We have identified climate-related risks and opportunities (including those related to water) in short-term (0-3 years), medium-term (3-6 years) and long-term (6-50 years) horizons.
These are described in our Annual Reports and below, with their potential company and financial impact (assessed using processes such as scenario analysis, cost projections and our Emissions Long-Range Planning tool), and our resulting management approach. Our CDP Climate Change and Water Security submissions provide additional information, including where in the value chain these risks and opportunities occur.
Renewable Energy in France
Geothermal heat from the produced water at our oil operations in Parentis supports the production of more than 7,500 tonnes of tomatoes annually in 15 hectares of greenhouses
|Category / Issue||Description of Impacts||Management Approach||Potential Financial Impact|
|Short-term Transition Risks: 2022-2025|
|Policy and Legal: Increased Pricing of GHG Emissions e.g. Carbon Tax||Short-term impact is primarily in Canada and Ireland. Canadian Federal Greenhouse Gas Pollution Pricing Act has set carbon tax rates at $50 per tCO2e in 2022, rising to $170 by 2030, with provincial reponses to keep pace with the federal system. Our Ireland operations are subject to the EU ETS and Ireland Carbon Tax systems. Longer-term impact rests on carbon pricing’s vulnerability to changes in government policy.||With our recent northeast British Columbia acquisition, our Canadian carbon tax liability increased to approximately $1.6MM in 2022, and is forecasted to exceed this in the near term. Our Ireland EU ETS liability is forecasted to be approximately $0.8MM in 2022, increasing to approximately $2.6MM in 2025 and $3.5MM in 2030. The Ireland Carbon Tax liability is expected to be an additional approximately $0.1MM/year over this period. All estimates are net Vermilion.||Our exposure is mitigated by provincial responses to the Act, including Alberta's Technology Innovation and Emissions Reduction (TIER) regulation and Output-Based Pricing Systems (OBPS) in Saskatchewan and forthcoming in British Columbia. Our ongoing efforts to reduce the energy and emissions intensity of our operations are integral to managing this risk, including our emission reduction targets. Vermilion continues to monitor and comply with taxation requirements.|
|Policy and Legal: Enhanced Emissions and other ESG Reporting Obligations||Climate and other ESG reporting obligations are evolving rapidly, with Vermilion potentially subject to the International Sustainability Standards Board (2024) and European Sustainability Reporting Standards (2028), U.S. Securities and Exchange Commission and Canadian Securities Administrators Climate-Related Disclosure Rules, and Canada's Modern Slavery Act. Although Vermilion's existing sustainability-related disclosure provides a sound foundation for compliance, there are costs to implement these, particularly potential requirements for increased levels of audit. The impact to Vermilion would be a decreased netback per BOE, due to increased expenses for staff time and system development and implementation.||The financial impact is an increase in operational cost associated with the management and quantification of emissions to meet new reporting requirements, and the administrative costs associated with reporting and audit obligations. This is estimated at $0.8MM annually.||Regulations in all of our business units are monitored on an ongoing basis, and assumptions/ scenario planning is used annually to assess risk. In Canada, we implemented an external emission data gathering software in 2021 to support the evolving regulatory landscape. Vermilion also engages stakeholders relating to emissions reporting obligations. Management of this risk is built into Vermilion's operations and our ERM. In addition, we expect to automate our emissions data gathering, aggregation and calculation processes in 2024, while ensuring audit-ready processes for all ESG data points to align with proposed regulatory requirements.|
|Policy and Legal: Changes in Mandates/Regulations re Products - Existing Production or Acquisition Impaired by Regulatory or Political Changes||Vermilion's operations are subject to regional regulatory and political changes that result in changes to equipment requirements such as engineering and equipment modifications to reduce carbon emissions and / or emissions of criteria air contaminants.The most likely short-term impact is regulations in Canada and the European Union to reduce methane emissions, in France to reduce flaring, and in Netherlands to reduce NOx. From a macro perspective, geopolitical impacts (e.g. war in Ukraine) have escalated diverging government and consumer viewpoints on the need for energy security vs energy transition. We expect that demand for oil and natural gas to remain strong in the short to medium term, while safety and environmental regulations governing its production will increase. We have identified these risks as interconnected and existing in the short-term; however, they should be seen as medium- to long-term risks as well, impacting both existing production and acquisitions.