Report on Sustainability 2019

Carbon risk and energy outlook

Integration of carbon risk into our decision-making processes

Suncor takes an integrated approach to managing carbon risk and we embed carbon into our decision making processes in multiple ways.

Carbon risk is considered one of Suncor’s principal risks. As such, it undergoes a regular Board of Directors review. This includes reviewing external trends, carbon risk pathways, and Suncor’s plans to mitigate those risks. Carbon risk is also brought forward to the Environment, Health, Safety and Sustainable Development Committee of the board on a quarterly basis for ongoing oversight.

Climate risk and resilience in a low-carbon economy

Each year, as part of our normal integrated business planning process, we develop price assumptions for a variety of economic variables. This includes both base and alternative case carbon prices that take into account existing regulations and the expected trajectory of those regulations as they apply to our assets. These assumptions are used in the evaluation of all business, acquisition, divestiture, capital and strategic planning activities. The alternative case takes a much higher view of future carbon prices and serves as a “stress test” which adds confidence to capital decisions.

In addition to carbon price, other factors such as crude oil price and demand changes over time, are evaluated in business, capital, and strategic planning processes. Each business is required to consider these material factors and demonstrate that it will be able to continue to meet an acceptable rate of return, including funding its sustaining capital and enabling Suncor to maintain and grow its dividend. If the business cannot meet these objectives, it is required to outline the steps needed to achieve this target.

Our internal management model for project and asset development incorporates carbon pricing and our GHG goal prior to a commitment of significant resources, and ensures that all material climate change risks and opportunities are well understood. The process allows for analysis of technical options, but also the regulatory and external stakeholder context to be recognized in decision-making.

At an enterprise-wide level, we use scenario planning to assess the resilience of our business strategy over the long term. We also test our whole portfolio of businesses against our long-term GHG goal to ensure it is achievable.

The energy system of tomorrow

We are starting to see global efforts to reduce emissions through nationally determined commitments in accordance with the Paris Agreement. Broader technology and policy pathways are necessary to deliver energy to a growing global population, while at the same time mitigating climate change. Limiting emissions will be achieved at an energy system-wide level in the most appropriate way for each region or jurisdiction. There are no single or simple solutions to this challenge.

In our base case energy outlook, we take the following broad trends into consideration:

  • Forecasted population growth, the increasing need for energy in developing economies and the aspiration for a better quality of life. As such, we see the global demand for energy increasing steadily. Much of this increase is expected to come from developing countries in Asia, the Middle East, Latin America and Africa.
  • We believe decoupling of economic growth and carbon emissions is required to fundamentally change the energy mix.
  • National emissions reduction commitments made as part of the Paris Agreement will drive carbon pricing and complementary policy frameworks that are expected to accelerate energy efficiency and emissions reduction technology and incent broader scale adoption of alternative low-carbon energy.
  • We expect oil demand will continue to grow until approximately 2040 due to population growth, urbanization and increased living standards, but oil is expected to decline as a percentage of the global energy consumption mix.
  • Given natural declines, staying at current production levels, much less meeting increased demand, will require investment in new production from global shale, deep-water and oil sands reserves – a major challenge, given the reduction in capital investment due to depressed commodity prices in recent years.
  • We expect supply cost will continue to be moderated by industry efforts to optimize production and invest in technological advances.

Scenario planning

We use three long-term energy futures scenarios to test our business strategy. All of the scenarios are plausible and could affect our operating environment and business strategy in markedly different ways. Under each of these scenarios, including the one with the most aggressive decline in oil demand, we believe a substantial amount of oil will be required for decades as the world gets on track to meet its climate ambitions. This view is also supported by forecasts from organizations such as the International Energy Agency and the US Energy Information Administration. Meeting that demand at either low, or highly volatile, oil prices will be a challenge.

Each scenario has an implied crude oil price range and climate change regulatory impact. Two of the three reflect the current global aspiration toward reducing carbon emissions; what differentiates the scenarios is the context, pace and scale at which that comes about.

Of these scenarios, “Autonomy” is the scenario we consider best represents the technology and policy context that would be essential to meet the aspiration of limiting cumulative emissions to 450 ppm. In 2019, Suncor is currently working on the development a 2°C scenario that we can use to test our business strategy beyond 2040.

The scenarios are used annually by the CEO, the Executive Leadership Team and the Board of Directors to assess business and growth strategy and identify alternative strategic directions. This process continues to be a useful tool for stress-testing our business on a number of key dimensions, including climate risk.

Scenario summaries

We used three scenarios defined by IHS Markit as the basis for the development of the Suncor scenarios. The IHS Markit Autonomy, Rivalry and Vertigo scenarios have been modified to fit our unique circumstances/needs.

Autonomy

Rapid technological and societal change transforms the energy landscape in Autonomy, supported by a peaceful and collaborative world.

