Scenario analysis

IEA Energy Outlook

We reference two energy scenarios from the International Energy Agency (IEA) 2023 World Energy Outlook that illustrate their concept of future demand and track the Paris Agreement goal of reducing global greenhouse gas (GHG) emissions to limit the global temperature increase to 2 degrees Celsius while pursuing efforts to limit warming to 1.5 degrees Celsius.  

Total energy demand in 2050 stays flat compared to 2022 in the Announced Pledges scenario but declines in the Net Zero Emissions scenario. Demand for natural gas and oil has different outcomes across the IEA scenarios. 

Even in the Net Zero Emissions scenario, 2050 oil demand remains at 20 MMBBL per day and natural gas at 15 MMBOED, and despite a reallocation of capital to renewables, significant investment in upstream natural gas and oil is still required. IEA estimates oil investments alone will average $378 billion each year from 2022 to 2050 globally in the Announced Pledges scenario and $210 billion per year from 2022 to 2050 in the Net Zero Emissions scenario. This is a cumulative oil investment total of approximately $11 trillion globally in the Announced Pledges scenario and approximately $6 trillion globally in the Net Zero Emissions scenario for the period 2022 to 2050. 

Achieving the IEA’s Announced Pledges scenario (APS; limiting temperature increase to 1.7 degrees Celsius) requires significant progress on several fronts:¹ 

• Improving energy efficiency of power generation, transportation and industrial processes.  

• Reducing emissions from fossil fuels or capturing and storing or utilizing those emissions. 

• Increasing clean energy electricity, innovation and investment. 

The APS requires achieving all major national emissions reduction targets made by governments around the world, as well as meeting all country-level targets in full for access to energy/electricity. This includes supporting policies that could reduce the need for coal-fired capacity or even halt new coal investment through cost-effective, low-emissions electricity deployment. Even with these changes and requirements, APS will still require flexibility to use existing infrastructure while new options are being developed to replicate natural gas services. Such flexibility requirements in the power sector may be met with low-carbon hydrogen and hydrogen-based fuels. Oil and gas resources will still be needed in the APS but will be consolidated to include a smaller number of low-cost, responsible producers. Changes in the energy system will take time, as energy infrastructure components have long asset lives and require cross-sector, system-wide changes and retrofits to meet new specifications.  

Unlike the APS, the IEA Net Zero scenario starts with the end result of achieving 1.5 degrees Celsius and works backward to fit solutions to the final desired outcome. It provides hypothetical data to inform the decisions to be made by policymakers, who have the greatest scope to move the world closer to its climate goals. The assumptions used in this scenario are challenging. For example: 

• Reducing energy demand by about 14% from 2022 levels would require reverting energy demand back to 2010 levels, while supporting 3 billion more people with nearly three times the economic activity.  

• Increasing the share of renewable electricity supply to the level assumed in 2050 would require annual capacity additions about four times the record capacity achieved in 2020. The electricity market in 2050 is assumed to be 150% greater than the market in 2022, the equivalent of adding an electricity market the size of India every year between now and then.  

• Of 400 milestones needed to achieve net-zero emissions described in the Net Zero Emissions scenario, 85% are demand-side actions that would require government intervention while also addressing energy security and affordability. 

These widely varying factors are the reason scenario planning is important. There is not just one pathway to a low-carbon future — there are numerous ways in which government action and technology development could interact with consumer behavior to bring about a low-carbon future. Performance on climate-related risks and opportunities is driven by planning across a range of widely varying scenarios and having the financial strength and asset flexibility to adapt to different outcomes.

Scenario planning at ConocoPhillips

The scenarios we have developed describe possible pathways leading to a particular outcome. Scenarios are hypothetical constructs and are not predictions or forecasts of what we think is going to happen; they are used to illustrate which factors drive future developments. We use scenarios in our strategic planning process to: 

• Gain better understanding of external factors that impact our business to assist in the identification of major risks and opportunities and inform mitigating actions. 

• Identify leading indicators and trends. 

• Test the robustness of our strategy across different business environments. 

• Communicate risks appropriately. 

• Inform how we position our business, as technologies and markets evolve, to capitalize on opportunities that meet risk and return criteria. 