||Operational changes to comply with existing methane reduction regulations is expected at approx. $1.5MM in the short term, with those associated with eliminating routine flaring in France subject to continuing review in 2023. The cost of compliance with proposed regulations, such as Canada's proposed regulatory framework for reducing oil and gas methane emissions to achieve a 75% reduction by 2030 is not yet established, and will depend on the final version of the framework.||Vermilion is closely monitoring regulatory and market changes to ensure its approach to resilience under evolving conditions remains appropriate. We provide feedback to governments on proposed regulations, as per our lobbying disclosures, and allocate resources, including staff and capital, to ensure that required operational changes can be effectively actioned. In the short term, we are pursuing two emission reduction targets, with associated measures including tying in vented equipment to flaring infrastructure in Canada, using NOx scrubbers and NOx certificates to comply with new regulations in Netherlands. In 2023, we are developing our net zero to 2050 plan and 2030 emissions reduction target. We are also working with external partners to further implement and develop emission reduction technologies that are economic to the company, in part due to the potential generation of carbon credits. Based on stakeholder engagement, Vermilion believes that independent assessments of our operations by third parties are an important tool to demonstrate our responsible approach to production of essential energy. As a result, we have sought and achieved Equitable Origin responsible gas producer certification for 3 of our Canadian sites, the AFNOR CSR Committed label in France, and the Business Working Responsibly mark in Ireland.|
|Reputation: Shareholder Divestment||Investors are raising concerns regarding risks related to emissions, environmental and biodiversity protection, water stewardship, and abandonment and reclamation liabilities.||Impact of divestment estimated to be equal to 0.25X of 2023E FFO reducing market capitalization by 317MM$ . This estimate covers all significant sustainability risk scenarios including but not limited to water stewardship, biodiversity, modern slavery, and community relations.||In addition to our net zero transition plan development, we have set public targets to reduce ARO liabilities and internal targets to maintain freshwater intensity performance via water management plans where higher-intensity freshwater use is, or could become, an issue. We are also prioiritizing compliance with incoming sustainability reporting requirements, which are largely investor- and financial institution-driven.|
|Reputation: Changes in Customer Behaviour and Legal Challenges||Government and community relationships are strongly linked to both social and regulatory licenses to operate. Communities where we operate also bear potential impacts, including noise, dust, lights, traffic, etc. Legal challenges against oil and gas industry increasing. Adoption of EVs, opposition to fossil fuels by public. Windfall tax/solidarity contribution.||Delays or shutdowns in production per day; Windfall tax impact of 222MM in 2022 expected to significantly decrease in 2023 due to decrease in commodity pricing.||Non-technical Risk Management Policy and framework, being implemented in 2023 that provides for community/social impact assessments. Lobbying policy being implemented in 2023. Strategic community investment program Ways of Caring. Engagement with governments on specific issues such as windfall tax.|
|Medium-Term Transition Risks: 2026-2030|
|Technology||Our emission reduction projects and net zero to 2050 plan rely on technologies that are rapidly evolving, but in many cases unproven at larger scales and uneconomic for dispersed assets that are not, for example, near an electrical grid or pipeline gathering system. Assumptions by those outside the industry that broad generalizations on methane reduction being economical for all assets prove false. Some technology projects will fail; others will prove uneconomic.||Based on the capital and/or operating spend required to reduce our near-term carbon tax liability through emission reduction projects. To be recalcluated as part of the net zero by 2050 pathway plan.||Risk mitigated through careful and deliberate approach to new technology adoption. We have established sustainability project criteria that need to be met in order to move into the Vermilion Opportunity Development Process, providing various stage gates and offramps.|
|Market: Increased costs related to capital and financing||Pressure from stakeholders and limited access to debt, capital or insurance without the use of sustainability-linked financing arrangements||100 bps increase to total debt would represent $10MM||Establishment of 2 emission reduction targets and 1 ARO target, development of net zero by 2050 transition plan and 2030 target, to establish groundwork for sustainability-linked financing should it be required.|
