carbon tracker occidental petroleum · this is supplemented by climate-related disclosures and...

Last updated: Nov 5, 2019 of 25

Carbon Tracker – Company engagement profile

Occidental Petroleum Description1: Occidental Petroleum Corporation (“Occidental”) explores for, develops, produces, and markets crude oil and natural gas. The Company also manufactures and markets a variety of basic chemicals, vinyls and performance chemicals. Occidental also gathers, treats, processes, transports, stores, trades and markets crude oil, natural gas, NGLs, condensate and carbon dioxide (CO2) and generates and markets power. Ticker (Bloomberg) OXY US Chairperson Vicki Hollub Home Country US CEO Vicki Hollub Market Cap ($bn) $37.5 Next AGM Unscheduled Enterprise Value ($bn) $46.7 Website www.occidental.com Total Debt / Total Capital (%) 32.6% Profile update November 4, 2019

Reserves Mix MMBOE Resources Mix MMBOE Production Mix KBOE/D

Reserves/ Production as of Dec 31, 2018

Not Disclosed

This is a climate scenario analysis and company engagement profile for Occidental developed by the Carbon Tracker Initiative to support the Climate Action 100+ Initiative (CA100+) shareholder engagement with Occidental, one of 33 global oil & gas producers. Our central analysis is focused on Occidental’s relative position on the global oil & gas supply curves and whether Occidental’s unsanctioned and potential oil & gas upstream projects are aligned with the Paris Agreement carbon budgets and climate goals. This is supplemented by climate-related disclosures and corporate governance analyses for indications and evidence of how Occidental is evaluating climate-related risks and whether climate targets aligned with the Paris Agreement are integrated into its planning process.

1 Description and market data from Bloomberg.

2002

750

Proven Developed Proven Undeveloped

419141

98

Crude Oil Natural Gas NGLs


Conclusions for Occidental Petroleum

Capex indicators Metric Comments

% of NPS upstream oil & gas capex outside B2DS budget—unsanctioned projects only, 2019-30 (% band) 2

90 - 100 %

% of NPS upstream oil & gas capex outside SDS budget—unsanctioned projects only, 2019-30 (% band)

40 - 50%

Upstream capex excluded as above NPS (shown as % of total capex)

25%

Sanctioned unneeded projects in 2018?

Undetermined We have not evaluated shale assets, see details below.

Company Carbon Budget Analysis Metric Comments

Minimum production reduction [3] to 2040 (vs 2019) of B2DS

N/A Assuming a linear decline rate, Occidental will have used all of its carbon budget before 2040.

Minimum emissions reduction to 2040 (vs 2019) of B2DS

N/A Occidental will have used all of its carbon budget before 2040.

Company Guidance and Targets Metric Comments

Production guidance (2019 vs. 2018) 9.9% Midpoint of 715-730 mboe/d production guidance for 2019. Also indicates business plan provides for 5-8% CAGR at $50/bbl.

Scopes 1& 2 emissions reduction Targets

N/A Occidental is developing a methane and carbon emissions intensity metric for 2030.

Scope 3 emissions reduction target None

Other indicators Metric Comments

Quality of emissions reduction Target (1-6), 1 is best, 6 is lowest

5 Since our last update, Occidental has introduced the above emissions reduction targets, moving up one level from “6” to “5”.

Management incentives Poor

Future prices used in planning and impairment.

Occidental does not disclose prices used in impairment testing or planning.

2 Carbon Tracker’s oil & gas climate scenario analysis uses International Energy Agency (IEA)’s New Policy Scenario (NPS) to reflect business-as-usual vs. IEA’s climate constrained Beyond 2 Degrees Scenario (B2DS) and Sustainable Development Scenario (SDS) 3 Production drop is defined as 2040 production compared to 2019 production, based on a linear decline over the period.


Table of Contents

CONCLUSIONS FOR OCCIDENTAL PETROLEUM 2

SCENARIO BENCHMARKING 4

CONCLUSIONS FROM CLIMATE SCENARIO ANALYSIS 5 POTENTIAL CAPEX TO 2030 – OIL FIELDS, NEW ASSETS ONLY 7 POTENTIAL CAPEX TO 2030 – GAS & GAS-CONDENSATE FIELDS, NEW ASSETS ONLY 8 HIGHEST CAPEX PROJECTS 10 CA100+ PEER GROUP COMPARISON 12

COMPANY PRODUCTION AND CARBON BUDGETS 14

COMPANY EMISSIONS REDUCTION AMBITION 16

SCENARIO MODELING 18

SCENARIO CONSTRAINT 18 SCENARIO METHODOLOGY 19 SCENARIO OUTPUTS 20 RISK ASSESSMENT - CARBON AND COMMODITY PRICES ASSUMPTIONS IN THE FINANCIAL STATEMENTS 21

