Environmental Social Governance Discussion

Fuels InstituteSeptember 29, 2020

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ESG Overview

• Why does ESG matter to your organization?• Impact of ESG on share price: SRI / ESG driven institutional dollars• Applicability to a privately held company

• Impact of ESG on operations and reporting

• Applicability – this is not Sarbanes Oxley! • ESG requirements have already arrived, market driven• Formal i.e. legal / regulatory requirements likely to follow• ESG is a puzzle that can be a cost center only OR it could capture and

drive operational improvements

Why ESG Matters

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More investors / access to capital (Equator Principles, IFC, SASB, UNPRI etc.)

Operational cost savings - cash flow risk management

Reputational & legal risk management

Market & accounting outperformance

Positive signal to external ratings agencies

Broad ESG Examples

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• Environmental. One-time plastics usage; water usage and conservation; wastewater treatment; fracking; palm oil deforestation; brown sites; long-term resource planning; climate risk; conflict minerals; solar and alternative energy.

• Social. Corporate reputational risks; pay equity; advancement within the workplace; the #MeToo movement; investor avoidance screens; human capital management; animal welfare; good corporate citizenship; and LGBTQ issues related to corporate policies.

• Governance. Cybersecurity; experienced, independent and diverse board members; separate chair/CEO; executive pay and compensation; compensation linked to long-term performance; director compensation and perks; succession planning; diversity initiatives; board education; ethics; accounting and business practices; knowledge of stewardship and governance codes adopted in U.S. (and globally if applicable); blockchain; artificial intelligence evolution; changing regulatory environments; and a long-term vs. short-term performance focus.

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Environmental Social Governance

An approach to generate higher financial returns and positive societal impact.

• Corporations— Management is able to monitor how efficiently and effectively the company utilizes resources that impact its overall profitability. • Companies save/retain more money

• Investors – ESG is exponentially growing as an investment strategy because it helps to identify companies with superior business models. • Investors make more money

ESG Overview: A Market Driven Approach

Women & Millennial investor interest is on the rise

ESG as risk mitigation: sharpen focus on material issues that drive value

LT investment performance

$1 in every $4

Financial entities are incorporating key ESG risks and opportunities within their portfolios; making sure their investment managers integrate ESG analysis to enhance returns and minimize downside risk.

• Intangible assets (eg: brand equity and IP) analysis is paramount to risk/value.

• S&P 500 intangible assets have gone from less than 30% of book value in 1998 to 65% in 2017

Investment Firms & Asset Mgmt

Note: Different entities are using their own internal processes for identifying the most challenging and pressing ESG issues, and then factoring that information into investment criteria.

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Case StudyTrends

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Market Movers, e.g. Larry Fink

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ESG vs S&P 1500 Growth of $10,000, January 1 to April 1, 2020 *slide courtesy of Jeff Hove, FI

Jan. 1 – March 31, 2020

ESG: $8,120 – lost 18.8% S&P 1500: $7,950 lost 20.5%

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ESG vs S&P 1500 Growth of $10,000, April 1 to August 24, 2020*slide courtesy of Jeff Hove, FI

April 1 – Aug. 24, 2020

ESG: $13,800 – gained 38% S&P 1500: $13,390 – gained 33.9%

Bank of America

“Asset managers are likely to disclose how they have embedded climate risk into their overall risk management, and how these risks and opportunities have affected their strategies. This includes the role of the board and the role of management.”

Pensions & Investments

“Financial professionals expect E and S factors to impact share prices and bond yields more than twice as much as they currently do in five years.”

CFA Institute

Current Event Headlines

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US Sustainable Investment Forum

“Often, a shareholder resolution will fail to win a majority of the shares voted, but still succeeds in persuading management to adopt some or all of the requested changes because the resolution was favored by a significant number of shareholders.”

ESG Overview: Oil and Gas Industry

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Revenue/Costs; Assets/Liabilities; Cost of Capital

Equity & Debt

* Dividend or interest payments

OpEx & CapEx

* Price/availability of inputs; assets; cost of regulation

Discount Rates

*May be too low–not reflect true investment risk

Accounting Ratios

* Debt Service, IRR, ROE, Current Ratio

Changes to Cash Flow

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ESG Trends: US House Financial Services Committee, updated 1/7/20

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Why should a privately held company consider an ESG program?