|Medium-Term Physical Risks: 2026-2030|
|Acute: Increased Severity of Extreme Weather Events such as Cyclones and Floods||Vermilion's Wandoo field off northwestern Australia, Corrib project off the Irish coast and oil fields in the coastal area of SW France can be impacted by extreme weather events such as cyclones, resulting in down time or damage to infrastructure. Such events can also impact the downstream handling capacity of our partners, resulting in a limitation to the distribution and sale of our products.||Based on the value of the Wandoo Platform and a 1- in-10,000-year cyclonic event, the financial implications associated with damage due to a severe weather event is estimated at $274MM (total impact before insurance). The third-party costs associated with potential damages from extreme weather events are not tracked.||Vermilion maintains insurance as a mitigative measure to reduce the financial impact associated with damage to our assets due to severe weather events. We also have a robust asset integrity program that maintains our offshore facilities to their original design specifications of CAT 5 hurricane force. We also have protocols for monitoring and preparing for cyclones, and have invested in our emergency response capabilities in the event of damage to our assets due to severe weather.|
|Long-term Transition Risks: 2030-2050+|
|Technology: Substitution of existing products and services with lower emissions options, including market supply and demand||Although we see demand for oil and natural gas remaining robust in the short- to mid-term, it is likely that demand for oil and, to a lesser degree, natural gas will eventually fall as the energy transition evolves and various alternatives for renewable energy options become technologically and economically available. This could impact the need for our products in the longer term, post 2030 for oil and even further out for natural gas, potentially leading to lower commodity prices. As 2021-2022 have demonstrated, however, it will be critical to maintain adequate supplies of both oil and natural gas during the energy transition, to provide both accessibility and affordability.||Given the uncertain timeline and progression of the energy transition, and supply-demand dynamics, we are not using a financial forecast for impact. We are, however, using our scenario analysis to identify potential opportunities that would mitigate the risk to our products.||Based on our scenario analysis, we identified the need to explore new and evolving technologies and processes to identify synergistic fits for our business in both traditional and renewable energy production. We are pursuing this via our established track record in geothermal energy from produced water, for which our internal expertise in engineering, geoscience and drilling is particularly well suited. We are also investing in early R&D in other areas, such as biogas and the conversion of traditional oil and gas assets to geothermal and hydrogen production, to better understand the long-term potential.|
|Long-Term Physical Risks: 2030-2050+|
|Chronic: Rising Sea Levels||Chronic Physical: Potential rising sea levels could impact our Netherlands assets and operations due to issues such as flooding, transportation difficulties, supply chain interruptions and salinization of groundwater.||A rise in sea level could have an estimated financial impact of $571MM before insurance at our main Netherlands gas processing facility Garijp (GTC) caused by an extreme 1-in-10,000-year tide/extreme wind event.||Physical measures such as conventional berms may not provide complete protection. Based on Vermilion's assessment of less than 0.05% probability over the next 5 years we have accepted this level of risk, reviewing it annually.|
|Chronic: Changes in Temperature Extremes, Including Rising Mean Temperatures; Changes In Precipitation Patterns and Extreme Variability in Weather Patterns||Chronic Physical: Based on RCP4.5, which limits warming to 3C (overshooting 1.5-2C), our assets and operations could experience climate changes between 2041 and 2070 such as: North America: 2-3C increase, 12-14% increased precipitation, 7-8% increased aridity, >10 fewer frost days and <25% decrease in number of dry spells. Europe: 1-2C increase, 0-5% increased precipitation, 4-12% increased aridity, generally decreased frost days, with several areas seeing <25% increase in number of dry spells. Australia: 1C increase; 8% increased precipitation SMHI, Climate Information, https://climateinformation.org/, last accessed: 9 July 2023. Overall warming temperatures, greater precipitation and generally drier conditions (due to increased evaporation) may increase capital costs for drilling, completion and workover operations due to increased timelines, equipment breakdown and restricted access in North America (fewer frost days). They may also impact the health and safety of workers, and create variability and potentially more severe weather events such as flooding, drought and wild fires. Flooding could result in limited access to locations; droughts could impact the availability of surface and / or groundwater required for drilling and completion. This could negatively impact growth by increasing timelines and capital costs to bring on new production.