GOVERNANCE STRUCTURE 22

REMUNERATION INCENTIVES 23

ENGAGEMENT 24

APPENDIX 1: LEAST-COST METHODOLOGY OVERVIEW 25

DISCLAIMER

Carbon Tracker is a non-profit company set up to produce new thinking on climate risk. The organization is funded by a range of European and American foundations. Carbon Tracker is not an investment adviser and makes no representation regarding the advisability of investing in any particular company or investment fund or other vehicle. A decision to invest in any such investment fund or other entity should not be made in reliance on any of the statements set forth in this publication. While the organizations have obtained information believed to be reliable, they shall not be liable for any claims or losses of any nature in connection with information contained in this document, including but not limited to, lost profits or punitive or consequential damages. The information used to compile this report has been collected from a

number of sources in the public domain and from Carbon Tracker licensors. Some of its content may be proprietary and belong to Carbon Tracker or its licensors. The information contained in this research report does not constitute an offer to sell securities or the solicitation of an offer to buy, or recommendation for investment in, any securities within any jurisdiction. The information is not intended as financial advice. This research report provides general information only. The information and opinions constitute a judgment as at the date indicated and are subject to change without notice. The information may therefore not be accurate or current. The information and opinions contained in this report have been compiled or arrived at from sources believed to be reliable and in good faith, but no representation or warranty, express or implied, is made by Carbon Tracker as to their accuracy, completeness or correctness and Carbon Tracker does also not warrant that the information is up-to-date.

About Carbon Tracker

The Carbon Tracker Initiative is a team of financial specialists making climate risk real in today’s capital markets. Our research to date on unburnable carbon and stranded assets has started a new debate on how to align the financial system in the transition to a low carbon economy.

www.carbontracker.org | [email protected]

The analysis and information in these profiles were prepared and conducted by: Mike Coffin, Analyst, Oil & Gas Andrew Grant, Senior Analyst, Oil & Gas Henrik Jeppesen, Head of Investor Outreach North America Robert Schuwerk, Executive Director, North America


Scenario benchmarking

Methodology: Carbon Tracker’s “Least-Cost Methodology” is further explained in Appendix 1. In short, Carbon Tracker’s analysis focuses on supply costs; it is assumed that the lowest cost projects will be most competitive in a low demand world. Capex spent on higher cost projects runs a greater risk of failing to deliver adequate returns and being wasted. Potential capital and production data sourced from Rystad Energy’s UCube database. Analysis relates to upstream oil and gas operations only. Potential capex/supply is capped at the level of the International Energy Agency (IEA)’s central New Policies Scenario (which assumes no further policy action on climate beyond that already announced, rather than full supply and considered by the IEA to be consistent with a 50% chance of 2.7°C warming). In effect, this assumes that projects above this level are already heavily discounted by investors. We focus on the delta from this level down to the carbon-constrained scenarios. Ignoring higher cost projects makes the results more conservative, but also means that not all opportunities to destroy value are reflected. Results are presented in terms of capex associated with projects that fit or don’t fit within each climate scenario “carbon budget”. Note that much of this capex will not have been committed to date. This represents an opportunity to destroy value, or the extent to which business models may have to change. Our analysis uses the climate benchmark scenarios developed by the IEA with the 1.6°C Beyond 2 Degrees Scenario (B2DS) and the 1.7-1.8°C Sustainable Development Scenario (SDS). IEA scenarios are sourced from the World Energy Outlook 2018 and Energy Technology Perspectives 2017.


Conclusions from climate scenario analysis Below, we provide the results of our least-cost application of various carbon budgets. While the detailed results are provided, we emphasize that the modelling exercise is based on long term estimates and hypothetical scenarios. We therefore continue to believe that results are best interpreted in a relative manner. According to our analysis, Occidental has approximately $16bn of capex opportunities between 2019 and 2030 for unsanctioned upstream oil & gas projects that fits within a business-as-usual scenario such

as IEA’s 2.7C New Policy Scenario (NPS cap).

However, in a world consistent with the demand levels from a 1.6C B2DS benchmark scenario there is no room for 93% of Occidental’s capex opportunities and no room for 49% of the capex opportunities in

a world consistent with the 1.7-1.8C SDS benchmark scenario.

Total Oil & Gas - Capex ($bn), new assets only 2019-2030

B2DS

1.6C

SDS

1.7-1.8C

Within budget 1 8

Outside budget (to NPS cap) 15 8 Total (NPS cap) 16 16

Excluded above NPS 5 5 Total available capex opportunities 21 21 % total capex above NPS 25% 25% % of NPS budget

Within budget 7% 51%

Outside budget (to NPS cap) 93% 49%

Potential capex %-range 90 – 100% 40 – 50% Numbers may not sum due to rounding

In this analysis we have first ignored the capex opportunities that would deliver new oil & gas supply beyond demand included in a business-as-usual scenario (NPS cap), but approx. $5bn or around 25% of Occidental’s total oil & gas capex opportunities above the NPS cap represent additional exposure to potential stranded assets.

