Climate change is a significant global issue that poses a challenge to affordable and sustainable energy provision. No one sector can supply an effective response to this issue. It requires a coordinated effort by companies, governments and communities. We believe that all energy sources have a role to play in meeting global energy demand, and each has its challenges. The consensus of multiple scenarios is that oil and gas will continue to have a major role to play, and that natural gas will be pivotal in the transition to a low-emission energy system.
While Oil Search is not a signatory to the Oil and Gas Climate Initiative, our view aligns with the intent and principles of the Initiative.
We support efforts — including those of the PNG Government — to move towards implementing an effective global climate agreement. We also advocate establishing and implementing a clear, stable policy framework that supports a global warming trajectory of 2°C. This will help the energy industry in making informed decisions and effective and meaningful contributions to addressing climate change. Market mechanisms such as an emissions trading scheme or other carbon-pricing mechanism are an efficient response, and we support these and other measures that improve certainty.
The challenge is to meet growing energy demands while ensuring supply is sustainable and affordable. Meeting it means that investment today in gas, renewables and technologies that reduce greenhouse gases, such as carbon capture and storage (CCS), will greatly contribute to reducing the cost and impact of climate change for future generations.
Although oil will remain an important part of Oil Search’s portfolio mix in the medium-term, we have a gas-dominant portfolio and growth strategy. With some of the most competitive operating and planned LNG projects in the industry, we remain resilient to a low-price, carbon-constrained environment.
We will monitor new technologies such as CCS and, when feasible, seek to adopt and integrate low-emissions technologies into our investments, including non-operated projects. However, compared to our peers, Oil Search’s scale, age of directly operated assets, largely non-Operator status for new developments, and limited geographic scope make it impractical for us to:
- Invest in research and development of new technologies such as CCS.
- Make additional material inroads in energy efficiency or emissions reductions for existing operated plant.
Our proposed significant investment in the Papua LNG Project is consistent with our low-cost, gas-dominated strategy. We will support Operator efforts to ensure the project minimises emissions, is climate change compatible, and contributes positively to PNG’s climate change goals.
We’re committed to managing and understanding the regulatory, reputational and market risks of climate change to our business. This includes maintaining open lines of communication on the topic with a broad range of stakeholders, including governments, investors and non-governmental organisations, as well as transparently reporting our emissions and energy consumption performance.
The draft Financial Standards Board Task Force on Climate Related Financial Disclosures (TFCD) were released in December 2016, with consultation closing in February 2017. These draft recommendations will not be formally adopted until June 2017. In anticipation, Oil Search considered earlier versions in the development of our strategy and our planned disclosures. However, we will not be fully compliant until the recommendations are formally adopted and we have an opportunity to evaluate them in their final form. Any opportunities identified for improvements to our disclosure will be iteratively integrated into our public materials.
We will collaborate with our peers and partners to:
- Improve efficiency e.g. through project integration.
- Adopt technological innovation to reduce greenhouse gas emissions where feasible.
- Provide access to low emission, gas and biomass sourced energy in collaboration with local and national authorities, as well as other stakeholders.
- Consider participating in multi-stakeholder initiatives.
We conduct exhaustive modelling of various long-term supply and demand scenarios for oil and LNG, based on input from a variety of authoritative sources. We encapsulate these scenarios in a range of commodity price outlooks, including material downside cases reflecting weaker sustained long term demand for our products. The economic viability of existing assets is then tested against the same downside economic cases.
In relation to 2C resilience planning, we are working to develop a clearer understanding of the energy market adjustments and consequent potential energy price impacts consistent with the achievement of the 2C target globally. We will look to model downside scenarios consistent with those impacts once we have completed that work.
We have also considered a combination of the scenario analyses conducted by leading energy authorities, including the International Energy Agency1 and Wood Mackenzie2, and our major oil and gas peers.
Due to expected energy efficiency measures and the progression to less energy-intensive economies, the growth in global energy demand is predicted to slow. However, it is uncertain how quickly this will take place.
Despite the slow-down, CO2 emissions are still expected to grow by 10-25% between now and 20352. The extent of growth depends on the demand outlook for coal, and on energy demands in India and China. As carbon and climate change policy is enacted, a robust global supply outlook and decreasing energy costs are likely to increase inter-fuel competition, including a probable increase in non-fossil fuels’ share of the global energy mix.