||The financial implications of a single time event (i.e. wildfire) have been assessed on a case-specific basis. Vermilion maintains insurance to mitigate the potential impact of precipitation-related extreme events (i.e. Wild fire, Flooding)||Each of our assets is assessed for potential risks and hazards, including those associated with weather events, from lightning to flooding to wild fires. These risks are reviewed at least annually on a case-by-case basis as part of our Enterprise Risk Management system. Mitigation approaches such as clearance of vegetation around facilities, and physical barriers to flooding, are implemented as per our HSE Management System, to protect the health and safety of our workers, contractors and the public, and to protect the environment.|
|Short-term Opportunities 2022-2025|
|Products and Services, and Resilience: Development of New Products and Services through R&D and Innovation; participation in renewable energy programs||Directly related to the long-term transitional risk associated with the substitution of low-carbon products, we have the opportunity to participate in the development of those products. This has the potential to reuse our current infrastructure to provide alternative products, such as biogas or hydrogen, or to develop new products such as geothermal energy, creating new revenue streams.||As this opportunity is in the early stage of assessment, it is difficult to quantify the financial impact, but it is estimated at up to $2.0MM per year in revenue and returns on investment. Potential also exists for significant cost adjustments, as assets slated for abandonment would be repurposed to enable them to continue to generate energy.||We are leveraging our technical experts and partnerships to provide input into alternative and renewable energy projects as they are identified. An example of the development of low emission goods/services is our France-based industry partnership with Avenia to expand the use of geothermal energy production in oil production, and a geothermal association in Germany. We have also developed criteria for approving the move of these ideas into our Vermilion Opportunity Development Process, which provides clear gates and criteria for considering and implementing such projects.|
|Products and Services: Access to New Markets||More stringent global measures to reduce emissions from individual ships by 30% by 2030, established through amendments to MARPOL Annex VI, came into force on Jan 1 2020, limiting the sulphur content of bunker fuel to a maximum of 0.5%. Vermilion’s Australian Wando facility produces 4500 bbl/d of low sulphur crude oil that meets the needs of refineries in the short term to meet IMO regulations.||Vermilion conservatively foresees achieving a premium of $10/bbl for its Wandoo production over the next three years for cumulative incremental revenue of $49.3MM.||Vermilion continues to access local markets for our low sulphur production, while exploring regions to expand our operations. Our Marketing group ensures that Vermilion meets its contractual obligation with our buyers in terms of volumes, delivery dates and crude quality.|
|Medium-term Opportunities (3-6 Years)|
|Products and Services: Ability to Diversify Business Activities; Shift in Consumer Preferences||Vermilion maintains a diverse, stable global portfolio of oil and gas assets. Our strong record of safe and socially conscious development of energy resources has provided opportunities to access and develop these resources. We see our commitment to sustainability as core to our business, which has provided important organizational focus on emissions quantification and management. As consumers become more aware of and involved in the selection of their energy sources and associated carbon intensity, we believe that Vermilion will continue to be a top quartile choice, providing us with opportunities not available to peer organizations.||The financial impact of changing consumer preferences in difficult to quantify. We foresee revenue opportunities in two distinct areas. (1) In consumers selecting premium energy products, with these products demanding a higher price than other energy sources on the market; currently we estimate the potential impact of premium pricing in the long-term to be $1-5 per BOE, or $31.1MM/year based on $1 at 2022 production levels. (2) Access to more stringent markets, supported by our environmental and sustainability performance. Vermilion has entered into German, Hungarian, Croatian and Slovak oil and gas operations, which our sustainability performance has supported.||Based on stakeholder engagement, Vermilion believes that independent assessments of our operations by third parties are an important tool to demonstrate our responsible approach to production of essential energy, and generate premium. As a result, we have sought and achieved Equitable Origin responsible gas producer certification for 3 of our Canadian sites, the AFNOR CSR Committed label in France, and the Business Working Responsibly mark in Ireland. We are currently assessing the potential to expand these certifications.|