Total Oil & Gas – Capex ($bn), new assets only 2019-2030

Oil Gas Total

Total within NPS cap ($bn) 15 1 16

Excluded above NPS ($bn) 4 1 5

Total available capex opportunities ($bn) 19 2 21

B2DS within budget (% of NPS budget) 0% 100% 7%

B2DS outside budget (to NPS cap) 100% 0% 93%

SDS within budget (% of NPS budget) 47% 100% 51%

SDS outside budget (to NPS cap) 53% 0% 49%

% total capex opportunities above NPS cap 22% 51% 25% Numbers may not sum due to rounding


When we look further into Occidental’s not yet approved capex opportunities within the oil and gas activities respectively, it is clear that the majority of new unsanctioned oil capex opportunities do not fit within the climate benchmark scenarios, with 100% falling outside the demand in B2DS and 53% outside the SDS benchmark, whereas all of Occidental’s gas capex opportunities fit inside the climate benchmarks in both B2DS and SDS (inside NPS), excluding 51% of gas capex that doesn’t fit inside NPS.

Oil and gas in sanctioned projects exceed 1.5 ̊C with no CCS4 The Paris Agreement set out an international commitment to limit the global temperature rise this century to “well below 2 degrees Celsius above pre- industrial levels and to pursue efforts to limit the temperature increase even further to 1.5 degrees Celsius”. In response, the Intergovernmental Panel

on Climate Change (IPCC) prepared a Special Report on Global Warming of 1.5C, published in

October 2018. In Carbon Tracker’s “Breaking the Habit” report, we draw on two illustrative 1.5C scenarios based on the IPCC’s Special report described as follows:

P1 – “A scenario in which social, business and technological innovations result in lower energy demand up to 2050 while living standards rise, especially in the global South. A downsized energy system enables rapid decarbonization of energy supply. Afforestation is the only CDR [carbon dioxide removal] option considered; neither fossil fuels with CCS nor BECCS are used.” P2 – “A scenario with a broad focus on sustainability including energy intensity, human development, economic convergence and international cooperation, as well as shifts towards sustainable and healthy consumption patterns, low-carbon technology innovation, and well-managed land systems with limited societal acceptability for BECCS.” While CCS is restricted in this scenario, it still includes large amounts and assume a little higher captured emission by 2040 than that captured in the SDS at the same point.

Comparison of 1.5C pathways to post-FID oil production

Conclusion for oil: In the P1 pathway, oil demand is satisfied by post-FID production alone, i.e. assets that are already producing or under development. In the P2 pathway, the addition of CCS makes room for some new oil projects, but in very limited quantities compared to the growth aspirations of industry companies.

4 This section is based on Carbon Tracker’s report ”Breaking the Habit—Why none of the large oil companies are “Paris-aligned,” (September 2019).

https://www.carbontracker.org/reports/breaking-the-habit/



Conclusion for natural gas: On a global aggregate basis, global gas demand under P1 is approximately similar to that which will be supplied by already-sanctioned projects, with a small requirement for new projects under P2. Given the very limited remaining carbon budget available for new and unsanctioned projects under a 1.5°C pathway, we have not performed an asset-level analysis by company as nearly all capex will be outside the budget

Potential capex to 2030 – oil fields, new assets only

Note - projects with a breakeven above $150 are aggregated at $150/boe

Total Oil - Capex ($bn) 2019-2030

B2DS SDS

Within budget 0 7

Outside budget (to NPS cap) 15 8

Total (NPS cap) 15 15 Excluded above NPS 4 4 % total oil capex above NPS 22% 22% % of NPS budget Within budget 0% 47%

Outside budget (to NPS cap) 100% 53% Numbers may not sum due to rounding


Potential capex to 2030 – gas & gas-condensate fields, new assets only

Beyond 2 Degrees Scenario (B2DS)

Charts are for global LNG, North America and Europe only. "Other" gas not shown Projects with a breakeven above $15/kcf are aggregated at $15/kcf

B2DS - Capex ($bn), 2019-2030

LNG N.America Europe Other B2DS Total

Within budget - 0 - 1 1

Outside budget - 0 - 0 0 Total - 0 - 1 1

Excluded above NPS - 1 - 0 1 % total capex above NPS - 100% - 2% 51% % of NPS budget LNG N. America Europe Other Total

Within budget - - - 100% 100%

Outside budget (NPS cap) - - - 0% 0% Numbers may not sum due to rounding


Sustainable Development Scenario (SDS)

Charts are for global LNG, North America and Europe only. "Other" gas not shown Projects with a breakeven above $15/kcf are aggregated at $15/kcf

SDS - Capex ($bn), 2019-2030

LNG N.America Europe Other SDS Total

Within budget - 0 - 1 1 Outside budget - 0 - 0 0

Total 0 - 1 1

Excluded above NPS - 1 - 0 1 % total capex above NPS - 100% - 2% 51% % of NPS budget LNG N. America Europe Other Total

Within budget - - - 100% 100% Outside budget (NPS cap) - - - 0% 0%

Numbers may not sum due to rounding


Highest capex projects

To meet the climate goals in the Paris Agreement, fossil fuel use must drop dramatically. The precise pathway is unknown, but with benchmark scenario analysis we can work back from the Paris temperature constraints to understand which fossil fuel projects might fit within that limited remaining budget. In our view, the only way that fossil fuel companies can be “Paris- aligned” is to commit to not sanctioning projects that fall outside this constraint5--and shrink fossil fuel production where necessary. The eternal search for growth in the context of finite planetary limits mean either the failure of climate targets, or investor exposure to “stranded assets” when industry dynamics change – or both.