Using scenarios enables us to understand a range of risks around potential commodity market prices associated with various GHG emissions reduction scenarios. To assist our capital allocation decisions, we can test our current portfolio of assets and investment opportunities against these future possibilities and identify where strengths and weaknesses may exist. 

We use a range of analyses, input and information when developing our strategy. The detail of our scenarios gives insight into the analysis we use to inform our strategic decision making and reinforces to stakeholders and shareholders that we are both preparing for reductions in GHG emissions consistent with the Paris Agreement and developing resilient strategies that reflect the complex and uncertain range of energy futures. 

We use four main energy transition scenarios in our global energy model: Pre-Pandemic Trends, Moderate Transition, Accelerated Transition and 1.5 Net Zero. The four scenarios incorporate a wide range of possible outcomes for energy and carbon emissions.  

While these scenarios extend to 2050, well beyond our near-term operational planning period, they give insights on trends that could have an implication for near and medium-term decisions and enable choices on the creation or preservation of future options. 

Each scenario models the full energy system including coal, oil, natural gas, solar, wind, geothermal and nuclear, as well as their related GHG emissions and pricing policies. Each of these plausible pathways is designed to stretch our thinking about potential rates of new technology adoption, policy development and consumer behavior.   

The scenarios describe four pathways out of the myriad that are possible, given the uncertainty surrounding the development of future energy markets out to 2050. They do not describe all possible future outcomes and are not used as a reliable indicator of the actual impact of climate change on the ConocoPhillips portfolio or business. 

In addition to using the four scenarios to analyze potential outcomes, we regularly monitor key signposts as we work to track the pace and direction of the energy transition and identify potential leading indicators of change in the demand for hydrocarbons. In this way we aim to establish not just which scenario we are moving toward, but also to identify emerging disruptive scenarios. This analysis is presented to executive management and the board of directors to assist in strategic decision making.   

The thoughtful application of scenarios in strategic planning is core to our ability to navigate future uncertainty and is a practical way of conveying this information in a decision-useful manner. The key to scenario planning is the use of a wide-enough range to characterize uncertainty, rather than trying to correctly guess specific future variables or parameters.  

Scenario descriptions

Scenario	Key assumptions	Carbon taxes (in 2023 dollars)	Energy demand	Oil and gas demand growth from 2022
Pre-Pandemic Trends	Government policies for carbon emissions remain globally uncoordinated.   Technologies evolve at a gradual pace and current modes of transportation and power generation remain the lowest cost, most efficient avenues for energy consumption and generation.	Carbon taxes are introduced at a moderate rate in OECD countries, rising to only $30/tCO2e in 2050.  Non-OECD countries do not implement carbon pricing by 2050.	The global oil market grows by 30% over 2022’s 100 MMBOD level, driven by solid economic growth and a lack of competitive alternatives.  Natural gas demand increases by more than 70% compared to 2022, reaching 680 BCFD as growing economies utilize more natural gas.	48%
Moderate Transition	Moderate advances in national level carbon pricing policies and alternative energy technologies, with incremental shifts in consumer preferences for low-carbon products.	Carbon taxes go into effect across OECD countries during the mid-2020s and are $25/tCO2e in 2030, rising to $60 in 2050.   China implements its proposed national carbon pricing policy at 50% of the OECD carbon fee.   No other non-OECD country implements a carbon pricing policy prior to 2050.	Global oil demand plateaus in the early to mid-2030s at around 110 MMBOD and then declines very slowly, remaining above current levels through 2050.  By 2050, the global gas market expands by 40% from 2022 levels. The primary driver for natural gas demand growth is power generation, followed by hydrogen production.  Captured carbon grows to 2.6 gigatonnes per annum in 2050.  Total hydrogen market expands to 250 million tonnes per annum in 2050.	21%
Accelerated Transition	Accelerated deployment of established low-carbon technologies, such as intermittent renewables and electric vehicles.  Increased focus on structural and fuel efficiencies.  Significant reductions in battery, wind and solar generation costs through economies of scale, and rapid deployment of grid infrastructure, catalyzed by a more favorable regulatory environment and reduced permitting timelines.	Economy-wide carbon pricing goes into effect across OECD countries during the mid-2020s and is $30/tCO2e in 2030, rising to $100 in 2050.   China implements an economy-wide carbon pricing policy at 50% of the OECD price.  Non-OECD countries impose a low $5/tCO2e price by 2030.	The global oil market peaks in size by 2028 and remains near that level until tapering more quickly in the mid-2030s.   The global natural gas market grows at an average annual rate of 0.7% until peaking near 430 BCFD in 2040 and slowly declining thereafter.  Captured carbon increases to 4 gigatonnes per annum by 2050.  Advances in renewables-powered hydrogen technology expand the hydrogen market to around 350 million tonnes per annum by 2050.	-7%
1.5 Net Zero2	Key technological breakthroughs and rapid global policy coordination. Significant technological advances in low-carbon, dispatchable, high-capacity-factor power generation, long-duration energy storage, and carbon removal.   Enhanced geothermal systems (EGS), small modular reactors, and nuclear fusion all reach commerciality before 2040.	OECD countries and China implement a transparent economy-wide carbon price mechanism by 2025 which rises from $50/tCO2e in 2030 to $200 by 2050.   Other non-OECD nations follow by imposing economy-wide carbon prices of $10/tCO2e in 2030 rising to $50 by 2050.	Global oil demand peaks in 2025 and declines to 50 MMBD in 2050.  The natural gas market is much more resilient in this scenario in comparison to oil as natural gas is needed as a lower-carbon fuel for reliable, dispatchable electricity generation. Global natural gas demand peaks in 2030.  Captured carbon plays a critical role in emissions reduction, expanding to 6 gigatonnes per annum by 2050.  Hydrogen market grows to around 430 million tonnes per annum in 2050.	-45%

