Climate Change Risks Management
Climate-change-related risks and opportunities are integrated into OMV Petrom ’s EWRM process aimed at identifying, assessing, and managing business-related risks. The short- and medium-term risks are analyzed for their impact on the Company’s three-year financial plan. The effects of long-term risks are evaluated based on a qualitative analysis, taking into account a wider range of uncertainty. Climate-related risk and opportunities have already impacted our business plans and objectives in the medium term. The most substantive climate-related changes in the oil and gas industry are expected to arise on a longer time scale – in particular with regard to revenues. Therefore, management pays close attention to climate change related long-term risks and opportunities and takes these into account in strategic decision-making. Risks are identified in a bottom-up approach by the employees responsible for our day-to-day business, and in a top-down approach by the corporate units responsible for monitoring regulatory, market, and reputational risks in line with the latest national and international developments. These risks are assessed in terms of their potential impact on the medium-term financial performance plan. In the bottom-up approach, climate-change related risks are identified using the standardized methodology of the EWRM process. This process is based on the EWRM Standard supplemented with a set of principles defining the ESG/sustainability risk and opportunity requirements as part of the OMV Petrom risk management framework, supported by the rights, responsibilities and expectations of specific risk stakeholders.
Being the first Romanian company to support the recommendations of the Task Force on Climate-related Financial Disclosures, OMV Petrom considers and addresses climate change-related risks according to TCFD recommendations, as well as the double materiality perspective proposed by the EU Non-Financial Reporting Directive. This year, OMV Petrom announced a series of commitments in support of reaching a net zero target by 2050. Getting there requires measuring, managing risks and opportunities, enhancing transparency and proper funding.
In 2021, our progress on TCFD is summarized below:
- Governance – ongoing manage and coordinate climate change risks and opportunities. There are dedicated task forces, New Energy Solutions and Environmental, through which EB members quarterly monitor and manage climate change risks and opportunities.
- Strategy – risks and opportunities identified, future focus on impact evaluation and company resilience in the light of the recently published 2030 OMV Petrom business strategy with the sustainability framework embedded.
- Climate Change Risk – continued risk management process (scenario analysis); future focus: pilot for climate risks of new investment projects.
- Metrics and Targets – ongoing enhanced disclosure, new climate change KPIs disclosed in 2030 OMV Petrom strategy.
Potential severe weather events like flooding, periods of low or no precipitation and storms could bring physical risks that impact our assets portfolio such as: floods, landslides, railway infrastructure damages, inability to access water for the normal operations (internal consumption). Climate change risks impacting physical assets are evaluated on a mid-term period (three-year time horizon) using our EWRM framework and process. The potential financial impact has been estimated based on assumed business interruption in OMV Petrom Upstream and Downstream generating loss of revenues of approximately 27 mn EUR.
Potential future restrictions on the carbon intensity of feedstocks, political and security risks in the countries of origin of our feedstock, and any other supply limitations pose a threat to sufficient refinery feedstock supply. There is a risk of imbalance between certificates allocated and Company-required emissions volumes, resulting in higher costs, generated by the uncertainties about the allowance demand and abatement costs. Current and emerging regulations in line with international public-sector initiatives, such as the Paris Agreement and Fit for 55 legislative packages proposal, and their subsequent transposition into national Romanian regulation result in limits set on GHG emissions by the energy sector. This process of decarbonization will change the energy mix and will lead to a reduced demand for fossil fuels with a high carbon content. There is a risk that demand for refined fuels may decrease due to less carbon-intense substitute products coming to the market. Emissions regulations, energy efficiency regulations, and regulations on the increased share of renewables in the energy mix are expected to result in a decrease of gasoline and diesel production in accordance with European regulation so as the new car registration trends towards gasoline and battery electric / hybrid cars, as well as to a decrease in the production of our heavy products.
Reputational risks stem from the increasing number of investors who assign a company’s environmental and social responsibilities high weight in their investment decision-making process. This can be for reasons of internal policy or due to regulatory pressure for public investment transparency regarding sustainability issues.
Decarbonization creates opportunities for OMV Petrom based on the increased demand for lower-or zero-carbon products (e.g., natural gas, biofuels, e-mobility, CNG, LNG, hydrogen). OMV Petrom is well placed to meet this demand with lower carbon Black Sea gas and significant investment in renewable energy, biofuels, alternative mobility and new technologies.
Scenarios consistent with the goal of limiting the global temperature increase to no more than 2°C by reducing greenhouse gas emissions are of utmost importance for our strategic considerations as they imply fundamental changes to the current energy market. We are aware of the potential risk of stranded assets if we cannot fully exploit our reserves due to surpassing the global carbon budget. During the strategy development and planning processes, OMV Petrom has considered scenarios reflecting various aspects of potential economic, technological, and social developments and their implications for the energy market and, consequently, for our business.
OMV Petrom uses the International Energy Agency (IEA) assumptions to incorporate current and announced policies, targets and plans in the company’s mid-term planning framework. Based on the IEA, in the context of Sustainable Development Scenario (SDS) path implementation, we projected the development of the oil and gas demand in Europe and in the OMV Petrom core markets up to 2030.
The IEA SDS was used by OMV Petrom as a downside sensitivity to generally understand how the existing and future OMV Petrom portfolio performs in such a business scenario. For this scenario, a thorough analysis was performed regarding the assumptions behind it and their implementation in an OMV Petrom model in order to understand the long-term financial consequences for OMV Petrom.
Given the uncertainties generated by the long-term horizon and the increasing challenges posed by climate change on our industry, we have tested our strategy for a downside-price scenario, with a Brent price lower by USD 15-20 than in the mid-term plan scenario. The stress case reflects globally declining volume developments for almost all products resulting in negative growth rates and further decline in margins compared to the mid-term plan scenario. Also, an increase in CO2 price was taken into consideration. See below the clean CCS EBIT in EUR bn variation.
The results under the downside price scenario present a healthy financial position maintained, with a gearing ratio below 20% throughout the period. In addition, under this price scenario the 2030 Clean CCS EBIT is estimated to be double versus 2020 considering the transformational program that OMV Petrom is proposing through the new strategy, while the CAPEX remains unchanged.
The SDS charts a path fully aligned with the Paris Agreement by holding the rise in global temperatures to well below 2 degrees Celsius and meets objectives related to universal energy access and cleaner air. According to our strategy, OMV Petrom will reduce by 2030 the Scope 1 and 2 carbon emissions of its operations by ~30%, compared to 2019.