Selected projects that Occidental sanctioned in the calendar year 2018 that are inconsistent with Carbon Tracker’s analysis of the SDS scenario by a margin of error (e.g. more than $10/bbl higher than our SDS breakeven cut off for oil projects):

Occidental - Largest sanctioned projects in 2018 – inconsistent with SDS (and B2DS)

Project Asset Field Type Category 2019-2030 potential

capex ($bn)

Breakeven band (15%

IRR)

None identified (though shale assets not considered)

- - - - -

• Capex shown relates to selected company's equity participation only. Undiscovered resources excluded.

• Projects shown have breakevens that exceed SDS marginal level by at least $10/bbl for oil assets, $1.5/kcf for gas assets

• Parameters: Minimum 2019-2030 capex: $200m; Minimum 2019-2040 production: -- • Excludes tight/shale assets

5 This analysis is further discussed in “Breaking the Habit” (Carbon Tracker, 2019)


Occidental’s portfolio of remaining unsanctioned projects with the highest capex that does not fit within the B2DS:

Top 5 Highest capex assets outside budget – remaining unsanctioned oil

Project Asset Life cycle

stage Category

2019-2030 potential

capex ($bn)

Breakeven band (15%

IRR, $/boe)

Permian Midland Tight, US

Midland_horizontal_TX_Oxy, US Discovery Tight/shale 1.6 50 - 60

Ghasha (Oil), AE Ghasha (Oil field), AE Discovery Conventional (land/shelf)

1.4 50 - 60


Spraberry Horizontal_TX_Oxy, US Discovery Tight/shale 1.3 50 - 60

Permian Central Platform Tight, US

Permian Central_TX_Oxy, US Discovery Tight/shale 0.8 130 - 140


Midland_horizontal_TX_Oxy, US Discovery Tight/shale 0.6 50 - 60

Capex shown relates to selected company's equity participation only. Undiscovered resources excluded

Top 5 Highest capex assets outside budget – remaining unsanctioned gas

Project Asset Life cycle

stage Category

2019-2030 potential

capex ($bn)

Breakeven band (15% IRR), $/kcf

Permian Delaware Tight, US

Penn Shale (Cisco/Canyon)_NM_Oxy, US

Discovery Tight/shale 0.9 12 - 13

Capex shown relates to selected company's equity participation only. Undiscovered resources excluded


CA100+ Peer Group Comparison

In Carbon Tracker’s climate benchmark scenario analysis, about 93% of Occidental’s unsanctioned capex opportunities (within the NPS cap) does not fit within the B2DS scenario. Occidental has about $15bn in capex for oil projects and some $1bn for gas projects inside the NPS Cap between 2019 and 2030. This places Occidental in the 4th quartile of CA100+ peers.

While our methodology first excludes Occidental’s potential unsanctioned upstream projects with breakeven costs higher than fit within the business-as-usual scenario (IEA’s NPS), in reality most oil & gas companies still have significant project opportunities beyond this NPS level. For example, for Occidental we excluded potential upstream projects for approximately $5bn ($4bn in oil and $1bn in gas) between 2019-2030 equal to about 25% of Occidental’s total potential upstream capex

opportunities, which places Occidental in the 1st quartile of CA100+ peers.


The CA100+ initiative have 33 oil & gas producers and here we have segmented them into 4 groupings; Majors, Government Controlled, Independent Oil companies (IOCs) in North America and Europe (NAEUR) and IOCs in Rest of the World (covering Asia, Pacific and Africa). Occidental belongs to the group of North American and European (NAEUR) and compared to peers

Occidental is in the high end of exposure to unneeded unsanctioned projects outside of the 1.6C B2DS climate benchmark, whereas Occidental has relatively low exposure to high cost projects that do not fit within the business-as-usual NPS cap.

