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Meeting global needs – managing climate change business risks

Energy is the foundation for modern life and the gateway to opportunity and development for developing nations.

Energy powers technology and enables progress throughout the world. It provides heat for homes and businesses; power for hospitals and clinics to run advanced, life-saving equipment; fuel for cooking and transportation; and light for schools and streets. In 2040, the energy sector will need enough supplies to sustain the lives of 9 billion people and a world economy more than double that of 2014. Expanded economic output and roughly 2 billion additional consumers by 2040 will mean that global energy demand will likely grow by about 25 per cent over 2014. To put this growth in perspective, this increase is equivalent to the total energy used in North America and Latin America today.

Given the importance of energy, it is in the interest of every government to increase access to reliable and affordable supplies for its citizens. That is why consumers should be concerned with policies that could have an adverse impact on energy production. Such restrictions could also impact the rate of economic development and the ability of nations to develop.

Growing energy demand will require diverse investment

Technology is the key to expanding supplies of energy to meet global needs.

Such innovation requires significant investments and sustained research and development, the result of which will be affordable and abundant energy production with reduced environmental impact.

It is also important to recognise that energy is a long-term, capital-intensive sector of the economy.

As a major participant in the global energy industry, ExxonMobil must anticipate and adapt to trends and changes in our industry so that we can make sound business decisions and invest our shareholders’ money wisely in projects that remain attractive in the long term.

Every year, we prepare a long-range analysis of global energy trends. We call it the Outlook for Energy and it looks at how people use energy, how much they will use in the decades ahead, and what our industry must do to meet the needs of billions of people.

Our current Outlook for Energy covers the period 2014 to the year 2040. It provides a strategic framework to aid evaluation of potential business opportunities. Like all credible forecasts, we see fossil fuels continuing to shoulder the bulk of societal needs in the future. We also see a future marked by a shift to lower-carbon fuels. With this shift will come a plateau in carbon dioxide (CO2) emissions, and we project that new technologies will open up new energy options, such as unconventional oil and natural gas in North America.

Risk assessment

The company employs a robust process for evaluating investment opportunities and managing our portfolio of operating assets. ExxonMobil requires that all business units use a consistent corporate planning basis in evaluating capital expenditures and developing business plans.

The company also tests investment opportunities against a broad set of economic assumptions, including low-price scenarios that could be representative of a carbon-constrained environment, to confirm that the investment will perform acceptably across a broad range of economic circumstances during its lifetime. The geographic and asset diversity of the company’s portfolio further helps to reduce risk and enhance profitability across a wide variety of economic conditions. Capital plans and our asset portfolio are reviewed extensively with ExxonMobil’s senior management and the Board of Directors each year. The company’s energy and environmental perspectives, including those relating to climate, are also reviewed with the Board annually to help the directors understand financial and other risks associated with the corporation’s investments.

Projects are evaluated under a wide range of possible economic conditions and commodity prices that are reasonably likely to occur, and we expect them to deliver competitive returns through the business cycles. We apply prudent and substantial safety margins in our planning assumptions to help ensure robust returns.

The company also stress tests its oil and natural gas capital investment opportunities, providing a further margin of safety against uncertainties, such as those related to technologies, costs, geopolitics, availability of required materials, services, and labor, etc. Stress testing provides us an opportunity to fully consider different economic scenarios in our planning an investment process. The Outlook for Energy is reviewed annually, and updated to reflect changes in views and circumstances, including advances in technology and changes in government policies.

Financial risk

We use a simple cost of carbon as a proxy mechanism to help model the potential impacts of a broad mosaic of future GHG policies. For example, in most OECD nations, we assume an implied cost of CO2 emissions that will reach about USD $80 per metric ton in 2040. Developing nations will have a wide range of policy costs with the wealthiest ones reaching about USD $35 per metric ton.

This GHG proxy cost is integral to ExxonMobil’s planning, and we believe the policies it reflects will increase the pace of efficiency gains and the adoption by society of lower-carbon technologies through 2040. Such policies are also likely to accelerate the growth of lower carbon sources of energy like natural gas and renewables, while suppressing the supply of coal.

A key strategy to ensure investment selectivity under a wide range of economic assumption is to maintain a diverse portfolio of oil and gas investment opportunities. This diversity in terms of resource type, corresponding development options (oil, gas, natural gas liquids, onshore, offshore, deepwater, conventional, unconventional, liquefied natural gas, etc.) and geographic dispersion is unparalleled in the industry. The company does not believe current investments in new reserves are exposed to the risk of stranded assets, given the rising global need for energy.

Physical risk

While most scientists agree climate change poses risks related to extreme weather, sea-level rise, temperature extremes, and precipitation changes, current scientific understanding provides limited guidance on the likelihood, magnitude, or time frame of these events. Anticipating the likelihood of an event at the regional or local level in comparison to global averages is even more difficult.

Nevertheless, ExxonMobil robustly engineers its facilities and operations with extreme weather considerations in mind. Local climate, as well as potential changes in local conditions over the life of the investment (such as changes to sea level or permafrost), are carefully assessed and considered. Given the spatial and temporal uncertainties of many extreme weather events, particularly with respect to future changes in climate, facilities are generally engineered to be resilient to extreme event “tails,” with the inclusion of additional safety factors built in to cover a number of engineering uncertainties.

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