Climate change and energy transition is considered a principal risk to our business. We continue to consider the specific challenges, risks and opportunities it represents to improve our understanding and response.
During 2020, our Board and Senior Leadership Team examined our business model and our actions to date, to revise and improve our strategy, and set a clearer path toward net zero over the coming years. This will assist in future proofing our business while maintaining a strong business proposition.
Global energy transition
In 2021, we anticipate a greater emphasis on global energy transition, with an acceleration of activities by investors, companies and businesses around the world in developing and implementing actions that limit temperature rise. Governments are expected to further their specific commitments in their Nationally Determined Contribution (NDC) plans under the Paris Agreement. This forms part of the transition towards more sustainable affordable sources of energy and the path to develop net zero carbon economies. To meet the aspiration of limiting temperature rise to 1.5°C above pre-industrial levels, the continued use of hydrocarbon fuels with technologies and mechanisms to capture carbon emissions associated with their use will be required for some decades to come. Given the importance of climate action policy and planning to Cairn and our stakeholders – especially investors – we will continue to assess our reporting against the four pillars of the TCFD: governance, strategy, risk management, and metrics and targets.
The global context
In its 2020 edition, the World Energy Outlook discusses two main and interconnected themes: the impact of COVID-19 on the energy sector and the prospects for accelerated energy transition. Subject to the duration and severity of the pandemic, its effects are likely to be felt for some time to come. The IEA predicts a 5% fall in global energy demand and an 18% decrease in energy investment, hitting oil and gas in particular. The report covers a variety of scenarios and suggests that demand for natural gas is likely to grow significantly, while oil remains more vulnerable to economic uncertainties. Nonetheless, while proportions vary, most scenarios consider a role for hydrocarbon energy in 2050 and beyond.
Cairn's business context
We assess the resilience of our key assets against several transition scenarios, including the IEA’s Sustainable Development Scenario (SDS). These consider business as usual, along with limiting temperature rise to 2°C and 1.5°C scenarios, with both orderly and disorderly industry responses to the changing demand for oil and gas. Under all variations of the model, each of our existing assets delivered returns above our downside case. We built on our understanding of likely hydrocarbon demand scenarios during 2020 with a detailed review of the likely impact of COVID-19 on demand and oil price. We also analysed the medium-term market outlook as a result of energy transition, including implications of the IEA Net Zero Emissions 2050 scenario, which points to the scale of the carbon reduction challenge ahead. This review is presented in our Annual Report and Accounts 2020. Our Board and Senior Leadership Team looked hard at our business model in the context of energy transition to revise and improve our strategy. The aim was to chart a clearer path towards the UK’s commitment to net zero over the coming years, and refocus our approach to future-proofing our business while retaining a strong Cairn business proposition.
The outcome of the revised approach, agreed by the Board, means Cairn will focus on targeting hydrocarbon projects that can be produced responsibly and in support of multiple UN SDGs, ensuring that we manage climate-related resilience to provide value to shareholders and stakeholders.
Despite the impact of COVID-19, we are confident that the Group’s portfolio remains resilient to energy transition policy changes and will remain relevant in a global economy as it transitions to lower-carbon sources of energy.
We have improved our reporting against both the Task Force on Climate-Related Financial Disclosures (TCFD) and Sustainability Accounting Standards Board (SASB) frameworks, in addition to GRI and CDP in 2020. We will strive to further improve and supplement the qualitative information and quantitative metrics we disclose in accordance with these standards during 2021.