For further details of Carbon Tracker’s Scenario Analysis Methodology see End Notes to this document or Carbon Tracker’s recent documents:

o Breaking the Habit—Why none of the large oil companies are “Paris-aligned,” (Carbon Tracker, 2019)

o Balancing the Budget: Why deflating the carbon bubble requires oil & gas companies to shrink (Carbon Tracker, 2019)


https://www.carbontracker.org/reports/balancing-the-budget/


Company Production and Carbon Budgets

Carbon Tracker uses a least-cost framework to understand which fossil fuel projects fit in a low carbon future and which don’t. We have translated our economic framework into an emissions profile resulting from least-cost investment behaviour. The result is a series of company level “carbon budgets” – the limit on aggregate carbon dioxide emissions that each company can release on a forward-looking basis, a product of those projects in its portfolio that fit into a given low-carbon demand scenario determined entirely on cost grounds. These company-level budgets overcome a major shortcoming of intensity-based company targets that do not reflect the absolute emissions limits inherent in our climate system and are not least-cost based. Notably, our budgets factor in the carbon efficiency of production, based on average carbon intensities as at today. In this approach, budgets are adjusted so that companies with worse-than-average carbon intensity are encouraged to lower their average intensity. We combine Rystad’s estimates of production lives for both existing projects and those that are unsanctioned which fall within the B2DS and SDS budgets, respectively, to provide an illustrative model of production over the short term, assuming a linear decline. This is then compared to company guidance, where available. It should be noted that the linear production decline rates introduced by Carbon Tracker are neither a forecast nor projection of future company production. We have provided it to characterize the delta between company guidance and what would be required in a low-carbon transition on a basis that is consistent for all companies covered.

Occidental - Production and Carbon Budget (2019-2040), Carbon Tracker methodology Aggregate

Sanctioned CO2

Emissions Budget

(2019-2040) 6

Minimum Production Reduction

Minimum Emissions Reduction

Zero Year7

2040 (vs 2019)

Annual Decline

2040 (vs 2019)

Annual Decline

B2DS 1.2 Gt CO2 - - - - Pre-2040

SDS 1.5 Gt CO2 80% 3.6% 80% 3.6% Post-2040

6 Company Carbon Budgets are calculated based on the aggregate of a companies' emissions or using an industry-average emissions intensity applied to production (marked with *). 7 In the corporate context, “net zero” is the point at which an individual company’s emissions must cease entirely. “Zero Year” is the year in which a given company’s emissions would reach zero on a linear projection; for each of the majors this falls after the 2040 period end. While global emissions may need to reach net zero in a certain time, for some companies the zero year will come earlier.


Occidental – Official Production Guidance

On Capex Unclear, company spent $1.3bn in Q1 2019

On Production Guidance of 715-730 MMBOE for 2019, compared to 658 MMBOE produced in 2018.8

Comment: Guidance is based on mid-point of production guidance. Based on 2019 production, and a forward linear projection based on the aggregate production volume of Occidental’s project portfolio that fits within a 2-degree scenario, production would reach zero before 2040. A linear projection is used to enable comparison between companies, and different company trajectories are possible. For more discussion see “Balancing the Budget”.

8 We project the 5% production growth in our modelling of Occidental’s production growth post-2019.

https://www.carbontracker.org/reports/balancing-the-budget/


Company Emissions Reduction Ambition

It is often said that ‘you can’t manage, what you don’t measure’, thus disclosed climate target(s) are important indicators for investors to judge whether the company intends to make its business compliant with the targets and ambitions of the Paris Agreement. For fossil fuel companies, Carbon Tracker’s starting point is the “carbon budget”, or the finite amount of emissions that can be released into the atmosphere to result in a reasonable probability of a given level of warming. Coming directly from climate science, this fundamental principle illustrates that ultimately the planet must reach net zero emissions – if global emissions are still being added every year, the atmospheric concentration of greenhouse gases will continue to rise, and hence so does the temperature. Hence, to meet climate goals, it is an unavoidable consequence that fossil fuel use must drop dramatically. To be meaningful in reducing overall emissions, and stabilising global warming to within Paris goals, Carbon Tracker believes, the only way that fossil fuel companies can be “Paris- aligned” is to commit to not sanctioning projects that fall outside this constraint, thus companies must:

o set corporate climate targets driven by Paris-compliant capex plans, o use targets that cover scope 1, 2 and 3 emissions, and o shrink where necessary.

A note on emission intensity targets - many companies set targets on an emissions-intensity basis - a relative measure of the level of emissions per unit of activity. However, a company can meet intensity target by adding zero/ low emission renewables to activities, while maintaining or even increasing its oil & gas production, thus without reducing absolute emissions from oil & gas production. Scope 3 emissions (from use of their products) –any commitment to reduce emissions is a positive step, but few oil & gas companies include scope 3 emissions although c.85%9 of lifecycle emissions from oil & gas. Thus, we believe that for a company to have its carbon targets recognised as “Paris-compliant” they must factor in scope 3 emissions to have effect. A 10% reduction in Scope 1 and 2 sound impressive but only equate to a 1.5% reduction in total emissions and a net-zero commitment on scope 1 and 2 will leave total emissions at 85% of present-day values under flat production. The fine print on targets - many of the targets evaluated involve further limitations that lessen the scope of intended emissions reductions. For example:

• Including only operated assets: Oil & gas projects are usually owned in partnership with multiple companies or by requirement, a state-owned partner. One partner (usually largest shareholder) will have “operatorship”, but a material part of most companies’ assets are operated by others and often not included when targets are set. Only 60% of oil majors’ upstream production is operated by themselves, thus we believe targets should be set on an “equity” basis.

