Addressing climate-related risks and opportunities

Climate-related risks and opportunities that have the potential to impact our company are addressed through business and operational planning, strategic planning and financial planning. Our SD risk management processes identify those risks and assess the potential size, scope and prioritization of each. We have aligned a description of these impacts with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).

Business planning

Climate-related risks and opportunities may affect our business planning through impacts to demand for our product, product costs, supply chain, daily operating and mitigation activities, project design and emissions reduction projects, among others. 

Products and services

Compliance with policy changes that create a carbon tax, fee, emissions trading scheme or greenhouse gas (GHG) reductions could significantly increase product costs for consumers and reduce demand for natural gas and oil-derived products. Demand could also be eroded by conservation plans and efforts undertaken in response to global climate-related risk, including plans developed in connection with the Paris Agreement. Many governments also provide, or may in the future provide, tax advantages and other subsidies to support the use and development of alternative energy technologies that could impact demand for our products. However, there are also opportunities associated with increased demand for lower-carbon energy sources such as natural gas to displace coal in power generation and in combination with carbon capture and storage in the production of hydrogen for industrial use. More information about these opportunities is included in the LNG and Low Carbon Opportunities sections.

Supply chain 

We collaborate and innovate with industry groups, peers and suppliers to integrate sustainability into our supply chain strategies.   

We engage with suppliers on the environmental and social aspects of their operations throughout the procurement process. This includes communicating our expectations and priorities and identifying opportunities for improvement and collaboration related to climate issues, including GHG management and environmental supply chain risks.   

Supplier’s Scope 1 and Scope 2 emissions are a category of our Scope 3 emissions. We have ongoing engagements with major suppliers to seek alignment of their GHG emissions goals with our plans for the energy transition. We also utilize a questionnaire in key bids that includes questions on sustainability and in 2023 we began incorporating an assessment of their emissions reduction efforts into targeted bids. 

In 2023, we enhanced our Scope 3 Supplier Emissions Strategy¹ to reflect how we can most effectively manage climate risks and opportunities within our value chain. Our strategy includes the following elements:  

• Identifying suppliers with high relative impact on Scope 3 upstream supplier emissions. 

• Promoting alignment of supplier GHG targets with our net-zero ambition.  

• Building a governance framework for supplier sustainability to include Scope 3 supplier emissions.  

• Annually reviewing our Supplier Expectations and updating when applicable to add to expectations associated with climate, nature, responsible use of resources and human rights.  

• Collaborating with suppliers in conjunction with industry partners like API and Ipieca to align on disclosure frameworks and systems for collecting and reporting supplier emissions.   

In support of our strategy, key 2023 achievements include:  

• Issuing a supplier emissions questionnaire to suppliers representing ~50% of our global spend to communicate our priorities, understand the priorities of our suppliers, and to promote and engage in two-way learning opportunities.  

• Continuing to highlight climate and sustainability expectations for our suppliers through our annual Supplier Sustainability Forum.  

We continue to monitor climate-related risks and believe that maintaining a global network of suppliers will mitigate physical climate-related risks. Read more about our supply chain sustainability efforts. 

Commercial

Our Commercial organization has frequently consulted and provided ad hoc support for ConocoPhillips sustainability initiatives and is now developing a strategy to more consistently and proactively: 

• Support emissions reduction and other environmental initiatives. 

• Work with midstream and commercial partners to align on the ambition for net-zero. 

• Reduce GHG emissions along the value chain.  

Early work and near-term plans include: 

• Evaluating the potential to deliver differentiated products (e.g., natural gas, LNG, crude oil, and natural gas liquids) including a refresh of a previous consideration of Certified Natural Gas. This includes:
  • Focusing on methane emissions reduction, measurement and verification.
  • Engaging key certifiers to understand gaps between company plans and evolving certification requirements.
  • Engaging gathering, processing, and transport vendors to understand value chain emissions.
  • Evaluating participation in the differentiated gas market.
  • Monitoring regulatory and voluntary initiatives for requirements related to natural gas and LNG markets.
• Developing a Cross-Commodity Commercial Sustainability Engagement Plan to:
  • Identify potential partners for electrification efforts, low carbon projects, midstream projects and emissions protocols.
  • Find allies in advocacy efforts.
  • Influence processing and transport vendors to improve environmental performance. 