|Long-term Opportunities (6-50 Years)|
|Products and Services: Shift in Consumer Preferences||Under the Canadian Environmental Protection Act and based on commitments made by the Canadian and Alberta governments and energy utilities relating to COP21, there is a commitment to reduce emissions for coal-fired power generation. Based on this and with a number of power generating facilities in Alberta nearing the end of their service life, the demand for natural gas is likely to increase due to increased use of combined cycle gas turbine (CCGT) power generation.||The short term impact of this regulatory change on gas pricing is anticipated to be low and increase to medium in the mid- to long-term. Once the regulations have come into effect and the implementation period has occurred, there is a potential to see an impact on the marketable price and demand for natural gas. As a natural gas and oil producer, Vermilion would benefit from an increase in marketable prices for natural gas in our Canadian operations.||As we move further into the energy transition, we foresee natural gas playing an impactful role as a less carbon intense fuel than other options (i.e. coal). Vermilion continues to focus on the identification of resources and assets where we have the opportunity to apply our industry leading expertise to optimize production while reducing emissions. An example of our strategy to realize this opportunity is our asset base in Alberta, which currently includes a large liquids rich gas play. Vermilion's marketing team is also actively pursuing options for our natural gas production that will enable Vermilion to achieve the best netbacks on production.|
|Energy Source: Shift Toward Decentralized Energy Generation||The carbon intensity of energy used around the world has a direct relationship to where the energy product was generated. Vermilion’s business unit structure supports production and distribution of energy products into local markets. This strategy results in the significant reduction of the carbon footprint of our energy when compared to non-local sources.||The long-term financial impact of decentralized energy generation will depend on the speed of the energy transition balanced against the need for energy security. As such, we believe it is not possible to predict the financial impact at this time.||Vermilion continues to assess where we can access local markets for our production, while exploring regions to expand our operations. The actions taken in the past several years to realize this opportunity include alterations to our structure, our strategic objectives and our operational development plans to support Vermilion as a distributed energy provider, and exploration and development programs in regions with relatively low energy production as compared to consumption (i.e. Hungary).|
Our sustainability strategy rests on three pillars: Carbon, Conservation and Community.
Vermilion initially examined two energy transitions scenarios from the World Economic Forum. These compared a Gradual versus Rapid low-carbon transition based on inputs that included the International Energy Agency’s New Policies Scenario (Gradual) and Sustainable Development Scenario (Rapid), which meets the Paris Agreement’s goal to limit global temperature increases to 1.5 to 2ºC. Vermilion examined key factors impacting the speed of the transition – including the influence of new energy technologies; potential speed of their adoption; anticipated changes in policy and regulation; and emerging market pathways such as India – and resulting factors that could impact the company, including economics (demand, supply, consumer behaviour, and costs of energy); technological advancement; capital availability; government policy; and Company reputation. Among these, government policy was seen as most influential in the near to mid-term.
We applied these findings to Vermilion’s strategy to 2050 and beyond, described below. In particular, the scenario analysis led us to develop two emission-related targets that were announced in 2021: an aspirational commitment to net zero emissions in our own operations, including Scope 1 and Scope 2 emissions, by 2050, and a near-term target to reduce Scope 1 emissions intensity from our operations by 15 to 20% by 2025, using a baseline year of 2019. See Metrics and Targets, below, for more information.
In 2023, we augmented this work with a new analysis of both climate-related transition risks and physical risks. It should be noted that these scenarios are neither predictions nor forecasts; while they rely on the work of credible third-party organizations, they are constructions based on circumstances and assumptions that are highly vulnerable to macroeconomic and geopolitical changes. We have used them to inform our discussions on short, mid- and long-term business strategy, along with risk identification and management.