• Direct investments: Many companies invest directly in other entities (i.e. BP owns 19.75% of Rosneft), thus BP will profit from the sale of Rosneft’s hydrocarbons, but very few targets include emissions associated with production and sale from direct investments.

• “Routine” vs. “total” flaring: Many companies set targets on routine flaring, but not total flaring although non-routine flaring is often a fundamental part of the extraction of hydrocarbons.

9 85% based on Shell’s analysis. See https://www.shell.com/energy-and-innovation/the-energy-future/what-is-shells-net-carbon-footprint-ambition/faq.html

https://www.shell.com/energy-and-innovation/the-energy-future/what-is-shells-net-carbon-footprint-ambition/faq.html

https://www.shell.com/energy-and-innovation/the-energy-future/what-is-shells-net-carbon-footprint-ambition/faq.html


Compliance Indicator—Ambition:

1 Commitment to a scope 1-3 emissions reduction plan or fossil fuel investment reduction plan modeled on an absolute carbon budget corresponding to a well-below 2°C pathway.

2 An investment strategy that permits only sanction or acquisition of projects that the company has contended would be economically competitive on a 2°C or lower pathway.

3 Commitment to a scope 1-3 emissions reduction plan or fossil fuel investment reduction plan modeled on a relative measure of carbon intensity corresponding to a 2°C or lower pathway.

4 Commitment to a scope 1-3 emissions reduction or relative fossil fuel investment reduction plan, that is not linked to 2°C or lower pathway.

5 Commitment to an emissions target (absolute or relative), scope 1-2 only. X

6 No emissions target or fossil fuel investment reduction plan.

Occidental – Climate-related targets

May 2019 Scopes 1 & 2: Limit carbon intensity of new oil and gas field production by 2020 to a level that is 10% below 2018 levels.

May 2019 Scope 1 and 2: Support OGCI target of methane emissions intensity of .25 percent by 2025.

May 2019 End routine gas flaring by 2030.

Comment: Since our last update, Occidental has introduced the above emissions reduction targets, resulting in a new grade of “5”. Occidental is also developing a CO2e methane and carbon intensity metric and target for 2030, with interim targets. While the details have yet to be disclosed, the target will likely include offsets from the sequestration of carbon via the company’s enhanced-oil recovery operations. They may also seek to generate offsets via investments in technology that allows for emissions reductions by others.


Scenario Modeling

It is generally acknowledged that the carbon embedded in global reserves exceeds that which can be combusted in a Paris-aligned scenario. Our review evaluates company progress on assessing and disclosing the constraints that a global carbon budget imposes on the company. We examine three aspects: 1) Scenario constraint: We have compared the company’s low carbon scenario(s) to the IEA’s B2DS

scenario and others (the basis of our cost curve analysis), to see if the scenario is stretching.

2) Scenario methodology: In addition, we have evaluated whether the company takes a robust, least-cost economic approach to evaluating the risks and whether it discloses key assumptions.

3) Scenario outputs: We also examine the outputs; a company’s willingness to quantify the results is a

proxy for how seriously it is examining the risk.

Scenario Constraint

10

Total Emissions from Energy

Scenario (+/- IEA B2DS) 2010 2025 2030 2040

IEA NPS 0% 25% 57% 192%

IEA SDS 0% 9% 15% 44%

The company’s scenario work is largely unchanged compared to the previous year.

10 Occidental Petroleum, Climate-Related Risks and Opportunities: Positioning for a Low Carbon Economy, p.31 (May 2019).


Scenario Methodology

We evaluate whether a company has taken a least-cost approach to analyzing whether its assets would be economically competitive in a low-carbon transition, based on a related carbon budget.

Methodology 2018 Analysis 2019 Analysis

Analyzed? Quant.

Disclosure? Analyzed?

Quant. Discloure?

Well-below 2°C Compliance: Demand profile consistent with a well-below 2°C scenario for company's products selected and disclosed.

Yes No Yes No

Supply/demand fundamental analysis: Relative position of company's cost of supply vs. competitors in market modelled for all sanctioned and unsanctioned projects at asset level, even if details not revealed.

No No No No

Project Assessment: Viability in given scenario determined by relative positioning on a supply curve for the relevant market(s) OR use of appropriately conservative price assumption (defined in note#).

No No No No

# "Appropriately conservative price assumption" should reflect a market with materially declining commodity demand. The price should be less than company BAU internal price estimates. It should be the lower of:

1. The lowest price used by the company in its internal planning, strategic, or sensitivity testing process, or 3. The price modelled internally by the company as part of its 2°C scenario assessment.

Analysis of Occidental’s – Climate Scenario Methodology What has changed in 2019?