Operations 

While our business operations are designed and operated to accommodate a range of potential climate conditions, significant changes, such as more frequent severe weather in the markets we serve or the areas where our assets are located, could cause increased expenses and impact to our operations. The costs associated with interrupted operations will depend on the duration and severity of any physical event and the damage and remedial work to be carried out. Financial implications could include business interruption, damage or loss of production uptime and delayed access to resources and markets. For example, a three-day shutdown of all U.S. Gulf Coast production would result in approximately 700 MBOE of lost production.² It is unlikely all our Gulf Coast area production would be affected, as our operations are located across a wide span of the coast including inland and offshore assets.  

Adaptation 

Business-resiliency planning is a process that helps us prepare to mitigate potential physical risks of a changing climate in a cost-effective manner.   

Canada 

The Montney development team made a concerted effort to situate pads within existing cut blocks where timber has been cleared to minimize the risk from increased wildfire activity. Similarly, in response to previous years’ increased wildfire activity in Alberta, our Surmont team undertook forest fuel reductions near critical infrastructure and completed a Fire Smart hazard assessment to identify additional corrective actions to further reduce risks to critical infrastructure. At a landscape level, we are implementing an integrated land management plan with a local forest company to strategically reduce forest fuel loading in areas of future infrastructure development. We have also developed an automated active wildfire early warning system around both assets to identify active fires as a forewarning measure to keep people and infrastructure safe. 

In addition to mitigating fire risk, the Canada business unit has addressed increased surface water flow from high-frequency and short-duration storm events in Surmont with increased on-site training for managing the movement of water from well pads and central processing facilities. We have also implemented recommendations from an industry study on bioengineering techniques, such as live willow silt fences, to mitigate erosion and sedimentation issues during intense rainfall events. This proactive surface water management is critical in preventing on-site erosion from damaging critical infrastructure. In the Montney region, we monitor streamflow at the Halfway River, which acts as a signal for potential upcoming low-flow conditions in winter so appropriate mitigation measures can be enacted. Seasonal learnings like this inform streamflow prediction exercises and future development. We have also proactively assessed infrastructure design risks to account for a potential increase in high-frequency, short-duration storm events and are piloting the same bioengineering sediment control techniques as Surmont. 

Australia  

In 2021, our Australia business unit conducted climate water catchment-level modeling to inform a drought risk assessment to determine future impacts to water supply. Results showed that long-term evaporation and long-term and severe drought duration are projected to increase over the next 30 years in the local area. To mitigate this potential risk, both ConocoPhillips and the local water authority are investigating supplementary water supplies from alternate sources. We will use results from this, and future updates to the risk assessment, to plan for water availability in future operations as we adapt our practices to a changing climate. 

Alaska 

Climate change is also considered during new project design. In 2020 in our Alaska business unit, we updated our foundational design specification to increase the embedment depths for vertical support members and piles to align with predicted soil temperature trends. This revision updated the specification based on permafrost temperature trends and geothermal modeling predictions from 2020 through 2070. Use of the foundational design specification continues to date and will be revised as needed in the future. Additionally, long-term permafrost thermistors were installed in the Willow project area in 2024. Data will be used to evaluate permafrost temperatures near the surface, and data will be incorporated into engineering models and construction best practices.   

Strategic planning

A robust and flexible corporate strategy is key to addressing climate-related risks and navigating the energy transition. Some key climate-related components of an exploration and production company’s strategy are portfolio management, including portfolio resilience and diversification, focus on low cost of supply and capital allocation, carbon pricing, and investment in new technology through research and development.  

Acquisitions and divestments 

Business development decisions consider possible financial, operational and sustainability impacts to our portfolio. In our long-range planning process, we run sensitivities on our GHG emissions intensity based on possible acquisitions, divestments and project decisions. We focus on the cost of supply to account for lower and more volatile product prices and the possible introduction of carbon taxes. 

