Risk management

We utilize an integrated management system approach to identify, assess, characterize and manage climate-related risks. This system links to the enterprise risk management (ERM) process, which includes an annual risk review by the executive leadership team (ELT) and the board of directors. 

Assessing climate-related risks

The diagram below illustrates how we assess climate-related physical and transition risks for operations, developments and new major projects.

To understand long-term risk and mitigation options, we utilize four scenarios as described in the Scenario planning at ConocoPhillips section. 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. 

We periodically review emerging climate-related risks with our ELT as part of our scenario monitoring system, managed by our Chief Economist’s Office. 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 IPCC “1.5 degree” report, and we would evaluate appropriate business response. In our resiliency workshops, we use externally produced scenarios that describe the range of possible future physical risk. 

SD Risk Management Standard annual assessment

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 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, sociocultural 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. 

Resiliency planning workshops

We facilitate resiliency planning workshops within business units 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 leverage opportunities. These workshops are conducted on a periodic basis aligned with our Capital Projects Management System approval process to ensure that our operations have access to up-to-date science provided by qualified consultants to inform their engineering and infrastructure decisions. 

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 tonnes CO₂ equivalent (tCO₂e) net to ConocoPhillips during any year of its operational lifespan. This assessment is mandatory for investment approval in our project authorization process. 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 relying solely on our corporate scenarios. The climate risk assessment guidelines provide a framework for project teams to: 

• Forecast operational 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) and Social Issues Due Diligence Standard also provides further guidance on accounting for sustainable development issues for new acquisitions, new business ventures, joint ventures and property transactions. Further, our corporate authorization process requires all qualifying projects to include carbon pricing in their project approval economics. See the Carbon price section for more information. 

Project authorization

Our corporate authorization process requires all qualifying projects to include GHG pricing in their project approval economics. The base case for project approval economics now includes the higher of the forecast of existing regulations and the current transition scenario for that jurisdiction. Where there is no GHG price regulation, we use the current transition scenario for that jurisdiction. We also run two sensitivities: 

• With existing carbon pricing regulations, to reflect near-term cash more accurately. 
• With a sensitivity of $60 per tonne CO₂e to act as a stress test to reduce the risk of stranded assets should climate regulation accelerate. 

This ensures that both existing and emerging regulatory requirements are considered in our planning and decision making. 

Managing climate-related risks

Our climate-related risk management process is designed to drive appropriate action for adapting to a range of possible future scenarios. Through integrated planning and decision making, we develop mitigation plans for climate-related risk, track performance against our goals and adjust our plans as we learn and conditions evolve. 

Local risks and opportunities related to our operations and projects are assessed and managed at the business unit level, enabling tailored business goals to address the challenges and opportunities unique to each region’s operations. Reporting and overarching climate-related risks, such as GHG target setting and prioritization of global emissions-abatement projects, are managed at the corporate level. 

The diagram below shows a simplified process flow of our climate-related risk management process. 

Further, the ConocoPhillips Long-Range Plan (LRP) provides the data that underlies our corporate strategy and enables us to test our portfolio of projects against our climate-related risk scenarios, and thus make better-informed strategic decisions. 

We are integrating climate-related risks into our corporate strategy and LRP, resulting in outcomes and activities such as: 

• Reducing the sustaining price of the company — the equivalent WTI price at which cash provided by operating activities covers our ordinary dividend and capital expenditures that sustain our production at current levels. 

• Lowering the cost of supply to manage market risk and improve returns. 

• Maintaining a diversified portfolio of projects and opportunities to mitigate geographical and geological risks. 

• Diversifying our portfolio to include assets with lower decline rates and low capital intensity to drive higher free cash flow yields. 

• Developing technologies that reduce both costs and emissions. 

• Pursuing competitive opportunities in LNG, CCS and hydrogen. 

• Monitoring alternative energy technologies. 

Integrating climate-related risks into ERM

Climate-related risks from the corporate SD Risk Register are mapped to key categories in the ERM process. 

Descriptions of these risks and mitigation measures from the Climate Change Action Plan are shared with ERM risk owners to inform their assessments of risk ranking, corporate actions and mitigations. Each risk owner evaluates and prioritizes risks in their area based on likelihood and consequences, thereby determining the relative significance of climate-related risks in relation to other enterprise risks. 

The ERM process is a direct input into our strategic planning process. By identifying major cross-cutting risks and trends, we closely link action plan efforts to key performance issues and address and mitigate identified risks. The board reviews the ERM system and mitigation actions at least annually. 

Required regulatory disclosures on financial reporting and information deemed material and useful for investor decision making are presented in our filings with the Securities and Exchange Commission. 

SD risk management process

The SD risk management process ensures that a Climate Change Action Plan is developed to track mitigation activities for each climate-related risk included in the corporate SD Risk Register. This plan includes details about our commitments, related responsibilities, resources and milestones.   

As part of annual updates to the register, we evaluate the action plan and its effectiveness and make decisions to continue mitigation measures, add new measures or simply monitor the risk for further developments. The table below lists our key SD risk management streams, their scope and purpose. 

Read more about our SD Risk Register and Climate Change Action Plan.