Non-fossil fuels such as solar, wind and biomass are expected to grow the fastest. By 2035, 40–50% of global power output will come from hydro, nuclear, solar, wind and biomass. Within the fossil fuel energy sources, we anticipate natural gas will grow the most, rising in all sectors, including power, industry, residential, commercial and transport. While oil demand will remain robust, growth is likely to slow due to an upward trend in demand for non-oil fuel alternatives and more fuel-efficient technologies.
Predicting the outlook beyond 2035 presents many challenges. These include uncertainties around how future government policy developments may accelerate energy efficiency improvements, shifts to lower-carbon fuels, technological advances and renewable supply.
1 International Energy Authority Energy and Air Pollution World Energy Outlook 2016.
2 Various Wood Mackenzie sources, including Energy view to 2035: comparison with IEA, BP & XOM (March 2016), Carbon Constrained Scenario (November 2015)
Risk and governance
Our Board HSS Committee is charged by the Oil Search Board to oversee the Company’s strategies, processes and performance relating to health, safety, security and social responsibility, including human rights and climate change. The Board HSS Committee endorses our Climate Change Strategy and governs the management of the risks and opportunities posed by climate change to our assets.
In October 2016, the Committee endorsed and the Board approved our Climate Change Strategy.
Monthly HSS Group 1 meetings are the primary way that management is informed of and addresses climate change performance and initiatives.
Members of our senior management team are financially incentivised to manage longer-term risks that could impact on the value of the Company, including climate change risk, via the operation of the ‘at risk’ component of executive remuneration. Executives participate in a long-term incentive (LTI) plan, with payments under the plan linked to the relative shareholder returns generated by the Company compared to a global peer group of oil and gas companies and to the 50 largest companies listed on the Australian Securities Exchange. Failure to effectively address climate change risk would be expected to translate into relative underperformance in terms of creating long-term, sustainable shareholder value and hence impact on the realisation of LTI benefits.
Currently, Oil Search doesn’t operate in any country with an emissions trading scheme or other carbon-pricing mechanism. We believe our existing investment sensitivity analysis, including commodity price downside scenarios, would encompass any carbon pricing impacts on cash-flow and investment economics. During 2017, we will evaluate the adoption of a shadow carbon price for inclusion in the investment decision-making process.
Climate change risks are assessed at least annually as part of our corporate risk management approach and broader strategic planning and decision-making. Those risks are also assessed as part of the Board-led strategic reviews conducted at regular intervals.
Our most material climate change risks include:
- Changes in demand for our products.
- Emerging policy and regulations that create uncertainty, increase operating costs and raise expectations for our engagement on the topic.
- Reputational impacts, driven by stakeholder activism and increasing societal expectations.
Climate change risks and opportunities*
|Risk Type||Description||Financial Impacts||Our Response**|
|Physical Risks||Acute||Physical impact of more intense weather on investments.||Damage to physical assets; disruptions to operations, supply chains etc.||Embed internal procedures to ensure potential climate impacts are considered in design and construction of new/upgraded assets.|
|Chronic||Physical impact of more frequent catastrophic weather events.||Degradation of, or limitations on, resources.Increased community needs/expectations following catastrophic events.||
Embed internal procedures to ensure potential climate impacts are considered in design and construction of new/upgraded assets.|
Support community emergency preparedness and response (if required).
|Non-Physical Risks||Policy/Legal/Litigation||Legislation and regulation to address climate change and risks associated with policy-driven transitions (transition risks and liability risks).||Compliance costs; liabilities; restrictions on use of carbon-intensive assets; stranded assets.||
Retain dominance of gas in portfolio mix.Retain focus on low-cost assets.|
Maintain engagement with PNG Climate Change Development Authority and PNG policy-makers.
Embed internal procedures to reduce emissions/improve energy efficiency in all maintenance/upgrades and new assets, as well as Life of Asset planning.
|Technology||Changes in supply, demand and competition; re-pricing of carbon-intensive assets.||Investment in new technology required; write-offs of existing technology.||
Monitor emerging issues and technology developments.|
Fast-follower adoption of feasible technological solutions.
|Market/Economic||Changes in supply, demand and competition; re-pricing of carbon –intensive assets.||Asset impairment; viability of certain business models; Company or securities valuation.||
Evaluate adoption of shadow carbon price.|
Advocate for market mechanism as the most efficient response.
