Guided by our long-standing ERM program, Chesapeake takes a methodical approach to identifying, assessing and managing ESG risks, including climate-related risks. Risk identification is the responsibility of all Chesapeake team members according to our Three Lines of Defense model, with several teams specifically tasked with recognizing and managing risks related to climate change.
Three Lines of Defense Model
Business Plans and Strategy
1st Line of Defense
Operational and service groups
Identify and control risk at the front lines of the organization
2nd Line of Defense
Internal Controls team
Provides impartial enterprise risk and compliance analyses
3rd Line of Defense
Internal Audit team
Uses a standardized, objective process to identify risk-based audits of department and business unit controls and processes; reports directly to the Board’s Audit Committee
Through ERM, internal risk owners identify, review and assess the company’s risks. These risks are then linked to core ESG categories and regularly reviewed at the executive level to ensure strategy alignment and responsive risk mitigation.
The Board’s Audit Committee also reviews pertinent risks and mitigation plans at least quarterly through our ERM process. This reporting allows the Board to analyze the company’s material risks and direct business strategies accordingly.
Assessing Emerging Risks
On an annual basis, all leaders within the organization participate in risk surveys to review current risk drivers and identify any emerging risks. The ERM team also performs subject matter expert interviews across the organization to ensure a comprehensive process for risk identification.
When identifying enterprise-wide risks, we measure severity based on four characteristics. This process helps to ensure company-wide alignment on risk priority.
If a risk requires mitigation, we develop and execute specific plans to reduce the risk to an acceptable level.
Risk Measurement Characteristics
Potential for risk to occur
Speed of impact
Evaluation of controls and response plan in place to mitigate risk
Identifying Climate Risks
As part of our ERM process, Chesapeake has identified several climate-related risks that could impact our business. They include:
- Transition risks: Transition risks relate to the shift to a lower carbon energy supply.
- Reputation risks: Poor ESG performance could damage our corporate reputation among consumers, investors and other stakeholders.
- Market risks: Demand for oil and natural gas could be negatively impacted by market incentives to use alternative energy sources.
- Physical risks: These risks physically impact our operations, such as extreme weather conditions.
For the purposes of this report, we categorize climate-related risks according to the timelines below.
Defining Risk Horizons
Less than 12 months
5 or more years
Following our ERM process, once we identify a risk, we evaluate it against our risk-measurement characteristics. These characteristics closely mimic recommended TCFD disclosures.
|Risk||Impact||Potential Timing||Mitigation Strategies|
Regulatory and legislative
|Increased operating costs due to stricter controls, taxes or carbon pricing||Short- to Medium-term||Policy engagement, emissions reduction practices, new technology adoption|
Inadequate ESG standards and processes
|Negative corporate reputation perception, loss of access to capital and increased stakeholder activism||Short- to Medium-term||Emissions reduction practices, stakeholder engagement and reporting transparency, new technology adoption|
|Depressed prices affecting our financial performance||Medium- to Long-term||Market sensitivity analysis, diversified portfolio, RSG as market differentiator, hedging activity|
|Damage to facilities, disruption of operations and/or safety incidents||Short-term and ongoing||Business continuity and disaster recovery planning, facility design, emergency preparedness|
As the global economy shifts to a lower carbon future, legislative and regulatory proposals could restrict or tax GHG emissions and increase our operating costs relative to obtaining permits, operating our equipment and facilities, and adopting new technology.
At the federal level, the EPA has issued regulations that require us to establish and report a prescribed inventory of greenhouse gas emissions. These regulations, including any new potential controls on methane or carbon dioxide emissions, could expand because of goals set forth in the Paris Agreement. States may also pursue the issue directly or indirectly, enacting localized regulations governing or restricting greenhouse gas emissions.
Mitigation: We manage our regulatory risk through policy collaboration, supporting science-based research and adopting innovative technologies to reduce our footprint.
Through our policy engagement, we collaborate with stakeholders to develop policies that meet mutually beneficial environmental goals. We define sound policy as regulations that are based on scientific research and remain effective and equitable across regulated industries. Regulations should also recognize the expected growth and need for modern, affordable energy, as well as the continued technological and innovative advancements of our industry.
We continue to partner with universities and other institutions to support scientific research that enhances our understanding of GHG emissions and climate change. Our most recent partnerships have focused on the study of methane detection and reduction.
To meet regulatory requirements and voluntarily reduce emissions, we’ve adopted a number of innovative technologies to better detect emissions and prevent leaks or loss. Some of these technologies include continuous methane emission sensors, pneumatic retrofits, a comprehensive leak detection and repair (LDAR) program with FLIR cameras and our WellTender mobile app.
Opportunity: We view policy engagement as an opportunity to influence lasting and effective change. Chesapeake supports thoughtful, constructive federal regulations related to both GHG and methane emissions that encourage performance-based criteria to allow companies flexibility in determining the most efficient approach to achieving a determined metric. We also encourage complementing existing regulatory frameworks as opposed to creating duplicative systems.
Our focus is collaborative, which is why we work with trade associations and other organizations to partner with government in developing regulations. We endorse both API and AXPC’s Climate Policy and Principles as a guide for our climate advocacy efforts, and support policy that facilitates meaningful GHG emissions reductions; balances economic, environmental and energy security needs; and promotes innovation.