Summary
Energy markets impact
Expected impact on Suncor
  • Millennial shift – focus on sustainability and collaboration, sustainable urbanization.
  • Falling costs and improved reliability of clean energy allow developing countries to bypass large-scale hydrocarbon-based energy infrastructure.
  • Natural gas is a transitional fuel for power generation, but after 2030 increasingly renewable power. generation fuels a largely electrified energy system
  • Break through battery technology development supports growth in electric vehicles.
  • Oil’s role in geo-politics is substantially diminished contributing to a generally stable geo-political environment.
  • Stable moderately strong economy.
  • Carbon-intensive industries face high regulatory costs and requirements.
  • No new export pipelines are built out of the Athabasca oil sands region.
  • Abundant and cost-effective supply of energy coupled with moderation and eventual decline in demand, particularly in transportation, drives oil prices to stay low in the long term.
  • Oil exploration and production slows as investment moves to other sectors, reducing but not choking supply.
  • High-cost supply falls off fast.
  • Oil is still required and continues to provide a significant share of the world’s energy need.
  • No existing assets are stranded.
  • Existing long-life assets continue to produce, funding their own sustaining capital or modest growth capital requirements for incremental production expansion.
  • New oil sands growth projects are challenged and unlikely to proceed.
  • Oil sands continue to provide a stable dividend base while growth options in other resource basins are considered.
  • Only the top tier refineries remain profitable – Suncor’s Downstream maintains a focus on reliable, efficient and low-cost operations.

Rivalry

In Rivalry, population growth, urbanization and growing middle class drive energy demand – diverse supply is required to satisfy demand, with intense competition for market share between energy sources.

Summary
Energy markets impact
Expected impact on Suncor
  • Improving standard of living and greater personal wealth, particularly in China.
  • Expanding use of advanced technologies increases demand for energy.
  • Shift of economic power to millennials with the desire and means to address pollution and climate change.
  • Geo-political landscape remains tense and strong global economic growth shifts global influence.
  • Technology advancements allow access to greater oil reserves, with unconventional supply growing.
  • Natural gas and LNG play a larger role in transportation.
  • Strong growth in renewable energy.
  • Carbon-intensive industries face high regulatory costs and strict standards.
  • High global energy demand fed by diverse energy supply.
  • Refined products still dominate transportation fuels, but are losing market share to alternative fuels.
  • Fuel efficiency standards and technological innovation moderate growth in refined product demand.
  • Oil and natural gas are increasingly costly to produce and the oil price continues to trend upwards with some cyclical downturns.
  • No existing assets are stranded.
  • High price and market access enable robust oil sands growth and further investment in improved extraction techniques.
  • Continued focus on carbon footprint reduction through capital projects, technology development and efficient operations.
  • Competitive downstream provides robust returns and enables physical integration of oil sands crude.

Vertigo

Continued conflict and geo-political instability are at the forefront of the world. Vertigo is a world with economic volatility, unbalanced wealth distribution, and overall weaker GDP growth.

Summary
Energy markets impact
Expected impact on Suncor
  • International trend towards isolation and self-preservation with energy security a key concern.
  • Air quality, traffic congestion lead to smaller, higher- efficiency vehicles and some electric vehicle adoption.
  • Extreme weather events lead to social unrest.
  • Investor risk aversion and tight capital markets constrain both technology advancement and high capital projects.
  • Pipe-line projects constrained by stakeholder protests and investor risk aversion.
  • Unstable, boom/bust energy market.
  • Environmental progress and climate change mitigation takes a back seat to economic concerns.
  • Fossil fuels remain the primary source of affordable energy and dominate the global energy mix.
  • The price of oil recovers from current levels but fluctuates widely with rapid shifts in demand and supply.
  • Slower economic growth and technological progress limit the proliferation of electric and other alternative fuel vehicles; energy mix does not change significantly.
  • Slower economic growth limits growth in energy, oil and refined product demand.
  • No existing assets are stranded.
  • Long-life assets able to deliver free cash flow through commodity price volatility, enabling Suncor to maintain competitive returns to shareholders.
  • Integrated model helps smooth oil price cycles.
  • Growth projects rigorously tested to ensure ability to deliver returns in volatile oil price environment.
  • Financial strength is leveraged to consolidate assets at the bottom of the cycle.

Scenario signposts

Along with scenarios, we also develop and annually update our signposts, which are milestones to identify critical shifts in the external context. The world is in a constant state of change, sometimes moving faster than we expect. Tracking the pace and direction of the change is an integral part of our scenario work and helps us develop and evaluate strategic alternatives for our business by incorporating both global and Canadian current events, trends and actions.

Signposts include changes in global energy demand and supply mix, political and economic indicators, climate data, policy and consumer trends, and technology advances. Current signposts tell us:

  • the global energy mix shows signs of global demand growth for all forms of energy
  • volatility and uncertainty in geopolitical and global economic environments could hinder the growth of the global economy
  • technology continues to evolve at a rapid pace, which drives down costs and improves energy efficiencies for producers and consumers alike
  • economic priorities and geopolitical tensions appear to impede coordination on climate change action
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