In addition to addressing climate-related risks to our business, strategy, and financial plans, we have also identified an approach to address risks specific to the energy transition.  In early 2022, we published our plan for the Net-Zero Energy Transition (the “plan”) in our proxy statement. The plan is built upon the company’s “Triple Mandate,” which is focused on three objectives that are integral to our strategic goals: meet transition pathway demand, deliver competitive returns and achieve our net-zero emissions ambitions. The company’s plan is summarized below, with updates to our prior objectives in response to investor feedback and internal analyses noted. Our plan describes how the company will:

• Build a resilient asset portfolio : Focus on low cost of supply and low greenhouse gas intensity (GHG) resources that meet transition pathway energy demand.
• Commit to near-, medium- and long-term targets : Reducing operational (Scope 1 and 2) emissions over which we have ownership and control, with an ambition to become a net-zero company for Scope 1 and 2 emissions by 2050. These targets include:
  • Strengthening our previously announced operational GHG emissions intensity reduction target to 40-50% by 2030 and expanding it to apply to both a gross operated and net equity basis to ensure active engagement in our non-operated investments.
  • Meeting a further 10% reduction target for methane emissions intensity by 2025 from our 2019 baseline, building upon the 65% reduction we have made since 2015.
  • Achieving near-zero methane emissions intensity by 2030.
  • Achieving a target of zero routine flaring by 2025, five years sooner than the World Bank initiative’s goal of 2030.
• Address end-use emissions : Advocate for a well-designed, economy-wide price on carbon that would help shift consumer demand from high-carbon to low-carbon energy sources.
• Pursue transition opportunities: Evaluate potential investments in emerging energy transition and low-carbon technologies. During 2021 our efforts included:
  • Establishing a multi-disciplinary Low-Carbon Technologies organization to support achievement of our net-zero operational emissions ambition, as well as to identify and evaluate business opportunities that address end-use emissions and early-stage low-carbon technology opportunities that would leverage our existing expertise and adjacencies.
  • Allocating $200 million in the 2022 capital budget to advance energy transition activities, the majority of which will address Scope 1 and 2 emissions reduction projects across our global operations, with the rest allocated for early-stage low-carbon technology opportunities.
• Track the energy transition : Utilize a comprehensive scenario planning process to calibrate and understand alternative energy transition pathways and test the resilience of our corporate strategy to climate risk.
• Maintain capital discipline : Use scenario analysis and a fully burdened cost of supply, including cost of carbon, as the primary basis for capital allocation.

Our plan does not include a Scope 3 (end-use) emissions target. A Scope 3 target for an exploration and production company represents a prescribed curtailment of production and a shift of capital away from existing transition demand, whereas our responsibility to shareholders is to strongly compete for that demand. We do so by striving for the lowest cost of supply, lowest GHG intensity production. We are taking separate responsibility for encouraging a shift to low-carbon sources of energy by providing tangible support for carbon pricing, which would encourage changes in the choices made by end users.

The plan has been endorsed by the full Board of Directors and is designed to help investors and other stakeholders gain an understanding of the valued role ConocoPhillips intends to play in an orderly energy transition. The plan also supports our aim to be a best-in-class E&P company. Through our ongoing consideration of transition scenarios, the strategic planning process and stakeholder engagement, we expect the plan to continue evolving as the energy transition progresses over time.

Our Triple Mandate

ConocoPhillips intends to play a valued role in the energy transition by delivering on three objectives: responsibly meeting transition pathway energy demand, delivering competitive returns on and of capital, and achieving our net-zero emissions ambition. We call this the Triple Mandate, and it represents our commitment to create long-term value for our stakeholders.

First, meeting transition pathway energy demand requires a focus on delivering production that will best compete in any transition scenario. This production will be delivered from resources with a competitive cost of supply and low GHG intensity, as well as diversity by market and asset type. Next, in delivering competitive returns, ConocoPhillips has been a leader in shifting the exploration and production sector’s value proposition away from one focused on production toward one focused on returns. Finally, to drive accountability for the emissions that are within our control, we are progressing toward achieving our net-zero Scope 1 and 2 emissions ambition via a continuous pipeline of projects with near-, medium-, and long-term emissions reduction targets.