Our scenarios have a wide range of assumptions regarding technological advances, government policies (e.g., carbon prices) and consumer behaviors leading to a range of oil and natural gas prices. We take this future price uncertainty into account in our strategy by using a fully burdened cost of supply as our primary criterion for capital allocation. In the 2023 Analyst & Investors meeting we showed of the ~20 billion barrels of resources with a cost of supply at $40 per barrel and below held in our portfolio, resources at the average cost of supply can be produced at $32 per barrel.³ This compares favorably to the expected commodity prices detailed in our own scenarios as well as external scenarios such as the IEA’s Net Zero Emissions scenario.

The scenarios are designed to address transitional risks. A separate scenario process addresses physical climate-related risk using consultant scenarios based on the Intergovernmental Panel on Climate Change (IPCC) modeling. 

Key strategic linkages to our scenario planning

Our corporate strategy reflects several findings from our scenario analysis process. We have acted to: 

• Use a fully burdened cost of supply, including cost of carbon aligned with our current probability-weighted energy scenario, as an important metric in our project authorization process. In 2023, we had a resource base of ~20 billion barrels of oil equivalent (BOE) with $40 per barrel (or lower) cost of supply and an average cost of supply of $32 per barrel. Our strategic objective is to provide resilience in lower price environments, with any oil price above our cost of supply generating an after-tax fully burdened rate of return greater than 10%. 

• Prepare for diverse policy environments by maintaining a less than $40 per BOE sustaining price to generate the cash to fund capital expenditure to keep production flat over time and generate competitive returns to shareholders. 

• Maintain diversification in our portfolio to balance our production and capital expenditures as commodity prices become more volatile. 

• Identify and fund emissions reduction projects to reduce the impact of any future regulations, carbon prices or taxes, and to help maintain a low life cycle cost of supply. 

• Task each business unit with developing potential options to contribute to our operational net-zero emissions ambition. 

• Introduce a proxy cost of carbon into qualifying project economics to help us be more resilient to climate-related risk in the short to medium-term and provide the flexibility to remain resilient in the long-term. 

• Focus near-term technology investments on reducing both our costs and our emissions where economically feasible. 

• Monitor for potential disruptive technologies that might impact the market for natural gas or oil, enabling us to take advantage of our capital flexibility and reduce our exposure to lower commodity prices at an early point in time. 

• Pursue hydrogen production and carbon sequestration as potentially attractive investments in meeting transition demand for lower carbon energy. 
• Monitor global regulatory and legislative developments and engage in development of pragmatic policies aligned with the climate policy principles outlined in our Climate Change Position. 

_{1. The Sustainable Development Scenario (SDS), a component of previous IEA scenarios, is not featured in the most recent edition of the World Energy Outlook, as temperature outcomes and sustainable development goals in the SDS are similar to those in the APS.}