Monitor global and local regulatory changes and trends.
|Reputation||Damage to reputation stemming from association with an asset or company.||Damage to brand value; lost revenue; additional expenditure.||
Proactively engage with joint venture partners to develop project opportunities and publish climate change position statement and design philosophy.|
Advocate for a climate-compatible approach in project design, development and operation.
Increase accountability, including:
|Reputation||Damage to reputation by targeted shareholder activism or divestment.||Damage to brand value; declining access to finance.||
Adopt a gas-dominant portfolio.|
Align with the Oil and Gas Climate Initiative, to the extent possible given scale and geographic scope of assets.
Have strategy and positioning as part of the solution, with proactive support for PNG country goals (including power solutions) and advocacy for market mechanism.Issue clear public position statements on aspects of interest to stakeholders.
Transparent public reporting on views, risks and performance, including addition of equity emissions reporting.
|Opportunities||Financial||Commercial benefits stemming from the transition to a lower-carbon economy.||Identification of new revenue streams; improved operating efficiency; enhanced market pricing and transparency; accelerated technological innovation.||
Use our Power Strategy: contribute to helping PNG meet goals by increasing access to energy and through promoting both biomass and the use of gas as a transition fuel/fuel switch.|
Evaluate opportunities for offsets between the power business and Oil Search.
|Reputation/ Financial||Alignment with PNG sustainable development and climate change goals for adaptation and mitigation.||
Maintenance of stable operating environment.|
Ability to leverage existing initiatives.
Integrate opportunities for community renewables and other adaptation goals (e.g. water and sanitation) into PNG Sustainable Development Strategy where appropriate.|
Investigate provision of our onshore weather data to CSIRO/Bureau of Meteorology/PNG National Weather Service to support climate change science and modelling project.
Communicate malaria and climate impacts and the role of Oil Search Foundation in preventing malaria.
Support PNG disaster response capability development and response.
* This table has been adapted and customised from the Task Force on Climate-Related Financial Disclosures, Phase 1 Report (2016).
** These initiatives may be ongoing.
Over the past few years, there have been many developments relating to climate change. As a result, we conducted a robust situation analysis in 2016 to inform a new Climate Change Strategy.
This Strategy aligns with the principles of our Social Responsibility Policy and Strategy and our PNG Sustainable Development Strategy (which is under development in 2017). It helps to ensure Oil Search remains prepared for future carbon constraints and that we understand the potential risks and impacts to our business. While developing the Strategy, we assessed likely scenarios and proposed key positions, as outlined in earlier sections.
Given rapidly changing stakeholder expectations, technology and markets, this Strategy will continue to evolve and will be updated at least once a year.
Reducing the impact of operational emissions
As a socially responsible oil and gas producer, reducing our greenhouse gas emissions is an important element of our Climate Change Strategy.
Oil Search’s emissions in 2016 were 941 ktCO2-e and our emissions intensity 46 ktCO2 -e/mmboe. This represents a 50% reduction in emissions intensity and a 33% reduction in overall emissions against a 2009 baseline, exceeding our intensity target of a 12% reduction in emissions intensity by 2016 against a 2009 baseline. This achievement was predominantly due to ongoing flare reduction initiatives and, to a lesser extent, the gradual shift in composition of production from largely oil to oil and gas.
We obtain annual independent assurance over our greenhouse gas emissions data. For further information about our emissions performance since 2009, visit the Data Centre.
The age of Oil Search’s operated assets makes it impractical for us to continue making material inroads into energy efficiency or emissions reductions. In addition, as a growing business, future investment decisions may have a material impact on our forecast emissions profile. We have not set a new emissions target post 2016. This decision will be reviewed once we have greater business certainty over these current strategic variables.
We will continue to monitor new technologies and seek to adopt and integrate low-emissions technologies, where feasible, into new investments and non-operated projects.
Our project planning and design procedures mandate that energy efficiency and emissions reductions are considered at the outset and during the design phase of all new projects. They require that options for reducing greenhouse gas emissions from operating sites are periodically identified and reviewed, to demonstrate that emissions have been reduced to the extent practicable in asset design and operation.
Climate change adaptation impacts
Ensuring operations, investments and communities are resilient to the physical impacts of climate change is critical to the long-term sustainability of the Company.