Resilient portfolio   

Our ability to address climate-related risks and meet transition pathway demand will depend on our ability to deliver competitive returns on and of capital. Our sector-leading approach focuses on the cost of supply of our portfolio, committing to balance sheet strength and moderating growth by holding to disciplined reinvestment rates.  

Oil and natural gas are projected to remain essential parts of the energy supply mix in coming decades across a broad range of transition scenarios. We intend to maintain our key market role through remaining competitive and resilient to transition-related risks in any scenario by providing low-cost, low-GHG intensity production by asset type with continuously improving sustainability performance. 

Portfolio diversification   

The mix and location of the resources in our portfolio provide flexibility and adaptability as we monitor scenarios and global trends. Our short-cycle shale project times and capital flexibility enable us to redirect capital to the most competitive basins. Our extensive low cost of supply resource base allows us to divest higher cost assets to high-grade our portfolio as our strategy evolves. This applies to both hydrocarbon mix and geographic region. If policy in a country or region significantly impacts cost of supply, we can shift capital to other opportunities.  

One example of portfolio diversification is the significant expansion of our LNG portfolio in recent years through our increased interest in APLNG and participation in joint ventures with QatarEnergy. These projects have a low cost of supply and low GHG emissions intensity on a life cycle basis and align with our view that LNG is expected to play an increasingly important role in helping meet energy transition pathway demand, with its lower GHG intensity compared to burning coal for power generation. 

ConocoPhillips has long been a participant in the LNG business, utilizing our commercial capabilities to develop and supply markets. We believe that U.S. LNG is well placed to provide lower emissions intensity, reliable energy to European and Asian markets. Our investment in the U.S. Gulf Coast Port Arthur LNG project also allows for optionality for future offtake from expansion trains and access to excess cargos from equity investments. Read more about these projects in the LNG section. 

Cost of supply and capital allocation 

Cost of supply is the West Texas Intermediate (WTI) equivalent price that would generate a 10% after-tax return on a point-forward and fully burdened basis. In our definition, cost of supply is fully burdened with capital investment, foreign exchange, price-related inflation, G&A and carbon tax (if currently assessed). If no carbon tax exists for the asset, carbon pricing aligned with internal energy scenarios is applied. Cost of supply is the primary metric that we use for capital allocation, and it has the advantage of being independent of price forecasts. Providing low cost of supply also addresses a key component of a just transition — reliable and affordable energy supply. 

The cost of supply of our resource base supports our assertion that resources with the lowest cost of supply are most likely to be developed in scenarios with lower demand, such as the IEA’s Net Zero Emissions Scenario. As shared during our 2023 Analyst and Investor Meeting, we have a resource base of ~20 billion barrels of oil equivalent with a cost of supply of $40 per barrel (or lower) and an average of $32 per barrel.  

To assist our capital allocation decisions, we test our current portfolio of assets and investment opportunities against future possibilities and identify strengths and weaknesses that may exist. As a result of our strategy and scenario work, we have focused capital on resources with low cost of supply, exiting deep water and high emissions intensity gas fields while increasing our investments in unconventional oil projects.  

In recent years we have high-graded our portfolio and applied stringent capital allocation criteria that direct investments to resources that will best match transition demand. We are equally focused on developing assets that have a low cost of supply and low GHG intensity, as these are most likely to compete in any future energy transition pathway with each asset type contributing to its unique market (e.g., unconventionals, LNG, oil sands). Based on our current forecasts, our GHG intensity will improve over time and assets with less than 10 kg CO₂e/BOE are projected to represent a larger portion of our portfolio by 2030. In addition, the cost of supply of our portfolio performs competitively against expected commodity prices across a range of future scenarios. 

In 2023, we announced completion of the purchase of the remaining 50% interest in our Surmont asset. As a long-life, low sustaining capital asset, Surmont plays an important role in our diverse low cost of supply portfolio. The asset has competitive operating margins and remains compatible with meeting our 2030 GHG emissions intensity target. We have plans for future operational emissions reduction by applying both current and new technology. While Surmont is an emissions intensive asset, ConocoPhillips is also a member of the Pathways Alliance, working on reducing emissions using CCS from oil sands operations. 

