PautaInternas
Actions
Risks and Opportunities
Actions
Risks and Opportunities
Feb 10, 2023
Climate horizons
Ecopetrol has identified the risks and opportunities related to climate, physical and transition, as well as the potential impacts and benefits in the following horizons:
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2021 - 2024 |
The short-term horizon considers the following aspects: (i) establish and achieve the annual and intermediate GHG emission reduction targets, in line with the Decarbonization Plan, (ii) identify short-term risks and establish mitigation actions, controls and Key Risk Indicators (KRIs) within the framework of the annual risk management cycle, and (iii) identify and implement cost-effective opportunities to contribute to the GHG emission reduction goals. |
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2025 - 2030 |
The medium-term horizon is used to review both the GHG emission reduction and offset targets for 2030, in accordance with the company's Decarbonization Plan. This horizon also allows the identification of emerging risks that will impact the company in the next 5 years or more. |
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2030 - > |
The long-term horizon is used to review market trends, policy and regulatory changes, and emerging technology developments that may impact the company's climate ambition and long-term business strategy (2040). |
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Physical and transition risks
Physical risks
Physical risks derived from climate change can cause events (acute) which, in Ecopetrol´s case, are related to climate variability phenomena such as “El Niño” or “La Niña” phenomenon, or long-term (chronic) changes in weather patterns. Physical risks can have financial repercussions for the company such as direct damage to assets or indirect impacts caused by interruptions in the production chain.
In 2022, Ecopetrol developed the physical risk assessment of the company’s assets in Colombia to understand Ecopetrol’s vulnerability to future climate scenarios. The modeling was conducted in collaboration with Cervest, whose EarthScan platform uses regional climate models with various datasets to analyze the assets’ physical vulnerability related to the potential impact of climate hazards. An analysis of seven risks related to chronic hazards (drought, and heat stress) and acute hazards (precipitation, coastal flooding, riverine flooding, wildfires, and wind), under three IPCC climate scenarios to the year 2100, covering the lifetime of the main assets:
- SSP 5 (RCP 8.5), which shows the emissions trajectory under a business-as-usual scenario.
- SSP 2 (RCP 4.5), which shows the emissions trajectory achieving a stabilization in temperature increase at 2°C, with peak emissions in 2040.
- SSP 1 (RCP 2.6), which shows the emissions trajectory achieving a stabilization in temperature increase at 1.5°C, aligned with the Paris Agreement target.
Increases in maximum temperatures and in heat waves duration pose the greatest hazards to the entire asset portfolio. These are the most significant risks in terms of worker safety and even operational disruptions. However, it is not expected to have direct impact on infrastructure. In addition, six locations have a substantially higher risk of coastal flooding and more moderate river flooding is expected at four locations. The remaining climate hazards are not expected to increase substantially across the portfolio. For further information about the classification, please refer to the following link: https://app.earthscan.earth/knowledge-base/CervestRatingsMethodologyOverview_Oct2022.pdf
Transition Risks
The transition to a low-carbon economy may entail political, legal, technological and market challenges to address mitigation and adaptation requirements related to climate change. Depending on the nature, speed, and approach of these changes, transition risks can pose financial and reputational risks of different levels for organizations.
In 2022, Ecopetrol identified market, technology, reputational and regulatory risks:, prioritizing market risk (oil and gas demand) and regulatory risk (carbon pricing and offsetting), to assess the resilience of upstream assets, using the following IEA WEO 2022 scenarios:
- Stated Policies Scenario (STEPS, 2.5-2.9°C), which shows the emissions trajectory under current climate policies.
- Announced Pledges Scenario (APS, 2.1 °C), which shows the emissions trajectory considering that all published aspirational targets will be met.
- Net Zero Emissions (NZE, 1.5 °C), which shows the emissions trajectory achieving a stabilization in temperature increase at 1.5°C.
The assessment developed by Ecopetrol included stress testing to the upstream assets of the long-term strategy. The portfolio strategy was evaluated by comparing the NPV of future cash flows of IEA scenarios with Ecopetrol’s base case NPV. In both cases, assumptions associated with the following pathways were applied:
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Market risk |
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Pathway |
Potencial impacts |
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The demand for different energy sources, including fossil fuel, varies between climate scenarios. For Ecopetrol, the two main products are:
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Volatility in fossil fuel (oil and natural gas) prices could impact the company’s revenues from stranded assets, higher insurance premiums, higher capital costs, and change in insurance policy coverages. |
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Regulatory Risk |
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Pathway |
Potencial impacts |
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Carbon pricing: carbon pricing is seen as a key policy for energy transition, although it varies considerably between climate scenarios and implementation mechanisms. |
Increasing carbon pricing also increases the company’s operating costs, with a negative variation in APS and NZE scenarios, while remaining positive in STEPS scenario. Government responses to climate change could involve an increase on carbon prices for scope 1 and 2. |
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Emissions offsets: Ecopetrol established an offset limit for compliance with emission reduction targets at aound 30%. |
Regulation and sector-specific international public guidelines may limit the use of offsets, which would increase costs for Ecopetrol, due to the need to accelerate investment in additional abetment technologies to meet the carbon neutrality target. |
Opportunities
The efforts made to mitigate and adapt to climate change also create opportunities for companies, to identify and develop opportunities through resource efficiency and cost savings, the adoption of low carbon energy sources, the development of new products and services, access to new markets, and creating resilience throughout the entire production chain, will generate sustainability for the business.
Ecopetrol has identified the following opportunities arising from climate change, which are aligned with the company's corporate strategy.
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Ongoing opportunities |
Benefits |
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Energy resource |
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Resource efficiency |
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Products, services, and markets |
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Further information, see in detail Ecopetrol’s 2021 TCFD report |
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