Carbon Asset Risk Assessment & Scenario Planning | Hess Corporation
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Carbon Asset Risk Assessment

To help quantify climate related risks and opportunities – and to provide perspectives to our investors and other key stakeholders on how Hess’ oil and gas portfolio might be impacted by a transition to a lower carbon economy – Hess conducts an annual scenario planning exercise as a methodology to assess portfolio resilience over the longer term. This scenario based approach allows us to assess and communicate to our shareholders our understanding of future risks and opportunities in relation to the potential evolution of energy demand, energy mix, the emergence of new technologies, and possible changes by policymakers with respect to greenhouse gas emissions.

Because the Task Force on Climate-Related Financial Disclosures (TCFD) recommends transparency around key parameters, assumptions and analytical choices, Hess has chosen to model the two key scenarios detailed in the International Energy Agency's (IEA's) 2020 World Energy Outlook (WEO) against our own internal base planning case. The TCFD recommends that organizations use a scenario under which global warming is kept to well below a 2°C increase, compared with preindustrial levels, to test portfolio resilience. Such scenarios usually feature a reduction in demand for oil, natural gas and coal, and a growth in clean technologies. The Sustainable Development Scenario (SDS) in the IEA’s 2020 WEO, which is part of Hess’ modeling, fits with this recommendation.

Considerations for Carbon Risk Scenario Assessment

To evaluate the potential exposure of our portfolio in a carbon constrained future, we began by considering the long range outlook for energy supply and demand, as well as for oil, gas and carbon prices. We have used the IEA’s 2020 WEO to examine supply and demand and oil, gas and carbon price scenarios through 2040 in the Stated Policy Scenario (STEPS) and the SDS (see These scenarios are recognized as a leading industry standard and benchmark worldwide and are, therefore, an appropriate choice for an oil and gas producer such as Hess.

Our assessment of carbon risk is based on these scenarios, which are premised on a long term view of energy supply and demand. For its 2020 scenarios, the IEA has noted that there are minimal short term impacts on energy supply and demand related to the global COVID-19 pandemic.

In the IEA’s SDS, the emphasis on strong early action and the subsequent rapid reduction in emissions is fully aligned and internally consistent with the Paris Agreement’s objective to hold temperature rise to well below 2°C. The SDS is also consistent with universal access to modern energy by 2030 (United Nations (U.N.) Sustainable Development Goal 7, target 7.2) and net zero emissions by 2070.

We have not modeled the WEO’s newly introduced 2050 Net Zero Emissions Scenario, which is more aggressive than the SDS in reducing carbon dioxide (CO2) emissions, on the basis that the IEA does not provide sufficient public data in the form of oil and natural gas demand, energy price and portfolio impact information to conduct the appropriate modeling.

The pair of charts below depicts the 2020 WEO’s world energy demand and CO2 emissions under the IEA’s two key scenarios.

2020_World Primary Energy

2020_IEA World Energy Outlook Key Scenarios

In STEPS, which is consistent with enacted energy policies and a pragmatic view of proposed policies, worldwide energy use is expected to grow by approximately 20% between 2019 and 2040. While there is a decline in demand for coal in this scenario between 2019 and 2040, oil and natural gas are expected to grow by 7% and 29%, respectively, and account for 54% of the energy mix in 2040, up by 1% from the prior year’s STEPS.

In the SDS, worldwide energy use is projected to experience a moderate decline of 10% between 2019 and 2040. While oil and natural gas demand is projected to decrease by 24% in 2040, demand is still expected to account for nearly half of the energy mix (46%).

While the SDS projects lower oil demand in the 2040 timeframe, the IEA states that “decline in production from existing fields creates a need for new upstream projects, even in rapid energy transition” (2020 WEO, page 21).

In terms of the continuing upstream oil and gas investment required to meet such demand, in STEPS, projected annual global spending averages about $600 billion to meet demand during the 2020–2040 period. In the SDS, continuing investment in both new and existing oil and gas fields remains an important part of the energy transition (see the IEA chart above, right). Approximately $390 billion of annual upstream oil and gas investment is required to meet demand in the 2020–2040 period.

Since the oil price crash of 2014, upstream oil and gas investment has been significantly curtailed. During the past five years, upstream oil and gas investment has averaged about $400 billion annually, well below historical levels prior to 2014. In 2021, upstream oil and gas investment is projected to average about $320 billion, which is about 20% below the last five year period. Even with a major capital reallocation from fuels to power, the IEA’s SDS requires upstream oil and gas investment over the next 20 years to approximate the past five years, at slightly under $400 billion per year. The oil and gas industry is a long cycle business, and this continued underinvestment is a risk that could manifest itself as a medium term supply gap, where recent levels of investment are insufficient to meet medium term demand.