Strategic Flexibility

A robust and flexible corporate strategy will be key to navigating the energy transition. The three key strategy components for an exploration and production company are portfolio, capital allocation and management of uncertainty. We manage uncertainty by focusing on the fundamental characteristics that drive competitive advantage in a commodity business — a low sustaining price, low cost of supply, low decline rates and low capital intensity that drive free cash flow, capital flexibility and a strong balance sheet. Based on our scenario analysis and monitoring of signposts, we decide when we should act and which actions to take.

Reliable and Resilient Returns

Our resilience is based on our ability to deliver competitive returns on and of capital. Our solution to prior sector-wide underperformance has been continual improvement to the underlying cost of supply of our portfolio, committing to >30% return of cash from operations to shareholders, balance sheet strength and moderating growth by holding to disciplined reinvestment rates. Rates of return for our E&P projects are well above our weighted average cost of capital (WACC), and also well above current returns for some common types of renewable energy investments. We have communicated to stakeholders a credible 10-year strategic plan intended to generate double-digit returns on capital employed that are competitive with overall market returns.

Appreciating that oil and natural gas are projected to remain essential parts of the energy supply mix in coming decades across a broad range of scenarios, ConocoPhillips intends to maintain its key market role through resilience to transition-related risks. We focus on remaining resilient and competitive in any transition scenario by providing low-cost, low-GHG, best-in-class ESG production.

On any possible energy transition pathway, the company, our stakeholders and the financial sector must grapple with the questions of transition direction and pace, their trade-offs and how best to manage climate-related risks and opportunities. This emphasizes the importance of maintaining strategic capability to contribute to an orderly transition through scenario-based planning, portfolio resilience, sound financial standing, qualified people and well-developed processes.

Cost of Supply

Cost of supply is the WTI equivalent price that generates 10% after-tax return on a point-forward and fully burdened basis. In our definition, cost of supply is fully burdened with capital infrastructure, foreign exchange, price-related inflation, G&A and carbon tax (if currently assessed). If no carbon tax exists for the asset, carbon pricing aligned with internal energy scenarios are applied. Cost of supply is the primary metric that we use for capital allocation, and it has the advantage of being independent of price forecasts. Any oil price above the cost of supply will generate an after-tax fully burdened return that is greater than 10%.

The cost of supply of our resource base supports our assertion that resources with the lowest cost of supply are most likely to be developed in scenarios with lower demand, such as the IEA’s Sustainable Development Scenario. As of year-end 2021, we held resources of more than 20 billion barrels of oil equivalent (BOE) with a cost of supply below $40 per barrel WTI and an average cost of supply of approximately $30 per barrel WTI. Over the next decade, we will produce approximately 7 billion barrels of resource with an average cost of supply below $28 per barrel diversified across the regions described below.

In recent years we have dramatically high-graded our portfolio and implemented stringent capital allocation criteria that direct investments to resources that will best match transition demand. Over the next 10 years, our focus is on assets that have both a low cost of supply and lower GHG intensity. Importantly, each asset type competes within its unique market (e.g., LNG, oil sands) where they compete on the basis of their relative GHG intensity and cost of supply. Our portfolio of assets compete within their respective markets, meet high ESG performance standards and provide additional resilience through asset and global diversity.

Just as the company is focused on developing resources with low cost of supply, we are equally focused on developing low GHG-intensity resources as these are the resources most likely to compete in any future energy transition pathway.

Portfolio Diversification

The mix and location of the resources in our portfolio demonstrate flexibility and the ability to adapt to change as we monitor scenarios and global trends. Our short-cycle project times and capital flexibility enable us to redirect capital to the most competitive basins. Our extensive low cost of supply resource base allows us to divest higher cost assets to high-grade our portfolio as our strategy evolves. This applies to both hydrocarbon mix and geographic region. If policy in a country or region significantly impacts cost of supply, we can shift capital to other opportunities. Examples include our presence in the oil sands business in Canada and in North American natural gas. Changing market fundamentals led us to significantly reduce our focus on both, while our portfolio diversity enabled expansion in other areas.

Capital and Operating Spend

Our strategy is also made more robust by discipline in capital and operating costs. When oil prices started dropping in 2014, we were able to respond with changes to short- and long-term planning, as well as more cost-effective and efficient operations.

