Managing Climate-Related Risk
Guided by our long-standing ERM program, Chesapeake takes a methodical approach to identifying, assessing and managing ESG risks, including climate-related risks.
Risk Management Process
1
Identification
2
Assessment
3
Evaluation
4
Mitigation or Treatment
5
Monitor and Report
Three Lines of Defense Model
1st Line of Defense
Owns and Manages Risk
(Operational and Service Groups)
Encourages the department and business unit level to identify and control risks at the front lines of the organization
Internal risk owners (senior managers and subject matter experts) regularly review and assess company risks
An annual risk survey asks employees throughout the organization to review existing risk drivers and identify emerging risks
2nd Line of Defense
Oversees Risks, Controls and Compliance
(Internal Controls)
Provides impartial enterprise risk and compliance analyses
3rd Line of Defense
Provides Independent Assurance
(Internal Audit)
Uses a standardized, objective process to identify risk-based audits of department and business unit controls and processes
Reports directly to the Board Audit Committee
Assessing Risks through ERM
All leaders within the organization are asked to participate in the Annual Enterprise Risk Assessment and rank current risk drivers, provide context behind rankings and identify emerging risks. The ERM team also performs subject matter expert interviews across the organization to ensure a comprehensive process for risk identification at levels within the organization.
When identifying enterprise-wide risks, we measure severity based on two characteristics:
- Risk level (the potential for a risk to occur and its expected effects)
- Risk trend (the speed of the risk’s impact)
Relevant risks are linked to core ESG categories and regularly reviewed at the executive level to help ensure strategy alignment and appropriate risk response. Any risk owner can raise climate-related risk concerns with ultimate climate risk ownership attributed to our External Affairs.
At quarterly meetings, we report relevant climate-related risks to our Board’s ESG Committee under a broader category of sustainability. If a risk requires mitigation, we develop and execute plans to reduce the risk to an acceptable level.
The Board’s Audit Committee also reviews pertinent risks and mitigation plans quarterly through our ERM reporting process. This reporting allows the Board to gain insight into the company’s material risks and direct business strategies accordingly.
Identifying Climate Risks
Through our ERM process, we have identified climate-related risks that could impact our business. The TCFD separates these risks into two primary categories: transition (risks associated with transitioning to a lower carbon economy) and physical (risk specific to the physical impacts of climate change). For the purposes of this report, we categorize climate-related risks according to three time horizons:
<3 years
Short-term
3–5 years
Medium-term
5+ years
Long-term
| Risk | Category | Potential Impact | Timing | Mitigation Strategies |
|---|---|---|---|---|
| Policy and Legal | Transition | Increased operating and compliance costs | Short- to medium-term | Policy engagement, consortia and trade group involvement, emissions reduction practices, new technology adoption |
| Technology | Transition | Reduced demand for our product due to renewable energy sources; lost capital due to failed technology investments | Medium- to long-term | NEV team (explores emerging, industry-adjacent low carbon technologies); research, pilot testing and capital deployment for low carbon energy solutions; operational emissions reduction practices and operational efficiencies |
| Reputation | Transition | Negative corporate reputation perception; loss of access to capital and increased stakeholder activism (including increased political pressure and regulatory scrutiny) | Short- to medium-term | Emissions reduction practices, stakeholder engagement and reporting transparency, new technology adoption, strategic partnerships in the energy transition space |
| Market | Transition | Depressed prices affecting our financial performance | Medium- to long-term | Market sensitivity analysis, diversity in sales point (LNG), RSG as market differentiator, hedging activity |
| Extreme Weather | Physical | Damage to facilities, disruption of operations and / or safety incidents | Short-term and ongoing | Emergency preparedness, business continuity, disaster recovery planning and facility design |
Policy and Legal Risk
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 an inventory of GHG emissions and the SEC has proposed enhanced, standardized climate-related disclosures.
These current or pending regulations, including any new potential controls or fees on methane or carbon dioxide emissions, could expand because of targets set forth by the Biden administration or other regulatory agencies. U.S. targets, including the “nationally determined contribution” (NDC), a formal submission to the United Nations Framework Convention on Climate Change (UNFCCC), support the goal of reaching net zero emissions economy-wide by no later than 2050. States may also pursue the issue, enacting localized regulations governing or restricting GHG emissions.
We manage our policy and legal risk by collaborating with policy makers, complying with regulatory requirements, supporting science-based research and adopting innovative technologies to reduce our footprint.