The effects of climate change will impact some existing physical and non-physical business risks and potentially expose us to new ones. See the Climate Change risks and opportunities analysis for further detail.
We consider climate change risks when developing projects and in our Life of Asset planning procedures. Our Engineering Risk Management Procedure requires potential impacts from climate change variability on new facilities and infrastructure to be identified and assessed as part of the engineering risk process. The assessment outcomes must be incorporated into engineering design decisions, in accordance with our Engineering Design Procedure.
Assisting PNG to meet its climate and development objectives
PNG has one of the world’s lowest levels of access to power, with only approximately 13% of the population connected to the electricity grid. Those who are connected pay very high prices, and much of the energy is generated from diesel.
The significant economic, health and educational benefits mean that energy supply improvements are essential if PNG is to achieve its development goals. The PNG Government has set a goal of connecting 70% of the population to the power grid by 2030, using varied power solutions.
PNG has committed to transitioning to 100% renewable energy by 2030, if donor funding is available. Scalable renewable energy solutions will need to be rapidly introduced for PNG to meet this target. By implementing our Power Strategy, Oil Search will help the PNG Government to meet its Intended Nationally Determined Contribution (INDC) and commitments under the Paris Agreement by encouraging the adoption of gas as a transition fuel to displace diesel.
The Highlands Power Project, an Oil Search public-private partnership agreement with PNG Power Limited (PPL), seeks to provide cost-effective on- and off-grid gas-powered electricity to households, schools and hospitals in the Hela and Southern Highlands Provinces. Our domestic LNG initiative aims to develop and utilise discovered but undeveloped gas resources for multiple coastal industrial and consumer locations within PNG.
Since 2010, we have invested over US$30.3 million into the development of a biomass power plant in PNG. The PNG Biomass Power Project in Markham Valley will use wood chips from existing and new plantation trees that are grown and sustainably harvested in the Morobe Province to provide low-cost, reliable biomass power to the Lae Region.
The PNG Biomass Power Project is supported by a 25-year Power Purchase Agreement (PPA) that we signed with PPL in December 2015. Under the PPA, the project will generate up to 30 megawatts (MW) of renewable, biomass-fired, reliable baseload power for the Ramu grid, with deliveries commencing in 2019.
PNG lacks meteorology and biodiversity data, hampering efforts to consistently and reliably measure the impacts of climate change. Oil Search has a strong database of information in project impact areas and will investigate opportunities to share it so we can support PNG’s efforts to adapt to climate change in the medium- and longer-term.
Engaging on climate policy
As one of PNG’s largest companies and a socially responsible operator, we seek to engage with governments, industry groups, landowners, and other people with the ability to shape policies that impact our business and stakeholders. We do this with integrity and in an accurate, factual, transparent and meaningful way.
We actively engage with regulatory and other government agencies, including the PNG Climate Change Development Authority (CCDA), on proposed and existing legislation and commitments related to climate change. We belong to the CCDA industry stakeholder group.
We are also members of several associations and networks and monitor and engage with these groups in PNG to ensure their submissions and research in this area align with our position on climate change.
As we have no operations or exploration interests in Australia, we don’t actively engage in the Australian energy or climate change policy debate.
We disclose our policy recommendations, submissions and proposals annually in our Social Responsibility Report.
For a full list of Oil Search’s trade association memberships and further information about our principles for engaging with government on public policy, see Public Policy Engagement.
Working with peers to build a collective response
Achieving the trajectory required to meet a 2°C of global warming scenario will require a collective response. To speed up progress, our approach to climate change is underpinned by engagement and involvement in national and industry initiatives.
Due to Oil Search’s largely non-operator status, a key way to reduce our overall climate change risk and impact is to work with our partners and advocate for climate-compatible approaches to the project design, development and operation of non-operated assets. An example of this is improving overall efficiency through project integration.
Our Australian entity is a member of the Australian Petroleum Production and Exploration Association (APPEA). This provides Oil Search with a useful forum for information and to contribute knowledge and best practice. Whilst we monitor the Australian climate change dialogue, we have no operations or exploration interests in Australia and therefore we do not actively engage or contribute to the Australian domestic energy or climate change public policy debate.
We are assessing the benefits of being members of other multi-stakeholder initiatives, such as IPIECA, the Oil and Gas Climate Initiative and the Zero Flare Management Initiative.