In addition to policy engagement, we’ll continue to voluntarily reduce our emissions through technology adoption and continuous improvement programs such as pursuing responsibly sourced gas (RSG) certification. Our pledges to end routine flaring across our operations and reduce our methane intensity and GHG emissions are also significant steps to reducing our climate-related impact.
Market and social pressures related to the transition to lower carbon energy may result in increased reputational risks for our industry and decreased access to capital. In particular, poor ESG performance may lead to subpar ratings from organizations that track ESG-related performance, impacting investment recommendations and actions by key investors, analysts and stakeholders. Negative ESG publicity may also affect public sentiment and, in turn, a company’s social license to operate.
Mitigation: We’re committed to transparent stakeholder engagement and forward-looking programs that promote ESG excellence.
Through regular engagement, complemented by active listening, we respond to stakeholder concerns and continue to improve our operations.
Each year we evolve and enhance our sustainability reporting to drive greater transparency. For our 2020 data, we consulted with an independent, third-party organization to review and verify our GHG intensity, methane intensity, TRIR and spills metrics. This added layer of accountability provides assurance for our highest-profile ESG performance metrics.
Proactive ESG-focused Programs
To meet our climate-related pledges, we continue to build upon our emissions reduction practices and adopt new ESG programs. One example is commitment to pursue RSG certification of production in our two natural gas basins. This independent certification verifies that our gas was produced to the highest ESG standards, meeting strict emissions requirements, among a number of additional factors. RSG also provides additional data assurance as part of the certification process.
Opportunity: We were the first company to announce a commitment to pursue RSG certification across two major shale basins, with a goal of completion by the end of 2Q 2022. We’ll deliver on this commitment while also continuing to enhance our sustainability reporting. We’re participating in industry efforts to standardize ESG reporting, particularly related to emissions, and increasing our communications to key stakeholders about our reporting. We commit to reporting our ESG performance at least annually, providing progress on our climate-related pledges to reach net zero direct GHG emissions by 2035.
The demand for oil and natural gas could be negatively impacted by regulatory or market incentives to conserve energy or use alternative energy sources in combating climate change. Lower demand for our products could temporarily or permanently reduce pricing should a significant share of energy reliance shift to other sources.
Mitigation: Thoughtful, long-range planning and strategic financial analysis, coupled with our diverse portfolio, allow us to reduce market volatility risk.
At least quarterly we conduct market sensitivity analysis during which we evaluate our operational strategy and business portfolio against a number of market factors that could impact company performance based on product demand and pricing effects. Should a scenario show an enhanced risk, we develop a targeted mitigation plan.
We strategically protect our capital program by using hedging to offset downside risk. By locking in future market prices, we protect our capital program and affiliated revenue should there be a dip in demand or a significant negative shift in oil and natural gas pricing.
Our diverse portfolio allows us to shift to the most profitable asset based on changes in market demand. By having both oil and natural gas assets in basins across the U.S., we can better react to market volatility.
Opportunity: We expect to be a significant producer of RSG, a differentiated product that we believe will increase in demand as our market adapts to a lower carbon future. Not only will we have significant volumes of certified RSG in our portfolio, but this production is strategically positioned near LNG terminals to meet the growing global interest in responsibly produced fuel. We also plan to apply the innovative technology used to fulfill our RSG certification to our mixed (oil and natural gas) assets to further improve our overall environmental performance.
Climate change may produce global physical effects, such as higher sea levels, increased frequency and severity of storms, droughts, floods and other extreme weather events. If any of these effects occur in our operating areas, we could experience an incident at our sites, including safety or environmental concerns, downtime or damaged equipment. Our operational resources could also become limited or disrupted, affecting our production and financial performance.
Mitigation: Through the adoption of advanced technology, stringent processes to promote operational resilience and emergency preparedness, we protect our sites against physical risks.
Our facility-design standards require several elements to protect our operational equipment from extreme weather-related events. Some of these elements include the installation of catenary protection systems to reduce the risks of lightning strikes; cables anchoring tanks to concrete bases for protection during flooding; operational weatherization measures to protect against freezing temperatures; elevated berms for secondary containment if a spill occurs; and solar panels to power remote monitoring and shutdown capabilities if other power is lost.
Emergency Response Planning
Should extreme weather cause an emergency at one of our sites, our Emergency Response Plan (ERP) provides employees with the framework and action steps critical for responding to incidents in a safe, effective and efficient manner.
While it’s our goal to continue operations during an emergency, sometimes we must temporarily shut down a site or facility. If an emergency requires a prolonged closure, we utilize our business continuity and disaster recovery process to maintain critical operations. Our recovery team assesses the business impacts of certain risks, including extreme weather, and develops enterprise response and recovery plans to reduce potential associated impacts. These plans can include arranging alternate workspace, providing a secondary power source, or engaging with employees outside of our standard communication channels.
Opportunity: With a geographically diverse portfolio and nimble operating structure, we can efficiently shift resources should a weather emergency significantly impact one of our basins. Although we believe our mitigation plans would not require the shut-in of wells or production, should this need occur, we’re well-equipped to make the operating changes necessary to continue to meet market demand through another Chesapeake asset.