INPEX recognizes that climate change is a critical business issue. To achieve the long-term goals of the Paris Agreement, an economy wide transition to a low carbon society is under way. Global climate change response requires action by all members of the international community; governments, businesses and civil society. Governmental policy measures, technology development, industry response, and other long-term initiatives are particularly pertinent. We are committed to fulfilling our role in addressing climate change as a responsible member of the oil and natural gas industry. Furthermore, we comply with national regulations of each country in which we operate business, including those introduced to support the Paris Agreement. Our businesses will work with governments and other stakeholders to address the two societal demands of meeting increasing energy needs and reducing greenhouse gas (GHG) emissions; to achieve a balance between the two. In our actions towards achieving a low-carbon society, we will strengthen initiatives on promoting natural gas development and renewable energy as a means to reduce the emissions associated with INPEX's value chain. In addition, we will properly manage GHG emissions from our operations and proceed with technology development for practical application of Carbon dioxide Capture Storage*1 to capture and sequester GHG emissions. We shall also undertake analysis and initiatives in line with the Task Force on Climate-related Financial Disclosures (TCFD) recommendations and seek to complete disclosure of exposure to climate-related risks as well as information on climate related opportunities. INPEX has developed a position paper, “Corporate Position on Climate Change,” (issued December 2015, last revised July 2018) which is available on our website.*2
Carbon dioxide Capture and Storage
- *2Corporate Position on Climate Change
MESSAGE FROM THE DIRECTOR IN CHARGE OF CLIMATE CHANGE RESPONSE
To advance our response to climate change as a responsible oil and natural gas company, we published our position paper, “Corporate Position on Climate Change” initially in December 2015 and subsequently revised in July 2018. As detailed in INPEX's “Vision 2040” and “Medium-term Business Plan 2018-2022” announced in May 2018, we are also enhancing our systems for addressing climate change and implementing ongoing measures to disclose climate-related information in line with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). This aims to proactively contribute to a low-carbon society based on the long-term targets outlined in the Paris Agreement.
Specifically, our Board of Directors seeks to maintain its oversight and expand its involvement in governance. When developing our business strategies, we assess our ability to respond to a number of climate-related scenarios, including the IEA*3 WEO 2℃ scenario, to examine our business portfolio. With regard to risk and opportunity assessment, we have an annual assessment and management cycle where risks and opportunities are explored in detail and implement measures and work plans developed out of that process. As for management of greenhouse gas (GHG) emissions, we are considering target setting methods in line with international standards whilst complying with each country's national regulations and GHG management frameworks. We are also improving information disclosure regarding exposure to climate change risks in line with the recommendations as set out by the TCFD. To reflect industry best practice in these activities in a timely manner, we participate as a member of the Executive Committee in IPIECA—the global oil and gas industry association for environmental and social issues to disseminate and collect relevant information.
- *3International Energy Agency
Sustainability Initiatives on the TCFD Recommendations
Disclosure in Line with TCFD Recommendations
Governance Framework for Climate Change Response
As we recognize that climate change is a critical business issue, the Board of Directors seeks to maintain its oversight and expand the Company's involvement. Specifically, our “Corporate Position on Climate Change” was resolved by the Board of Directors and then published in 2015, with a revision in July 2018. As a rule, the Board will review this corporate position on a yearly basis. We revised the relevant rules in the 2018 financial year and created a system where assessment of climate change risks and opportunities is completed on a regular basis. The outcome of this assessment and the following target settings relating to climate change are approved by the Management Committee and then reported to the Board of Directors. Finally, we have tasked the Climate Change Strategy Group, within the Corporate Strategy & Planning Unit of the Corporate Strategy & Planning Division, to address climate change issues across the entire company.
Governance Framework for Climate Change Response
Climate Change Action and Director Compensation
Our “Medium-term Business Plan 2018-2022” sets out a number of climate-related targets in the areas of governance, business strategies, risk and opportunity assessment, GHG management and disclosure. These targets are integrated into executive bonuses.
