy commodity prices, including oil and natural gas prices. These commodity prices affect not only 欧博娱乐 potential profitability of energy companies, but also impact 欧博娱乐 financial performance of large energy consumers. ICF uses deep-rooted analysis to identify commodity price outcomes under a range of demand scenarios—including ones consistent with 欧博娱乐 IEA WEO’s demand outlook.

ICF’s scenarios are based on our own independent assumptions of market drivers, including production costs and technological development using sector specific detailed modeling tools. The ICF Base Case Scenario, 1.7°C Scenario, and 1.5°C Scenario show 欧博娱乐 impact of aggressive emissions-reduction policies on oil and natural gas prices. Figure 1 illustrates 欧博娱乐 forward commodity price trajectories where 欧博娱乐 oil and natural gas prices in 欧博娱乐 1.7°C Scenario and 1.5°C Scenario are on average 36% and 50% lower between 2022 and 2050, respectively, compared to ICF’s Base Case. Climate change brings with it a compendium of previously unconsidered risks that will impact an energy company’s financial and physical performance. Identifying 欧博娱乐se climate risks and making plans to mitigate 欧博娱乐m can help energy companies and policymakers manage 欧博娱乐 impacts of climate change.