2020_CO2 Emissions Reductions in Sustainable Development
2020_Global Oil Demand_Declines in Supply

Hess’ Approach to Scenario Planning

The TCFD recommends that, once a less than 2°C scenario is established, companies should define a base case or business-asusual outlook for the future. The base case should use the same set of metrics as the less than 2°C scenario (e.g., oil demand, carbon prices and other market factors) and share the same fundamental economic foundations. Establishing multiple scenarios allows measurement of the delta between metrics at future points to properly understand the envelope within which risk and opportunity may occur.

Hess’ approach to scenario planning is aligned with the TCFD recommendations. We have prepared internal guidance that details our approach and establishes a specified methodology. This also serves as a roadmap for our external verifier to review and verify that we followed our specified methodology when conducting this scenario analysis.

Our first step in this process was to establish a Hess base case, which for 2021 was premised off a $45 per barrel Brent oil price, increasing to $55 per barrel in 2022 through 2040, and a $2.75 per million British thermal units Henry Hub natural gas price held constant for the 2021–2040 period; both cost bases are in 2021 real terms. In addition, in the base case, we applied either actual carbon pricing for our assets and intended forward investments (where a regulatory framework for such exists) or used a carbon price of $40 per tonne through 2040 for other geographies. Hess’ base case was then compared against the various oil, natural gas and carbon prices in the IEA’s two key scenarios – STEPS and SDS – running our current asset portfolio and intended forward investments through these varying sets of assumptions to assess financial robustness.

The three charts below show the oil, natural gas and CO2 prices under the IEA’s STEPS and SDS against Hess’ base case. As these charts show, there is a wide spread of oil, natural gas and carbon pricing across the two IEA scenarios, a key ingredient for informative scenario planning.

2020_Crude_Natural_CO2 Prices

Results of the Hess Scenario Planning Exercise

Through our methodology, we have tested the robustness of Hess’ asset portfolio and intended forward investments under multiple energy scenarios, including the IEA’s SDS. In the chart below, the first column shows the net present value (NPV), at a 10% discount factor, of the Hess portfolio under our base case commodity and carbon prices normalized to 100%, and the second column shows the NPV of the Hess portfolio under the IEA’s SDS as an index to the Hess base case. The NPV of the Hess portfolio under the IEA’s SDS assumptions is 10% higher than under the Hess base case assumptions.

This demonstrates the robustness of Hess’ portfolio against even the most challenging of the IEA’s scenarios, aligned with the goals of the Paris Agreement, driven by our conservative planning assumptions as they relate to crude oil prices and the competitive pipeline of future investments in our portfolio.

2020_Portfolio NPV Index

Validation of Hess Strategy

With the lower oil demand assumed in the IEA’s SDS, industry competition will intensify, and higher cost producers may be forced out of the marketplace. Our scenario analysis validates Hess’ strategic priorities to grow our resource base, have a low cost of supply and sustain cash flow growth. This strategy is consistent with the IEA’s SDS, which envisions a meaningful role for oil and natural gas through 2040, when oil and natural gas are still projected to account for 46% of global primary energy demand.

Although recent events and market conditions have necessitated major reductions to our capital and exploratory budget, over the longer term, Hess plans to allocate the majority of our capital expenditures to developing the company’s assets located offshore of Guyana and in the Bakken shale play in North Dakota. Our offshore oil discoveries in Guyana are among the industry’s largest discoveries made globally over the last decade. The Liza Phase 1 and Phase 2 and Payara developments have long term oil price breakeven costs of between $25 and $35 per barrel Brent oil, at point of sanction for a 10% return. They also have rapid investment payback and strong cash flow generation under a range of oil prices, thereby underpinning and validating Hess’ strategy.

2020_Strategic Priorities 

In the Bakken, Hess has approximately 1,600 and 2,200 locations at $50 per barrel and $60 per barrel West Texas Intermediate (WTI), respectively, that can generate at least a 15% internal rate of return. That equates to greater than 60 to 80 rig years for the company, assuming one rig drills 30 wells per year.

We expect that the combination of Guyana’s low breakeven costs, along with aggressive cost reduction activities in the Bakken, will contribute substantially to structurally lowering our portfolio breakeven costs to less than $40 per barrel Brent oil by 2025. As a result, Hess is well positioned for the long term to retain our share in the marketplace as a low cost producer, even with the gradually reducing global oil demand projected under the IEA’s SDS.

2020_Bakken Locations

In summary, based on the results of our 2020 scenario planning analysis, we conclude that it is highly unlikely any of our assets would be “stranded” by CO2 pricing including under scenarios that are consistent with the aim of the Paris Agreement – and we believe that during the projected period we can continue to monetize our reserves and deliver strong performance under a wide range of market conditions.