Carbon asset risk 

Scenario analysis and our Climate Risk Strategy help build optionality into our strategic plans to reduce the risk of stranded assets. Key elements of our climate-related risk management process include: 

• Considering a range of possible future carbon-constraint scenarios. 

• Developing strategic alternatives to manage shareholder value in a future with uncertain carbon constraints. 

• Testing strategies and asset portfolios in various scenarios. 

• Incorporating risk mitigation actions into the Long-Range Plan and Climate Change Action Plan. 

• Taking action to reduce our cost of supply; we are one of only a few oil and natural gas companies to transparently disclose the full cost of supply of our resource base.  

All U.S. publicly traded companies must adhere to a consistent set of regulations that enable investors to evaluate and compare investment choices. We fully comply with rules and regulations, including for reporting natural gas and oil reserves. In order to meet the Securities and Exchange Commission requirement that reserve estimates be based on current economic conditions, our reported reserves are determined by applying a carbon tax only in jurisdictions with existing carbon tax requirements. We have also increased our disclosure over the years to offer investors and stakeholders additional insights into the processes and procedures we use to manage climate-related risks, including carbon asset risk.

Carbon price 

We use assumptions of carbon pricing to navigate GHG regulations, drive culture shift, encourage energy efficiency and low-carbon investment, and stress test investments. In 2023, the company used a range of estimated future costs of GHG emissions for internal planning purposes, including an estimate of $60 per tonne CO₂e as a sensitivity to evaluate certain future projects and opportunities. The base case for project approval economics and planning includes either the forecast of existing carbon pricing regulations or our current probability-weighted energy transition scenario for that jurisdiction, depending on which is higher. Where there is no carbon price regulation, we use the current transition scenario for that jurisdiction. We also run two sensitivities: 

• With only 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. 

Cost of compliance with carbon legislation 

Climate Legislation	2023 Cost of Compliance Net Share Before Tax ($USD Approx)	Operations Subject to Legislation	Percent of 2023 Production1
European Emissions Trading Scheme (EUETS)	$28 million	Norway	6%
U.K. Emissions Trading Scheme (U.K. ETS)	$0.8 million	U.K.	0%
Norwegian Carbon Fee	$35 million	Norway	6%
Alberta Technology Innovation and Emissions  Reduction (TIER)	$3.5 million	Canada	4%
British Columbia and Alberta Carbon Tax	$8.2 million	Canada	6%

In addition to the use of carbon pricing in planning and project economics, we use it in impairment testing, cost of supply calculations, and reserve calculations. 

• Impairment testing: Business units’ LRP submissions are the basis for the assumptions used in our impairment testing model for both operated and non-operated assets aligned with the higher of existing regulations or the carbon pricing assumptions used in the current energy scenario. 

• Cost of supply: On appraised resource volumes in our cost of supply model and LRP, we assume the higher of the carbon prices from existing regulations or those implied by the current scenario where applicable.  

• Reserve calculations: In accordance with SEC guidelines, the company does not use an estimated market cost of GHG emissions when assessing reserves in jurisdictions without existing GHG regulations. In jurisdictions where GHG regulations exist we base carbon prices on market actuals. In cases where existing carbon prices are not based on the market but are preset by a regulatory body, we use the pre-published prices (e.g., Alberta). 

Research and development

Technology will play a major role in addressing GHG emissions, whether through reducing emissions or lowering the energy intensity of our operations or value chain. As discussed in our External Collaboration and Engagement and Public Policy sections, we participate in a number of research and industry initiatives, two of which are the Natural Gas Initiative and Pathways Alliance Inc. The Natural Gas Initiative is a program led by Stanford University researchers with participation from industry, government, intergovernmental organizations and foundations. The initiative aims to increase public access to information about the accuracy of methane detection and quantification technologies. 

In 2021, ConocoPhillips joined the Oil Sands Pathways to Net-Zero Alliance (now Pathways Alliance Inc., “Alliance”), which includes Canadian Natural Resources, Cenovus Energy, Imperial, MEG Energy and Suncor Energy. Together this group represents the companies operating approximately 95% of Canada’s oil sands production. The ambition of the Alliance is to progress toward reducing Scope 1 and Scope 2 GHG emissions from oil sands operations to help Canada meet its climate goals with the use of carbon capture and storage. ConocoPhillips is partnering with the members of the Alliance and governments to accelerate emissions reduction efforts. Financial support, regulatory approvals and advances in technology are critical to advancing this ambition. 

