Oil company admits climate risks in financial returns

6th March 2017


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  • Mitigation ,
  • Reporting ,
  • Generation

Author

Julie Hogarth

Chevron has admitted that future regulations on climate change could lead to legal action and stranded assets, and pose significant risks to financial returns.

In its financial performance review, the energy multinational Chevron said that regulation of greenhouse gas (GHG) emissions could increase its operational costs and reduce demand for hydrocarbon and other products.

It states: ‘In the years ahead, companies in the energy industry, like Chevron, may be challenged by an increase in international and domestic regulation relating to GHG emissions. Such regulation could have the impact of curtailing profitability in the oil and gas sector or rendering the extraction of the company’s oil and gas resources economically infeasible.’

It notes that international agreements such as the Paris Agreement, and national, regional and state-level legislation that aim to limit or reduce GHG emissions are in various stages of implementation. Many have yet to be implemented, and others are under threat of being repealed, which makes it difficult to predict the ultimate impact that such regulations will have on the company, it said.

But it states that laws governing GHG emissions and an increasingly carbon-constrained environment may result in ‘increased and substantial’ costs relating to compliance, capital, operating and maintenance costs. Demand for hydrocarbons and the company’s products could fall, making them more expensive and damaging the economic feasibility of the multinational’s resources, and sales volumes, revenues and margins, it said.

More widespread public attention to climate change risks could increase the possibility of governmental investigations and potentially private litigation against the company, it added.

The company said it had factored these risks into its strategy and financial planning, and long-range supply, demand and energy price forecasts.

Fossil fuel companies have been increasingly criticised for failing to recognise the threat that climate change regulations and policy pose to the viability of their business and assets. Chevron is among the first energy company to acknowledge the risk, according to lawyers at activist law firm ClientEarth.

Alice Garton, corporate lawyer at ClientEarth, said that Chevron’s recognition was a significant development. ‘But Chevron is in a real minority in acknowledging it. We expect other carbon majors to follow suit,’ she said.

‘The future is not bright for fossil fuels. Any oil or coal major claiming a rosy financial forecast is pulling the wool over investors’ eyes. If these companies want to avoid being sued, they need to start taking climate change seriously, adapt their business models in line with the Paris Agreement, stop funding climate denialism and withdraw from trade associations that actively undermine strong climate policy. If they don't, they can expect liability “risk” to translate to “reality”.’

ClientEarth has scrutinised the law that underscores climate reporting by UK-listed companies and is focusing on how far they are addressing these issues. ‘Legal action may well be on the cards,’ Garton warned.

Last year, the organisation filed an official complaint to regulators the Financial Reporting Council (FRC) about two companies that it claimed had breached mandatory reporting rules under the Companies Act 2006.

Oil and gas companies SOCO International and Cairn Energy failed to make adequate reference to climate-related risks to their business in their annual reports, according to ClientEarth. The FRC is yet to respond to the complaint, according to a spokesperson for ClientEarth. Both companies denied the allegations.

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