In our scenario analysis, our Executive Committee and Board of Directors reviewed an internally developed comparison of a diverse range of climate-related transition scenarios. We focused on changes in demand for oil and for natural gas based on a Reference (business as usual) case and a Climate Policy (government support for reduced greenhouse gas emissions) case for Global, Advanced Economy and Emerging Economy scenarios. Specific scenarios included those from the International Energy Agency (Stated Policy, Announced Pledges and Net Zero), Equinor (Walls, Bridges), and BP (New Momentum, Accelerated), along with reference cases from Exxon, OPEC and the Energy Information Administration. Our analysis showed energy demand declines over a 5- to 15-year horizon, but also showed greater impacts on specific assets based on government policies, location and logistics (landlocked vs waterborne), and proximity to petrochemical or carbon capture and sequestration capacities.
For example, our analysis for the Reference case in advanced economies points to strong policy uptake in Europe and Industrialized Asia, as well as energy efficiency improvements in the residential and commercial sectors. Oil demand declines as energy transition policy momentum pushes road transport towards electrification, which is further displaced by biofuels around 2030. Efficiency gains reduce consumption, while demographic trends work against oil demand. Climate Policy scenarios see advanced economies driving a rapid uptake of renewables to a near full phase-out of combustible natural gas use, leading to a finale in the role of gas as a transition fuel. Gas use in 2050 is mostly consumed by the petrochemical sector and for hydrogen production. Both scenarios rely on assumptions such as a continued improvement in advanced technology development for renewables (for example, battery improvement); and the addressing of supply chain human rights and environmental issues for critical minerals.
We also assessed the physical climate-related risks in each of our major operating regions using the International Panel on Climate Change’s Representative Concentration Pathway (RCP) 4.5 scenario. We selected RCP 4.5 because it reflects the physical risks our operations would face if CO2 emissions do not start declining until approximately 2045, reaching approximately half of 2050 levels by the end of the century. This is more likely than not to result in rising global temperatures above 2C; specific geographic scenarios are summarized above in the Risks table. While we have set emission reduction targets that are significantly more ambitious than this, using RCP 4.5 enabled us to identify impacts to operations such as rising temperatures, aridity and dry spells in many areas, rising precipitation in some areas, and rising sea levels. Since climate volatility would also increase, RCP 4.5 highlights the need to consider adaptation and mitigation tactics including changing work schedules for daily heat cycles, along with greater wind, storm and wildfire protection for our assets. We note that RCP 2.6 (which requires CO2 emissions to have started declining by 2020) relies not only on reducing emissions, but also on removing significant amounts of greenhouse gases from the atmosphere.
We have incorporated the results of the discussions around these scenarios into our business strategy work in 2023, including the development of our net zero transition plan (see Targets and Metric section) and our Risk identification and management process.
Our sustainability strategy continues to emphasize ensuring our resilience under various scenarios, and rests on three emissions-related activities: Focusing on efficient and responsible production of oil and natural gas, viewing emissions as a potential energy source:
Implementing technically and economically feasible options for emission reduction, covering combustion, flaring, venting and fugitive emissions:
Exploring new and evolving technologies and processes to identify synergistic fits for our business in both traditional and renewable energy production:
The other two pillars of our sustainability strategy reflect the interconnected nature of sustainability- and climate-related issues:
Water:We recognize water as a basic human right, and as a vital resource that is shared among many stakeholders in our communities. We are therefore committed to protecting both the supply and the quality of water sources in our areas of operation by:
Biodiversity: We are focusing on protecting the species and habitats around us by proactively identifying biodiversity risks and opportunities, and implementing associated plans.
Our communities comprise a wide diversity of people and organizations, but they have one key thing in common: they care deeply about the safety, environmental stewardship and corporate citizenship that we bring to our local operations. In addition, our people care deeply about their communities - whether we work there or live there, these are the places we call home. We therefore steward our operations and relationships to demonstrate our commitment to being a responsible producer and a valued and trusted neighbor and business partner, including: