Scenarios in the Capital Planning Process
We utilize scenarios in our strategic planning process to:
- Gain better understanding of external factors that impact our business.
- Test robustness of strategy across different business environments.
- Communicate risks appropriately.
- Adjust prudently to changes in the business environment.
By using our own energy planning model, we gain insight into various scenarios impacting future supply, demand and prices of key commodities. This enables us to understand the range of risk around commodity prices, and the price risk associated with various GHG reduction scenarios. We can then test our current portfolio of assets and investment opportunities against these future prices and see where weaknesses may exist, assisting with our capital allocation prioritization.
Analyzing and modeling potential outcomes is not the end of the process. We also have to decide when we should act and which actions to take, which can differ depending on the mix of technological change and government action. To help our decision-making, we set up a scenario monitoring system to identify crucial signposts that would indicate whether we are moving towards one scenario or another. We have a cross-functional team of about 50 subject matter experts within the company who enter events as they occur so that we can check, on a quarterly basis, movement toward any scenario. An analysis of each quarter’s monitoring and direction is then presented to executive management to assist in portfolio and other decision-making. The objective of this monitoring exercise is not to predict commodity prices, but rather to identify the leading indicators of moving to a dominant change in the business environment.
The scenario process also allows us to respond with appropriate actions that will create value in all future scenarios, such as:
- Lowering the cost of supply.
- Shortening project cycle times.
- Developing technology that reduces both costs and GHG emissions.
- Economically reducing product losses.
- Recycling, re-using and renewing inputs, such as water and heat.