• Materiality determination• ESG performance is directly related to revenue and costs• if ESG metrics improve so should overall performance

• Robust reporting for external stakeholders on material issues• Apples to apples comparisons vis a vis competitors• Differentiator for investors• Precise (accounting) language to communicate existing initiatives

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Case StudyTrends

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Case StudyTrends

Case Studies

Trends

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ESG Overview:Options for Next Steps (continued)

Overview of an ESG implementation with time horizons of one, three and five years.

Three Year Horizon (more detail available upon request)Ensure that committee has representatives from operations, EH&S, IR, government relations, communications Ensure that ESG Committee reports and shares with ERM committee, Investor Relations, EH&S, Corporate SecretarySelect framework(s) against which to report with support of Steering Committee

Where appropriate, engage with stakeholders to gain buy-in for key metrics

Five Year Horizon (more detail available upon request)Continue three year horizon activitiesGain commitment from BoD, Corporate Secretary to include ESG metrics and reporting in 10-K, 10-Q

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Industry Operational Metrics Snapshot:Midstream

Topic Measure Drivers

Health, safety, and emergency management

• Total Recordable Injury Rate, Fatality Rate, and Near Miss Frequency Rate for: fulltime employees, contract employees, and short service employees.

• Process Safety Events (PSE) rates for Loss of Primary Containment (LOPC) of greater consequence (Tier 1).

• Discussion of management systems used to integrate a culture of safety and emergency preparedness throughout the value chain and throughout the exploration and production lifecycle

Operational risk perceptions, affecting cost of capital. Other impacts: • Loss of assets and one-time costs from high-magnitude, low-probability events • Production downtime or reduced capacity operations, affecting revenues • Legal or regulatory action, resulting in liabilities • Regulatory penalties and compliance, as well as corrective action costs • Reputational impacts, affecting ability to expand operations and attract employees • Frequent incidents, resulting in lower workforce productivity

Reserves valuation and capital expenditures

• Sensitivity of hydrocarbon reserve levels to future price projection scenarios that account for a price on carbon emissions. Estimated carbon dioxide emissions embedded in proved hydrocarbon reserves. Discussion of how price and demand for hydrocarbons and/or climate regulations influence the capital expenditure strategy for exploration, acquisition, and development of assets.

Adverse impact to valuation for oil and gas assets, resulting from regulatory action to limit greenhouse gas emissions. Other impacts: • Reduction in demand for oil and gas, resulting in adverse impact to return on capital invested • Increased cost of capital due to credit rating downgrades

Management of the legal and regulatory environment

• Amount of political campaign spending, lobbying expenditures, and contributions to taxexempt groups, including trade associations. Five largest political, lobbying, or tax-exempt group expenditures.

Long-term public and political support, affecting social license to operate and intangible assets. Other impacts: • Regulatory uncertainty, affecting risk profile of industry or company

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ESG Research TrendsShareholder Proposals

• Playbook on Shareholder Proposals Takeaways• Shareholder Activism on Sustainability Issues: analysis of 2,665 shareholder proposals

from 1999-2013• 42 % of shareholder proposals in our sample are filed on financially material issues• Proposals on immaterial issues are associated with subsequent declines in firm valuation while

proposals on material issues are associated with subsequent increases in firm value

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HBW Case Studies / Quals

Fortune 500 E&P • Onshore and offshore assets, both US and overseas• Conducted analysis of peer group vis a vis ESG including

• Statement on climate change• Statement on ESG

• Recommended and advised on implementation of Sustainability Committee that reports directly to BoD

• HBW conducted evaluation and rationalization of reporting frameworks, including rationalization

Fortune 500 Bank active in Energy Industry• Advisory on the current state and relevance of ESG• Advisory and drafting of criteria on which to evaluate entities• Advisory on ESG frameworks• One-off deep dives on companies

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ESG Overview:Options for Next Steps (Company)

Overview of an ESG implementation with time horizons of one, three and five years.

One Year Horizon • Engage with Investor Relations, Government Relations, Communications, BoD, EH&S,

Operations on the value proposition of ESG; discuss key outcomes and metrics for each business function

• Conduct assessment of peer companies with regard to ESG programs, including: • Formal statement on climate change• Conduct a detailed “spend analysis” on peer companies social investment• Formation of a ESG committee• Assessment and rationalization of existing “sustainability” reporting frameworks e.g.