Participating in the Energy Transition — New Low Carbon Opportunities

In early 2021 we established, and continue to expand, a multi-disciplinary Low Carbon Technologies organization. Its remit is to develop the corporate net-zero roadmap for Scope 1 and 2 emissions, understand the new energies landscape, and prioritize opportunities for future competitive investment. We are approaching this effort with the same discipline that we approach exploration in our traditional business, keeping seed costs low, leveraging competencies, identifying economically viable opportunities with materiality and flexibility, and only increasing investment once risks are managed and returns are assured.

The Low-Carbon Technologies organization works across the company’s business units to develop and implement region-specific net-zero roadmaps with detailed, time-bound actions, identify technology solutions for hard-to-abate emissions, pilot new methods to reduce and accelerate emissions reductions, and evaluate newly emerging competitive opportunities. This organization also supported pre-development work in 2021 to evaluate large-scale wind energy opportunities to provide power for our operations in the Permian, North Sea and Bohai Bay.

ConocoPhillips recognizes the important role that carbon capture and storage (CCS) and hydrogen could play in decarbonizing the global economy. We intend to apply the company’s disciplined growth approach to development of these new opportunities through clear investment criteria and a focused strategy. We have prioritized opportunities in these technologies as they offer potential for competitive returns and align closely with our technical competencies and global reach. As demonstrated in the figure to the right, we have recently taken actions to advance our positions in both technologies, including offering support to drive innovation.

Carbon Capture and Storage

Development of CCS projects could benefit from our existing technical expertise in subsurface and our track record in the safe development and execution of major projects in the oil and gas industry. We have assembled an internal team of subsurface and surface experts, with support from our Land, Regulatory, Legal, Government Affairs, Commercial, Environmental and Sustainable Development and Stakeholder Relations teams, and are actively engaged in subsurface characterization, business development and land acquisition.

In 2021, we evaluated potential CO ₂ storage sites along the Texas and Louisiana Gulf Coast to determine the feasibility of supplying CCS services to industrial emitters. We are also evaluating opportunities to deploy CCS in our own operations. For example, we recently joined the Oil Sands Pathways to Net-Zero Initiative, an alliance of Canada’s top oil sands operators that is working toward achieving net-zero GHG emissions by 2050.

Hydrogen

Over the last year we have also made early investments in enabling hydrogen technologies and continued our support of academic and industry research conducted to advance decarbonization efforts. Leveraging our global reach, we are evaluating and high-grading hydrogen and ammonia production and marketing opportunities, both domestic and international.   As our portfolio of CCS and hydrogen projects continues to mature, we look forward to sharing more details and updates with our stakeholders.

Offsets

While achieving our net-zero emissions ambition will primarily be driven by emissions reductions, we recognize that offsets may be required to mitigate some residual hard-to-abate emissions. Given the many entities setting net-zero emissions targets, the market for offsets is anticipated to have strong growth by 2050. After evaluating options and alternatives, we have designed a flexible, fit-for-purpose strategy to develop and invest in voluntary offsets beginning in 2022, helping secure credible lower-cost market entry in anticipation of growing long-term demand.

We plan to develop and support our own offset projects and make diversified investments in offset projects or funds. Our focus will be on countries/regions in which we operate or have land holdings. While at present we do not anticipate the need to utilize offsets to meet our medium-term targets, we plan to begin investing now to secure a lower-cost position for the future. We are looking for a variety of project types that will start creating offsets by 2025, including:

• Nature-based: Relating to forestry and land use, wetlands, agricultural improvements, and grasslands or soil enrichment.
• Technology-based: Relating to energy efficiency, fuel switching, abandoned well management, waste disposal and fugitive emissions reductions.
• Other projects that sustainably meet energy demand, while removing or reducing the GHG emissions from that energy.

In addition to these criteria, we emphasize the need for durability of the reductions and leakage minimization, as well as community, conservation, and biodiversity co-benefits that will create and increase commercial value for the projects, even if they are ultimately not needed for our net-zero operational emissions ambition.

Read more about the latest low carbon technologies developments.

A Best-in-Class Energy Transition Plan for the E&P Sector

Our Triple Mandate will drive continued focus and accountability for both returns and resilience, allowing us to play a valued, meaningful role in a managed and orderly energy transition. By meeting future energy transition pathway demand, delivering competitive returns and achieving our net-zero emissions ambition, the company is well positioned to execute this energy transition plan and participate in an emerging low-carbon economy. We believe our plan is adaptable, economically viable, accountable and actionable in any transition energy transition demand pathway.   We intend to provide periodic updates on our companywide performance against the plan.