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 risks related to climate change might reflect a potential impact of acute or chronic events like more frequent extreme weather events or systemic changes to our business due to changing legal framework and changing of customer behaviors. The acute risks are analyzed for their impact on the Company’s three-year financial plan. The effects of chronic risks are evaluated based on a qualitative analysis, considering a wider range of uncertainty.
The most substantive climate-related changes in the energy industry are expected to arise on a longer time scale – with regards to revenues. Therefore, management pays close attention to climate change related long-term risks and opportunities and takes these into account in their strategic decision-making process.
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 outlined by the ESRS for the application of the EU CSR Directive.
Physical risks
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. These risks are identified and assessed in each business division, considering the impact generated by the business interruption and the asset damage. In financial terms the impact represents the cumulative financial value of loss of revenues (due to business interruption) and repair or replacement cost (due to asset damage). For reporting purposes, these risks are aggregated using the Monte Carlo simulation, in line with our EWRM methodology and framework.
Based on the methodology described above, the potential financial impact of the physical vulnerability climate change risks is estimated to approximately EUR 46 mn in 2022.
There are several initiatives to manage or adapt to physical climate change risks. In this respect, we have implemented mitigation measures such as: develop Geographic Information System high risk landslide maps for Petrom locations and facilities, re-routing transportation of products on alternative routes, water management plans in operations, water risk assessment in relevant areas, water targets in relevant operations, emergency response plans and drills on a continuous basis and also, insurance policies concluded. Freshwater withdrawal and intensity index are monitored at OMV Petrom level as presented in the Water section of this report.
Transition risks
The Executive Board establishes the Company’s strategy and monitors the actions to obtain assurance of the strategy implementation. This approach ensures the effective management of climate-related transition risks and opportunities faced by the company in its way to the energy transition.
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. Regulations related to emissions, energy efficiency, and increasing share of renewables in the energy mix are expected to result in a decrease of fuels production. This is already shown in the new car registration trends towards gasoline and battery electric/ hybrid cars.
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 topics.
Transition opportunities
Transitioning to a low carbon business, by innovating, developing, and introducing new low-emissions products and services will ensure long-term value generation for OMV Petrom’s business and will contribute to a sustainable energy system in Romania and SE Europe. OMV Petrom has already initiated and further plans to execute various sustainable energy projects, including renewable power, biofuels, electro-mobility, and hydrogen, which will ensure a leading position for our company in the energy transition across the region where we operate.
Scenario Analysis
OMV Petrom Group uses two different scenarios: the base case and the stress case. The scenarios differ in the underlying expectations about the pace of the future worldwide decarbonization and lead to different assumptions for demand, prices and margins of fossil commodities. The base case is used for the mid-term planning as well as for estimates going into the measurement of various items in the group financial statements, including impairment testing of non-financial assets and the measurement of provisions. The stress case, which is based on a faster decarbonization path than the base case, is used for the calculation of sensitivities in order to recognize the uncertainty in the pace of the energy transition and to better understand the financial risk from energy transition on the existing assets of OMV Petrom Group. Both scenarios, the base and stress case, reflect more climate change mitigation efforts and a faster decarbonization path than the scenarios used in the prior year. But OMV Petrom Group still expects to see energy transitions at different paces in different parts of the world.
The base case is built on a scenario in which Organization for Economic Cooperation and Development (OECD) countries will achieve the net zero emissions goal between 2050 and 2070 (equivalent to a path between the IEA “net zero emissions” (NZE) and “sustainable development” (SDS) scenarios) and non-OECD countries will implement all announced decarbonization pledges in full and on time (equivalent to the IEA “announced pledges scenario”).
For the stress test analysis, a decarbonization scenario is used which is a potential trajectory to reaching the climate goals according to the Paris agreement. In this scenario, it is assumed that advanced economies will reach the net zero emissions goal by 2050, while middle-income and developing economies will only follow at a later point but not later than 2070. This scenario is built on a path between the IEA SDS and IEA NZE scenarios. The entire world following the commitments of the Paris agreement leads to lower global demand for oil and gas and consequently to lower oil and gas prices than in the base case. In addition, this scenario incorporates other possible effects such as slower economic growth in the short term.
For investment decisions, business cases are calculated based on the same price and demand assumptions as are used for the mid-term planning and impairment tests. In addition, a business case calculation based on the stress case assumptions is mandatory for all investment decisions in order to assess the economic viability under a “Paris aligned” scenario. The IEA NZE scenario is not used for investment decisions.
Costs for CO2 emissions are taken into account in business case calculations, impairment tests as well as the stress case scenario calculations to the extent carbon pricing schemes are in place in the respective countries.
Under this stress test scenario, the carrying amounts of property, plant and equipment related to the oil and gas assets with proved reserves would have to be decreased by RON 11 billion. For E&P oil and gas assets an additional sensitivity based on prices according to the IEA Net Zero by 2050 scenario was calculated and showed a decrease in the carrying amount of property, plant and equipment related to oil and gas assets with proved reserves of RON 12 billion. The value of oil and gas assets with unproved reserves that would be abandoned is not significant.
In the R&M segment, the stress case reflects globally declining demand for almost all products resulting in lower margins and cracks compared to the base case scenario. Under the stress case scenario, the carrying amounts related to Petrobrazi refinery would have to be decreased in total by RON 0.4 billion.
For more details, see also Note 2 to the consolidated financial statements for the year-end December 31, 2022, in the Annual Report.