IPECA, United Nations SDG, SASB, etc.• Form a steering or exploratory committee on ESG• Conduct survey and rationalization of existing reporting

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APPENDIX

Shareholder Activism: Not limited to Energy

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• Kroger: 8 shareholder proposals regarding its use of sustainable packaging since 2012

• Starbucks: green friendly image, 4 proposals since 2010• YUM! Brands, Inc. (KFC, Taco Bell & Pizza Hut):

• Shareholder (SH) proposals that were the most specific and aggressive (including citing a company’s failure to meet its own sustainability goals) were much more successful

Lowering Carbon Intensity of Fuels

STEVE PRZESMITZKI

SEP 29, 2020

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• None of the information in this presentation should be taken as fact or as a

projection into the future.

• Nothing presented or said should be used for financial decisions regarding Aramco or

any of its businesses.

Disclaimer

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• Aramco: Xin He, Lang Sui, Jessey Bouchard, Hassan El-Houjeiri, J-C Monfort,

Vince Costanzo

• Oak Ridge National Laboratory: Shawn Ou, Zhenhong Lin

• Argonne National Laboratory: Zifeng Lu, Yu Gan, Yan Zhou, Hao Cai, Michael Wang

• Stanford University: Mohammed Masnadi, Adam Brandt

Acknowledgements

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Presentation Outline

Aramco Overview

Upstream

Midstream

Downstream (Transportation)

Final Thoughts

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Who We Are – World’s Largest Integrated Energy Company

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Who We Are – World’s Largest Integrated Energy Company

Reserves

12.0millionbarrels per day - max sustained

capacity

Oil Production

Refining Capacity Base Oils

258.6billionbarrels of oil equivalent reserves

6.4millionbarrels per day

1 in 7barrels of the world’s base oils

Source: 2019 annual report

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Presentation Outline

Aramco Overview

Upstream

Midstream

Downstream (Transportation)

Final Thoughts

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Tank to

Wheels

Emissions

Life-Cycle Emissions - Well to Wheel

Well to tank and/or grid to tank Tank to wheels

Oil Production

Emissions

Refinery Emissions

Electricity Generation Emissions

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Crude Oil Differentiation – Country Basis

Some countries have lower carbon intensity due to a combination of geology and practices

Source: Masnadi, M.S., El-Houjeiri, et.al, 2018. Global carbon intensity of crude oil production. Science (August 2018).

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Resource Management

Stringent flaring reduction: limited to 20 scf/bbl – 5th percentile

Minimal fugitive and venting emissions: limited to 0.2 g/MJ – Similar to Norway 2015

Result: Global average reduction of ~43% (10.3 g/MJ to 5.8 g/MJ)

0 10 20 30 40 50 60 70 80 90 100

Cumulative oil production

MMbpd%

0

10

20

30

40

50

Up

str

ea

m c

arb

on

inte

nsitie

s

g C

O2eq

/MJ o

f cru

de

pe

tro

leum

Current World

No Routine Flaring World (Moderate)

No Routine Flaring World (Extreme)

Minimal Fugitives & Venting World

No Routine Flaring (Extreme)+Minimal Fugitives & Venting World

Carb

on

inte

nsitie

s (

g C

O2e

q/M

J)

10.3 g CO2eq./MJ8.7 g CO2eq./MJ8.3 g CO2eq./MJ7.9 g CO2eq./MJ

5.8 g CO2eq./MJ

From the supplementary information for M.S. Masnadi, H.M. El-Houjeiri et al., Science, 361 (6405), 851-853.

Gas management can provide substantial mitigation benefits – especially for the 90th percentile.

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Classification: General Use

Source: Yu Gan, et. al., Nature Communications, doi:https://doi.org/10.1038/s41467-020-14606-4 (2020).

Case Study: Reducing GHG Emissions in USA and China

The source of natural gas matters. Many supplies have higher carbon intensity than crude oil (<11g CO2 per MJ)

The trend is for more carbon intensive natural gas

Locations of natural gas supplies of China and their corresponding well-to-city-gate GHG intensities in 2016

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Presentation Outline

Aramco Overview

Upstream

Midstream

Downstream (Transportation)

Final Thoughts

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Tank to

Wheels

Emissions

Life-Cycle Emissions - Well to Wheel

Well to tank and/or grid to tank Tank to wheels

Oil Production

Emissions

Refinery Emissions

Electricity Generation Emissions

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Gasoline Refinery GHG Emissions – China Case Study

Fuel Cycle FeedstocksCoke burnH2 (SMR - other)H2 (SMR - NG)H2 (gasification)Fuel Cycle NG

SteamElectricityProcess heat (internal fuel)Process heat (gas)

