1.4.3Climate Change Risk and Opportunity
SBM Offshore's role as an energy transition company is founded upon the belief that it has a role to play in the physical and transitional challenges that climate change brings. SBM Offshore is aware of the time pressure building for the world to achieve a responsible transition in which energy stays affordable to society, while decreasing climate change impacts from greenhouse gas emissions from more traditional forms of energy.
SBM Offshore commits to a strategy and actions compatible with its ambition to achieve net-zero by no later than 2050, including emissions in scope 1, scope 2 and scope 3 – Downstream Leased Assets. SBM Offshore has established the following intermediate targets: by 2030, SBM Offshore targets net-zero scope 1 and 2 emissions1, and for scope 3 – Downstream Leased Assets; a 50% reduction of GHG intensity2 and zero routine flaring3 (2.1.7). More on the vision, mission and strategy can be read in section 1.3 and this year's progress on the energy transition, emissions and associated innovation in chapter 2.
SBM Offshore envisages applying a science-based approach, using key frameworks such as below, or equivalent:
- Assess the impact on the business using frameworks from the Task Force on Climate-Related Financial Disclosures (TCFD).
- Set targets, using guidance from the Science Based Targets initiative.
- Measure performance, based on guidance from the Greenhouse Gas Protocol and the EU Taxonomy.
- Disclose performance, leveraging above standards to disclose in this Report and the CDP Benchmark.
The above approach supports SBM Offshore in the framing of targets and actions in light of global guidance from the Paris Agreement. SBM Offshore takes planned actions in office energy, existing FPSO operations, emissionZERO® and invests in lower and non-carbon innovations (see sections 2.1.7 , 2.1.9 and 2.2). Climate Change Management and Adaptation is a key topic and discussed at Management Board level. At regular performance management meetings, the performance of New Energies and the emissionZERO® transformation program is reviewed. On a quarterly basis, progress on the UN SDGs are discussed, including climate-change-related company targets. Climate change risk and opportunities are also discussed as per the risk-management cycle described in section 3.6. Outcomes of these meetings are, for example, the risk appetite statement mentioned in section 1.4.1, the long-term goals described in section 2.2 and the climate change ambitions and scenarios described in this paragraph. These scenarios are part of an ongoing process to challenge perspectives on the future business environment, rather than to predict outcomes. These ambitions reflect the current understanding of the business and are subject to further development in the future.
Climate change impact assessments are also undertaken for client projects, in close co-operation with project lenders and external consultants, and provide insight into the physical and transitional risks of these projects. Examples of the physical risk metrics used are the exposure to flooding in yards under different climate scenarios and the number of storms in offshore locations. Transitional risk metrics examine the exposure to oil and gas supply/demand changes under various scenarios and the potential impact of carbon pricing.
SBM Offshore applies these insights to its strategy development and actions as part of its Enterprise Risk Management process. The sections below cover the mitigation of significant risks relating to climate change and portfolio risk, as explained in section 1.4.2.
Future-Proofing: Climate Change Scenarios
SBM Offshore has adopted two climate-change scenarios to future-proof current strategy and take appropriate action. The scenarios are based on the International Energy Agency (IEA) and the Intergovernmental Panel on Climate Change (IPCC) data, as explained in section 5.1.4.
- A steady Climate Change Scenario that falls short of meeting the Paris Agreement goals − i.e. a >2 degrees scenario.
- A bold Climate Action Scenario providing for strong commitment towards targets, as per the Paris Agreement, i.e. a 1.5- degrees scenario.
Steady scenario
- Key risks are mainly physical in nature with potential weather-related disruptions to the construction and operation of FPSOs and offshore wind projects. Even if the demand for hydrocarbons grows, access to high-rated funding for these projects might become more challenging.
- Key opportunities are: the need for resilient ocean energy solutions owing to increased weather events, a sustained demand for FPSOs and a greater opportunity for renewable energy solutions.
The bottom-line impact of the scenario is limited, namely a slight improvement in revenue potential through a stronger FPSO demand outlook, an opportunity for resilient energy production solutions and projects, with the growth of renewable energy demand remaining robust.
Bold scenario
- Key risks are: the decrease in demand and access to funding for FPSOs with a traditional emissions profile; insufficient internal resources to address the energy transition; and increasing carbon taxes.
- Key opportunities are: the development of new ocean energy solutions that address the energy transition; increased customer demand for zero-emission oil and gas solutions; and the ability to attract new investors supporting SBM Offshore’s sustainability agenda. An increased carbon price would also lead to a more favorable business case for renewable energy and emissionZERO® products.