Mitigation Strategies
Policy Engagement
We collaborate with stakeholders to develop policies that meet mutually beneficial environmental goals. We work with trade associations and other organizations to partner with governmental agencies in developing regulations.
Research
We partner with universities (and other institutions such as the Stanford University Natural Gas Initiative) 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.
Innovation
We’ve adopted a number of innovative technologies to better detect emissions and prevent leaks or loss. Some of these technologies include fixed methane emissions sensors, pneumatic retrofits, aerial methane detection, a comprehensive LDAR program and our WellTender mobile app.
Defining Sound Policy
Aligned with our policy engagement, we encourage policy that:
- Is based on scientific research
- Remains effective and equitable across regulated industries
- Recognizes the expected growth and need for modern, affordable energy and
- Accounts for continued technological and innovative advancements of our industry.
We endorse 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.
Technology Risk
With a shift to lower carbon resources, emerging technologies could displace or affect the competitiveness of more traditional energy and reduce consumer demand. Certain incentives (private or government) may encourage more adoption of these technologies. Also, as we continue to explore and adopt new technology within our industry, there are risks and uncertainties related to efficacy and capital deployment.
We continue to study and adopt emerging technologies and commercial solutions to increase our operational efficiencies and reduce our GHG emissions to be most competitive in a lower carbon future.
Mitigation Strategies
Emerging Technologies and Commercial Solutions
Our NEV team explores and advances emerging technologies and commercial solutions in low carbon energies.
We’re targeting investment opportunities adjacent to our core business that offer new ways for Chesapeake to enhance our strategies and diversify our portfolio. These opportunities include, but are not limited to:
- Geothermal
- Carbon capture and sequestration (CCS)
- Geologic energy storage
- Natural gas-derived fuels like low carbon intensity hydrogen and ammonia
Thorough Vetting of Capital Deployment
Through our NEV program, we use defined project objectives to direct our investments.
These objectives include:
- Maintaining positive return propositions and improving revenue generation
- Leveraging technical and operational expertise
- Driving lower end-use consumer costs
- Replacing high emission energy sources
Operational and Cost Efficiencies
We mitigate emissions while reducing our cash costs and decreasing cycle times. Our well productivity continues to increase as a result of enhanced operational efficiencies, allowing us greater flexibility in the changing energy landscape.
We are also adopting facility design improvements to reduce emissions at various points across our sites.
Engaging in Carbon Capture and Permanent Sequestration
In 2022, we entered into an agreement with Momentum Midstream that is expected to deliver 700 mmcf per day of Chesapeake natural gas volumes to premium Gulf Coast markets beginning in late 2024. Permanent carbon capture and storage opportunities (related to the associated natural gas processing) are available through the joint venture, of which Chesapeake owns a 35% equity interest.
Reputation Risk
Market and social pressures related to a lower carbon energy may result in increased reputational risks for our industry and decreased access to capital. 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.
We’re committed to transparent stakeholder engagement and forward-looking programs that work to reduce our industry’s environmental impact.
Mitigation Strategies
Responsibly Sourced Gas (RSG)
We were the first operator to achieve RSG certification across two natural gas basins. This independent certification verifies that our gas is produced to the highest ESG standards and meets strict emissions requirements, among a number of additional factors. RSG also provides additional data assurance as part of the certification process.
Stakeholder Engagement and Reporting Transparency
Through regular engagement, complemented by active listening, we respond to stakeholder concerns and continue to improve our operations.
Also responsive to stakeholder interest, we continue to evolve and enhance our sustainability reporting for greater transparency. We consult with an independent, third-party organization to review and verify our highest-profile sustainability performance metrics.
We also participate in industry efforts to standardize sustainability reporting and are increasing our communications to key stakeholders about our reporting. We commit to reporting progress on our climate-related pledges at least annually.
Proactive Sustainability-focused Programs
To meet our climate-related targets, we continue to build upon our emissions reduction practices and partner with peers and third-party organizations to advance emissions reductions as an industry. A few of our industry partnerships include:
The Environmental Partnership (TEP): Companies across the industry focused on information sharing around technically-feasible, commercially proven solutions, best practices and technological breakthroughs.
Appalachian Methane Initiative (AMI): A group of leading U.S. natural gas operators committed to enhancing methane monitoring across the Appalachia Basin and facilitating additional methane emissions reductions in the region; coalition fully funded by industry.