Heavy Sour

Heavy Sweet

Medium Sour

Medium Sweet

Light Sour

Light Sweet

The volume-weighted-average gasoline carbon intensity is ~11.7 g CO2eq/MJ

Source: J-C Monfort and H.M. El-Houjeiri, Aramco Services Company (2018). Modeling based on Wood Mackenzie commercial datasets

• 77 individual refineries in China, about 85% total capacity

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Refinery GHG Reduction Potential– China case study

Carbon intensity of petroleum products can be significantly reduced

~71% and 87% reduction possible for gasoline/diesel with CCS on coke burn and process heat

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Ga

te-t

o-G

ate

Re

fine

ry G

HG

Em

issio

ns

(gC

O2

e/M

J o

f ga

so

line

)

0

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Ga

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(gC

O2

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Assumed no GHG emissions associated with electricity generation and hydrogen production

Represents potential GHG

emissions reduction under

this scenario

Source: J-C Monfort and H.M. El-Houjeiri, Aramco Services Company (2018). Modeling based on Wood Mackenzie commercial datasets

11.7 - 2.25 gCO2e/MJ

(~19% reduction)

8.57 - 3.34 gCO2e/MJ

(~39% reduction)

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Presentation Outline

Aramco Overview

Upstream

Midstream

Downstream (Transportation)

Final Thoughts

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Tank to

Wheels

Emissions

Life-Cycle Emissions - Well to Wheel

Well to tank and/or grid to tank Tank to wheels

Oil Production

Emissions

Refinery Emissions

Electricity Generation Emissions

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Assumptions:

- Mixed vehicle technologies

- Calculations adapted from GREET Model (US and China versions)

- Gasoline Compression Ignition results based on joint study by Argonne and Aramco

- Opposed piston results based on joint study by Achates and Aramco

Vehicle Operation*

Fuel/Electricity Production

Vehicle Cycle

*Biogenic CO2 in the fuel has been deducted, where relevant

ICE Vehicles Electric Vehicles

All vehicles improving and legacy battery electric vehicles benefit from electric grid improvements

Life Cycle Assessment: Cradle to Grave Emissions

ICE Vehicles Electric Vehicles

GREET2016 GREET2019

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Case Study – Reducing GHG Emissions in U.S. and China

Improving ICE has greater potential to improve CO2 in the near term due to CAFE/CAFC accounting of BEV

Source: “Greenhouse Gas Consequences of the China Dual Credit Policy”,

Accepted by Nature Communications, 2020

Source: US: Preliminary data, Aramco, Oak Ridge and Argonne National Labs study

CO2 savings with ICE

(2239 MM-ton)S1: CAFE/CAFC met by aggressive BEV

penetration without improving ICEV efficiency

S2: CAFE/CAFC met by improving ICEV only

CAFE = corporate average fuel economy

CAFC = corporate average fuel consumption

CO2 savings with ICE

(2086 MM-ton)

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2010 2011 2013 2019

Concept Feasibility

Prototype

Passenger Vehicle Class 8 Truck

• Solid Sorbent System

• 10% CO2 Capture

• Compact System

(~8 times smaller)

• Liquid Solvent

System

• 30% CO2 Capture

• Liquid Solvent

System

• Waste Heat Recovery

• Seven CO2 Reducing

Technologies

• 50% lower CO2 target

On-board carbon capture seen as a long-term possibility by some parties.

Post Tailpipe Opportunity – Carbon Capture

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Tech Demo

All system components have been placed within the sleeper cab package space

Sized for 40% capture rate with 200 gallons of fuel

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Legacy fleet limited to 9% WtW benefit from crude production and refinery improvements.

Summing up for Light-Duty Vehicle

30 MPG

Minimal

flaring

and

fugitive

emissions

Renewable

electricity

and

hydrogen 45 MPG

Carbon

capture at

40%

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H2 as an energy carrier: Liquified H2 or ammonia in marine engines

Hydrogen is an energy carrier, not an energy source, and needs to be transported

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Ammonia

Aramco shipped 40 tons of “blue” ammonia to Japan for power generation, Sep 27, 2020.

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Presentation Outline

Aramco Overview

Upstream

Midstream

Downstream (Transportation)

Final Thoughts

Final

Thoughts• A holistic approach to reducing

emissions is key to achieving our

environmental goals.

• Large opportunity to reduce

emissions within fuels through

process improvements.

• Companies need to consider at

carbon reductions across the entire

value chain, including

transportation.