Climate Change Milestones
Process for the Assessment and Management of Climate Change Risks and Opportunities
Annually, we assess and manage climate change risks and opportunities (Figure A). During the 2018 financial year, the Climate Change Strategy Group prepared a draft action plan against climate change related risks and opportunities, and the Climate Change Strategy Project Team discussed and evaluated it. The revised action plan was reported to the Management Committee and Board of Directors. The Climate Change Strategy Project Team is a cross-organizational project team composed of about 20 members from each division. This process is planned to evolve and increase the involvement of the Management Committee during the 2019 financial year. Our risk assessment process follows the international risk management standard, ISO 31000:2009 (Figure B); identifying risks, and analyzing the causes, preventive measures, mitigation measures and the results (Figure C).
Fiscal 2018 Status of Climate Change Risks: Assessment Coverage, Expected Timing and Solutions
Fiscal 2018 Status of Climate Change Opportunities: Assessment Coverage, Expected Timing and Solutions
Assessment of Financial Impacts of Climate Change Risks
We use three methods to assess the potential financial impact of climate change risks. The first method is to assess the financial impact of relevant policy and regulatory risk that the introduction and enhancement of carbon pricing policies poses to our projects. According to a report from the World Bank*4, 96 of the countries participating in the Paris Agreement report using or considering the introduction of carbon pricing policy (such as cap-and-trade or a carbon tax) for their Nationally Determined Contributions (NDCs). We are applying an internal carbon price (US$35/t CO2-e) as part of the economic assessment of existing and potential future projects. The internal carbon price is applied on a project by project basis to the direct emissions from that project. The level of internal carbon price used is reviewed each year in line with IEA WEO carbon prices.
The second method is to analyze the financial impact of potential changes in oil and carbon prices resulting from the various climate scenarios and the impact those changes may have on our portfolio. By applying changes in oil and carbon prices, as presented in the IEA WEO Sustainable Development Scenario, to the net present value (NPV) formula for all projects, we can determine the overall impact to company NPV from the Sustainable Development Scenario. We have been trialing this method since 2018.
The third method is to assess financial impact of market risk that oil and LNG supply/demand forecasts according to the 2℃ scenario pose to our projects. To assess this risk, We apply a supply cost curve method to predict oil and LNG supply volumes in the future impacts on oil and LNG demand resulting from climate scenarios to assess our project's competency in the future. The cost curve is drawn with 'future supply by project' on the horizontal axis and 'economic efficiency (cost) by project' on the vertical axis. The supply cost curve is a global indicator, so it is also necessary to consider the actual geopolitics, government policies, technical capabilities, commercial practices and other factors of each region. We are discussing our assessment methods, including how we take each of these factors into account.
- *4World Bank - State and Trends of Carbon Pricing 2019 (June 2019)
Development of a Physical Risk Assessment Process
During the 2018 financial year, we have examined assessment processes of our physical risks and established a road map for both operator and non-operator projects. We will undertake assessments of all facilities by the early 2020s. During the 2019 financial year, we are conducting physical risk assessments of our operator facilities. As preparation, we used external data*5 to specify climate variables including mid-21st century's average temperature, precipitation pattern, and sea level rises for Niigata Prefecture in Japan and Darwin in Australia. We followed the RCP8.5(Representative Concentration Pathways 8.5) scenario in the IPCC fifth Assessment Report (AR5), which is a “Business as usual” scenario.
- *5Climate in Japan at the End of 21st Century, Ministry of the Environment (2015); Global Warming Projection Volume 9, Japan Meteorological Agency (2017); Monsoonal North Cluster Report, Climate Change in Australia (2015)
Three Approaches to Financial Assessment Response
The INPEX Low-carbon Society Scenarios
We are conducting scenario analysis using four different scenarios to reflect climate-related trends in our strategy and business planning. Our base case assumptions are derived from the New Policy Scenario (NPS) of the International Energy Agency's World Energy Outlook (IEA WEO). In the “Technological progress scenario”, we assume a rapid growth in demand for renewables and electric vehicles (EV), spurred by cost reductions around the globe. In the “Wake up scenario” the frequent occurrence of climate-related disasters pushes governments to address climate change more seriously, then society switches to low-carbon economy after 2025.