Another way we support technology development is through our annual MACC process which identifies and prioritizes our emissions reduction opportunities from operations based on the project’s breakeven cost of carbon ($ per tonne CO₂e reduced). This data helps identify projects that might become viable in the future through further research, development and deployment. As a result of this work, we have focused our near-term technology investments on reducing both costs and emissions where feasible.   

Through the MACC process, since 2018 we have spent approximately $750 million on research and development, equipment, products and services and projects to reduce our GHG emissions. 

Investments to reduce GHG emissions

Technology area	Stage of development	Cumulative investment 2018-2023
Energy efficiency	Applied research and development (R&D)	$6 million
	Pilot demonstration	$71 million
	Small scale commercial deployment	$10 million
	Large scale commercial deployment	$287 million
Methane detection and reduction	Applied R&D	$4 million
	Pilot demonstration	$2 million
	Small scale commercial deployment	$29 million
	Large scale commercial deployment	$107 million
Other emission reductions	Applied research and development	$20 million
	Pilot demonstration	$10 million
	Small scale commercial deployment	$35 million
	Large scale commercial deployment	$166 million

Financial planning

We take climate-related issues into account in our financial planning in several ways. We focus on the fundamental characteristics that drive competitive advantage in a commodity business — a low sustaining price, low cost of supply and low capital intensity that drive free cash flow, capital flexibility and a strong balance sheet. We have aligned a description of the potential impacts on financial planning with the recommendations of the TCFD and included additional descriptions of strategic measures we take to mitigate impacts. 

Commodity prices 

In the short-to-medium term, we use a range of commodity prices derived from our scenario work. In the longer term our scenarios provide insight into the possibilities for future supply, demand and price of key commodities. This helps us understand a range of risks around commodity prices, and the potential price risk associated with various GHG reduction scenarios. History has shown an interdependency between commodity prices and operating and capital costs. In the past, lower commodity prices have driven down operating and capital costs, whereas the opposite has been true when commodity prices have risen. 

Capital expenditures and operating costs 

New or changing climate-related policy can impact our costs, demand for fossil fuels, the cost and availability of capital and exposure to litigation. The long-term impact on our financial performance, either positive or negative, will depend on several factors, including: 

• Extent and timing of policy. 

• Implementation details such as cap-and-trade or an emissions tax or fee system. 

• Supply and demand-side renewable fuels or energy efficiency mandates. 

• GHG reductions required. 

• Level of carbon price. 

• Price, availability and allowability of offsets. 

• Amount and allocation of allowances. 

• Technological and scientific developments leading to new products or services. 

• Potential physical climate effects, such as increased severe weather events, changes in sea levels and changes in temperature. 

• Extent to which increased compliance costs are reflected in the prices of our products and services. 

The long-term financial impact from GHG regulations is impossible to predict accurately, but we expect the geographical reach of regulations and their associated costs to increase over time. We model such increases and test our portfolio in our long-term transition scenarios. 

Our strategy is also made more robust by discipline in capital and average production costs per BOE. When oil prices fluctuate, we are able to respond with changes to short and long-term planning, as well as more cost-effective and efficient operations. 

Reputation and access to capital 

In addition to considering cost of supply, portfolio resilience and cost of carbon, we also strive to compete more effectively by earning the confidence and trust of the communities in which we operate, as well as our equity and debt holders. We consider how our relative environmental, social and governance performance could affect our standing with investors and the financial sector, including banks and credit-rating agencies. An important priority in our corporate strategy has been remaining committed to our strong balance sheet that is resilient through commodity prices.  

Financial position 

Material information related to our financial position, including material climate-related matters, is disclosed in our most recently filed periodic report on Form 10-K and subsequent filings on Form 10-Q.  Discussion of material climate-related factors includes, but is not limited to, disclosures under the heading “Risk Factors” and within the section "Contingencies — Company Response to Climate-Related Risks.”