The bottom-line impact of the scenario on demand for SBM Offshore’s traditional markets could be significant if unmitigated and, as such, it is covered by scenario planning under SBM Offshore’s Group Strategy Development and Performance Management approach. Below graphs and tables provide further detail. Any financial risks are described further in section 4.3.27.
Climate Change Scenario ImpactS
In the scenarios described, physical and transitional risks could materialize. The steady scenario would bring a higher probability of physical risk, whereas the bold scenerio would introduce relatively more transitional risk.
Risk type (relevant scenario]) | Risks | Operational impact | Financial Impact | Management of Impact |
|---|---|---|---|---|
Physical (Steady) | Heat/warmer climate | Increased work strain for construction and offshore workers − decreased productivity and delays | Increased cost of construction | SBM Offshore mitigates risks from climate change impact to people and the environment for specific scenarios in each location. Examples are the preparation and execution of Health & Safety plan during the execution of SBM Offshore's projects and readily available Emergency Response plans. Associated financial impacts are mitigated in contingencies for additional schedule impacts, adequate safety measurements and cover through insurance. |
Drought extremes | Increased delays in steel production due to water scarcity | Increased cost of construction, water expense | ||
Unhealthy work conditions | Higher cost of safe water supply to people | |||
Bad weather window for installation | Increased disruption to schedule | Increased financial costs due to standby/unproductive time for personnel on board | ||
Heavy rains and floods | Flooding of onshore bases and construction sites | Damage to materials and machinery, increased insurance premium, delay penalties, contingencies and office closing | ||
Typhoons during construction | Physical damage to infrastructure | Increased cost of construction and repair costs for damage, insurance, contingency | ||
Peak winds and waves during operations | Technical and physical damage to assets and materials | Repair costs for damage, insurance premiums and downtime cost/ penalties | Design specifications of units take into account the latest metocean simulations of extreme weather events. | |
Risk type (relevant scenario]) | Risks | Operational impact | Financial Impact | Management of Impact |
|---|---|---|---|---|
Transitional (Bold) | Inability to attract employees/ resources | Decreased development in renewable product market, FPSO projects understaffed, net-zero targets at risk | Increased cost due to use of contractors rather than attracting in-house talent, potential cost of non-quality | SBM Offshore remains focused on being an attractive employer, with interesting opportunities in the energy industry. Moreover, working at SBM Offshore puts its employees in the centre of the energy transition. See also the risk 'Human capital' in section 1.4.2. |
Clients not supporting low emission effort | Reduced direct income from net-zero aligned technologies, net-zero targets at risk | Increased costs for SBM Offshore when clients are not committed to low emission efforts. SBM Offshore to cover for CAPEX/OPEX | Early engagement with clients on net-zero paths, whilst continuing to develop emissionZERO® and achieve SBM Offshore's net-zero targets. See also the risk 'Climate Change' in section 1.4.2. | |
Reduced demand for oil and gas leads to clients terminating contracts | Reduced operational activities and alignment of organizational capability | Decline in future revenues and earlier than expected decommissioning costs, managed through contract termination compensation | SBM Offshore has a compensation structure for contract termination. SBM Offshore continuously updates its offer in light of the changing energy landscape and aims to decarbonize its existing and new units through emissionZERO®. See also the risk 'Climate Change' in section 1.4.2. | |
Financing constraint for hydrocarbon-related projects | Alternative financing arrangements | Increased cost of financing, change in economic distributions, lower margins | Adequate access to debt and equity funding is secured through use of SBM Offshore’s existing liquidity, by selling equity to third-parties, the use of bridge loans and long-term project financing. Debt funding is sourced from multiple markets, such as international project finance banks, capital markets transactions and Export Credit Agencies. Engagement with clients to develop alternative commercial models which mitigate financing risk for SBM Offshore. See also the risk 'Funding' in section 1.4.2. | |
More stringent social and environmental laws | Increased liabilities or provisions, and assessments of contingent liabilities | Increased cost of production, limits to field development | The close monitoring of laws and regulations is carried out continuously, and substantive changes are escalated. This includes for liability from emergence of carbon tax and its mitigation through appropriate clauses in contracts. | |
Introduction of carbon pricing | Decrease in total primary fuel consumption and total energy input | Increased environmental tax and carbon pricing | ||
Delay in product development | Deviation from company net-zero path | Decreased potential for revenues from renewables associated with 2030 ambitions | SBM Offshore focuses its project developments effort in light of the changing energy landscape. It is enhancing products from its New Energies & Services (NES) portfolio through investments. See also the risk 'Climate change' in section 1.4.2 and project updates in section 2.1.4. | |