The IEA WEO revises the scenarios once a year to reflect changes in society. We conduct a signpost analysis regarding the main indicators of the IEA scenarios and actual events as signposts*6 to assess which one of our scenarios has already started to play out. The outcome of this analysis is used to review the consistency of our future strategic direction with society.
Signposts are early indicators of future scenario directions. INPEX identifies multiple elements as signposts including the energy mix, advances in electrification, and the spread of EV and low-carbon technologies. We closely watch these trends and the likelihood of certain developments.
Overview of IEA scenarios
IEA WEO New Policies Scenario (NPS)
The NPS is the central scenario of the International Energy Agency's World Energy Outlook, which assumes implementation of all currently announced policies. According to the NPS in WEO 2018, world's primary energy demand will continue to grow through 2040, with oil and natural gas together accounts for 53% of the total demand. Although the share of renewables (excluding hydropower and biomass) in the energy mix is smaller than that of oil and natural gas, they grow five-fold in the period from 2017 to 2040.
IEA WEO Sustainable Development Scenario (SDS)
The Sustainable Development Scenario is the IEA's most rigorous low-carbon scenario which integrates the objectives of three Sustainable Development Goals (SDGs). Under this scenario, electrification and steep reductions of GHG emissions contribute to achieve the Paris Agreement's target (average global temperature rise kept below 2 degrees Celsius and efforts pursued to limit temperature increase to 1.5 degrees Celsius).
Energy efficiency will be improved significantly with broad implementation of strong low-carbon policies as its backdrop. Primary energy demand will decrease by about 10% towards 2040. On the other hand, the share of oil and natural gas in the total demand will remain at 48%. Also, demand for renewable energies will increase about eight times the 2017 level by 2040.
Low-carbon Transition Plan
For this scenario entailing a further shift from the IEA New Policies Scenario to a low-carbon society, we acknowledge the uncertain prospects for a large increase in oil prices. Under these conditions, we assume in the Medium-term Business Plan 2018-2022 that oil prices will trend within the $50 to $70/bbl range with a gradual increase to $70/bbl. During this time, our target is to reduce production costs to $5/bbl (excluding royalties) for oil and natural gas upstream businesses, and we maintain financial and corporate resilience even if the crude oil price drops to US$50/bbl.
Meanwhile, we aim to reduce our carbon footprint. In addition to manage emissions from our operations appropriately, promoting the development of natural gas, for which robust demand is anticipated under both the NPS and the SDS, is an important mean to drive down the emissions. In parallel, we enhance renewable energy initiatives and participate in Proof of Concept trials for CCS, which captures and stores CO2.
In Vison 2040 we will further promote a low-carbon footprint in operations. We aim to be a key player in natural gas development and supply, mainly focusing on Asia and Oceania, as well as Japan to expand the company's domestic gas supply chain, on which our development and supply of natural gas has so far been focused, and create a global gas value chain. In the field of renewable energy, we aim for renewable energy projects to account for 10% of our project portfolio in the long term. For CCS, we will develop technologies for the practical application of CCS. Accordingly, while reducing our carbon footprint in each of our business activities, we will work to continuously increase corporate value by maintaining a business portfolio with the flexibility to respond to changes in the business environment towards 2040.
Supply Chain Initiatives
In our Health, Safety and Environmental (HSE) Policy, we have pledged that we will pursue every effort to reduce our carbon footprints and adhere to the GHG emissions management process. In our Contractor HSE Management Manual and Domestic Procurement Guidelines, we have included articles requiring compliance with this pledge in both work and procurement contracts, with compliance extending to the contractors and suppliers as well.
For example, we are tracking emissions from LNG carriers, chartered by our wholly-owned subsidiary INPEX Shipping for better understanding of our overall emissions and future improvement, and disclose the information as our Scope 3 emissions*7. These carriers are used primarily for shipping LNG from Ichthys LNG project.
- *7Performance Data