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 iea.org/reports/world-energy-outlook-2020). 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.

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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.