Occidental’s approach to scenario analysis is largely unchanged from the previous year.

Occidental uses the prices in the IEA SDS scenario alongside the carbon prices used therein to test the viability of its asset base. Occidental notes that carbon prices of $63 and $140 per metric tonne CO2 add only $1.70 and $3.80, respectively, to Occidental’s costs, the impact of which is offset by the commodity prices in the SDS, which are generally higher than the reference prices Occidental uses in its base scenario. We would question whether the oil prices assumed in the IEA’s low carbon scenario present an appropriately conservative test, being higher than current prices despite a much weaker demand environment.

To score higher on our analysis, Occidental must compare the carbon budgets for oil and gas in 2°C or lower scenario to assess the relative position of the company’s current and future assets.


Scenario Outputs

Here we evaluate whether the company has generated and disclosed useful outputs from its scenario analysis and work. Markets will likely select which resources are ultimately produced and sold; absent other information, these will likely be the lowest cost. A company applying a low-carbon scenario to its own assets should therefore evaluate what portion of its potential production would be competitive in such a scenario.

Outputs 2018 Analysis 2019 Analysis

Analyzed?

Quant. Disclosure?

Analyzed? Quant.

Disclosure? Disclosure of segment-level economic impacts, e.g. NPV impact to portfolio, from application of a well-below 2°C demand scenario to portfolio as a whole.

Yes Yes Yes Yes

Particularly affected or vulnerable individual projects (sanctioned and unsanctioned) identified.

No No No No

Identification and disclosure of supplementary metrics, i.e., discounted net cash flows from all sanctioned/ unsanctioned projects, discounted net cash flows from only well-below 2°C-compliant projects, volumes, percentages, or associated capex impacts in 2°C scenario calculated.

No No No No

Occidental- Outputs Narrative What has changed in 2019?

Occidental’s scenario outputs are largely unchanged from the previous year.

Occidental concluded that the impact on reserves would result in a 1% reduction in volumes, but the there was “no negative impact” on the net present value of reserves. It therefore concluded that there was no risk of stranded assets. Occidental must improve the structure of scenario analysis, per above, to improve its outputs.


Risk Assessment - Carbon and Commodity Prices Assumptions in the Financial Statements

In our 2019 update, we focus on company forecasts (for commodity and carbon prices) as a proxy for how robustly companies are evaluating climate related risks. Companies might anticipate lower prices in a lower demand scenario. The use of lower price expectations in the impairment testing process may therefore indicate a more conservative approach. In their financial statements, companies must make certain assumptions about future commodity prices to test for impairments, among other things. Some regulatory guidance (i.e., U.S. SEC Staff Accounting Bulletin 114), indicates that companies should utilize assumptions in the financial statements consistent with those used in the planning process. We therefore examine whether companies have disclosed conservative commodity and carbon price11 planning assumptions and incorporated them into financial reporting, or not. Even if permitted under existing accounting practices, the use of high future and increasing oil prices may have the effect of masking the financial risk to marginal projects.

Occidental uses carbon prices of $50 tonne/CO2 (up from $40/tonne CO2 in 2018) for investment projects above $5 million. However, based on Occidental’s scenario analysis, this has an impact of less than $2/bbl on costs.

Occidental - Commodity price assumptions as of 2018 Carbon Tracker Review 2018 2020 2030 2040 2050 Forecast or planning x x x x x

Impairment testing x x x x x

2C scenario x x x x x

Occidental - Commodity price assumptions as of 2019 Carbon Tracker Review 2019 2020 2030 2040 2050 Forecast/ planning x x x x x

Impairment testing x x x x x

2C scenario x x x x x

Occidental has not disclosed any commodity price assumptions used in planning projects or in their low carbon scenario. However, Occidental states that, “For impairment testing, unless prices are contractually fixed, Occidental uses observable forward strip prices for oil and natural gas prices when projecting future cash flows. Prices are held constant for periods beyond those covered by forward strip prices.”12 The company does not appear to apply assumptions from its scenario analysis (which relies on IEA SDS commodity and carbon prices) to project planning and impairment testing.

For further details see Carbon Tracker’s documents: o Reporting for a Secure Climate: A model disclosure for upstream oil and gas (Carbon Tracker, 2019)

11 We have noted elsewhere that the use of proxy carbon prices may not constitute robust transition risk planning when companies use prices that are (a) insufficient to test a Paris-compliant scenario, (b) apply only to Scope 1and 2 emissions, and/or (c) fail to factor in the impact those prices would have on demand. 12 FY 2018 Annual Report, at p. 32.

https://www.carbontracker.org/reports/reporting-for-a-secure-climate-a-model-disclosure-for-upstream-oil-and-gas/


Governance Structure

2019 Analysis

1. Does the board or one of its committees oversee climate risk assessment?

Each of Occidental’s four standing committees is involved in climate-related work (Audit; Environmental, Health & Safety (EHS); Executive Compensation; Corporate Governance, Nominating & Social). The Audit Committee is responsible for oversight of the firm’s risk management processes on climate while the EHS oversees disclosure and shareholder engagement on climate-related risks.