GTI Methane Emissions Inventory Project: Supported by Chesapeake data and operator expertise, GTI Energy will use funding from the Department of Energy (DOE) under the Innovative Methane Measurement, Monitoring and Mitigation Technologies (iM4) program to implement the Veritas measurement and reconciliation protocols to generate a detailed measurement-informed methane emission inventory of the Haynesville Basin.
Market Risk
The demand for 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.
Long-range planning and strategic financial analysis allow us to reduce market volatility risk.
Mitigation Strategies
Market Analysis
At least quarterly, we conduct market sensitivity analyses during which we evaluate our operational strategy and business portfolio against 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.
Hedging
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 natural gas pricing.
Diversified Market Access
In 2023, Chesapeake made significant steps to take advantage of a growing global LNG market. This included announcing separate long-term LNG supply partnerships with Gunvor and Vitol Inc. For a period of 15 years, both Gunvor and Vitol have committed to purchasing LNG supplied by Chesapeake (up to 2 mtpa and up to 1 mtpa, respectively).
Extreme Weather Risk
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 incidents 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.
Through the adoption of advanced technology, stringent processes to promote operational resilience and emergency preparedness, we protect our sites against physical risks.
Mitigation Strategies
Facility Design
Our facility design standards require several elements to protect our operational equipment from extreme weather-related events. Some of these elements include:
- Grounding and bonding systems to reduce the risks of lightning strikes
- Operational winterization measures to protect against freezing temperatures
- Elevated berms for secondary containment if a spill occurs
- Tank floodproofing measures
- Automated, autonomous process safety systems that safely shutdown production facilities
- Continuously (24/7) manned operations support center that monitors all facilities and wells for adverse conditions that may require executive action or emergency response
Emergency Response Planning and Business Continuity
Should extreme weather cause an emergency at one of our sites, our Emergency Response Plan provides employees with the framework and action steps critical for responding to incidents in a safe, effective and efficient manner.
If an emergency requires a well or operational 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 effects. These plans can include arranging alternate workspace, providing a secondary power source or engaging with employees outside of our standard communication channels.
Water Accessibility and Availability
We regularly assess water-related risks associated with freshwater use, water stress, extreme weather (including operating in floodplains) and water disposal/final disposition through our operational planning.
As described in our water stewardship position, we work to mitigate these concerns through site assessment; strategic and highly localized water use planning, sourcing, logistics and reporting; and by forecasting water needs. We continue to explore and adopt new technologies for operational and water use efficiency and water recycling.
Additionally, we monitor for drought and water scarcity, although our core operating areas have historically not been water stressed. We evaluate water stress levels as published through the World Resources Institute (WRI)’s Aqueduct Water Risk Atlas and seek to develop and implement strategies to reduce our freshwater use in these areas.
It’s company standard to position tanks on gravel, plastic or cement bases to prevent corrosion from standing water. Chesapeake also installs impervious secondary containment designed to last the lifetimes of the facility. To learn more about our water management practices, please read our 2023 Sustainability Report.
Climate-Related Opportunities
Through our nimble operating structure, emissions reduction efforts and commitment to sustainability performance improvements, we are well-positioned to capitalize on a lower carbon future — creating value for both the planet and our bottom line.
| Opportunity | Impact | Ongoing Activities |
|---|---|---|
| Resource Efficiency | Reducing operating costs due to operational efficiencies and emissions reduction programs | Operational / facility efficiencies Emissions reduction programs Fixed methane emissions monitoring system and LDAR program |
| Energy Source | Shifting to lower carbon energy sources for power generation to reduce costs and emissions | Alternative fuel (non-diesel) capabilities Industry-adjacent commercial solutions Emerging technologies |
| Product and Services | Focusing our portfolio on lower emissions products and exploring industry-adjacent commercial services/products to maintain competitiveness | RSG certification Emissions reduction programs Industry-adjacent commercial solutions Emerging technologies |
| Markets | Proactively positioning our portfolio to lead the RSG market and meet global LNG demand | LNG partnerships Strategic portfolio positioning Annual RSG recertification |
| Resilience | Maintaining our nimble operating structure and continuing to enhance our facility design to best respond to climate change (managing risks and seizing opportunities) | Geographically diverse portfolio Nimble operating structure Emergency response program and business continuity plan |