2. If yes, which committee and board members?

Audit Committee Members: Avedick B. Poladian (Chair); Howard I. Atkins; Carlos M. Gutierrez; Elisse B. Walter EHS Committee Members: John E. Feick (Chair); Howard I. Atkins; William R. Klesse; Jack B. Moore; Elisse B. Walter


Remuneration Incentives

2018 Analysis 2019 Analysis

25% of Occidental’s 2017 bonus was determined based on operational metrics, which includes production from ongoing operations (amongst other metrics). As a direct incentive to increase production growth, we consider this “poor”. The annual bonus also included core EPS as a financial metric, which can be seen as another incentive to grow albeit with other factors important as well as top line production. 2018 metrics for annual bonus have not been disclosed, but we note the addition of CROCE alongside TSR in the 2018 LTIP. We prefer returns-based metrics and are encouraged to see them increase in popularity. We also note the intention to add "an executive compensation metric related to the advancement of CCUS" and await further details.

For 2018, CROCE was introduced into the LTIP, which was previously based entirely on TSR. We see CROCE as a growth neutral metric. 25% of the annual bonus is determined based on operational metrics, which includes production from ongoing operations (amongst other metrics). As a direct incentive to increase production growth, we consider this “poor”. The annual bonus also included core EPS as a financial metric, which can be seen as another incentive to grow albeit with other factors important as well as top line production. Last year we also noted the intention to add "an executive compensation metric related to the advancement of CCUS" (stated for example in Occidental’s March 2018 “Climate-Related Risks and Opportunities” report) and continue to await further details.

Poor Neutral Good Poor Neutral Good

For further details see Carbon Tracker’s documents: o Paying with Fire: How oil and gas executives are rewarded for chasing growth and why shareholders could get

burned, (Carbon Tracker, 2019)

https://www.carbontracker.org/reports/paying-with-fire/

https://www.carbontracker.org/reports/paying-with-fire/


Engagement

Top 3 Questions for Management

1

Occidental seems to suggest that the prices in the IEA SDS scenario may not fully reflect market risk from a low-carbon transition. Will it improve its scenario analysis by testing against lower, more conservative prices?

2

Given that Occidental is using forward strip prices to test for impairments, is there any genuine commercial sensitivity concern to disclosing the prices used? Are they consistent with the company’s planning prices?

3 If Occidental’s value proposition includes the deployment of CO2 for enhanced recovery and sequestration, will it actively advocate for carbon pricing?

Top 5 Shareholders (as of November 4, 2019, Bloomberg terminal)

1 The Vanguard Group 7.02%

2 Dodge & Cox 6.08%

3 BlackRock 5.52%

4 State Street 4.09%

5 T Rowe Price 3.73%


Appendix 1: Least-Cost Methodology Overview

Carbon Tracker has used versions of our framework since 2014 in key reports such as 2 Degrees of Separation (2017, 2018) and Mind the Gap (2018), and recently updated in Breaking the Habit (2019) where the methodology is described fully. The following is a brief summary:

• We use development scenarios (described below) from the International Energy Agency (IEA)

and Intergovernmental Panel on Climate Change (IPCC) to define benchmark future global oil

and gas demand over the period to 2040. Oil is modelled globally, with regional gas markets.

• Rystad Energy’s upstream oil & gas database, UCube, is used to provide details on supply at the

individual project level from both sanctioned projects (those already on production or under

development) and potential supply from unsanctioned projects (exploration discoveries, or

undrilled targets).

• Potential supply is compared to demand under the given development scenario.

• Unsanctioned projects are ranked by breakeven cost at a common internal rate of return (15%),

to generate a supply curve. These are then used to fill remaining demand on a least-cost of

supply basis.

• Each project is then categorized as being inside/ outside under each scenario; those projects

with the highest breakeven costs are not required under any of the scenarios considered.

• In the capex numbers above, the supply curve has been "capped" at highest demand scenario

we run—the New Policies Scenario (NPS). This has the effect of excluding the highest-cost

sources of supply, resulting in a more conservative measure. We focus on the "misread" gap

down from the NPS to lower demand scenarios.

• Projects are aggregated by project owner (company) to indicate the percentage of each

company’s capex that would / would not go ahead under each scenario based. This gives an

indication of the opportunity to destroy value for each company and allows comparison

between companies on a consistent basis.

Development Scenario Overview This report focusses on two key scenarios, published by the IEA which include some CCS:

Beyond 2 Degrees Scenario (B2DS) – we estimate that our interpretation is approximately consistent with a 50% chance of 1.6°C warming. Sustainable Development Scenario (SDS) – noted by the IEA to be comparable to other published scenarios in the range 1.7-1.8°C in terms of trajectory over the period to 2040 (with no probability estimate provided).

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