Review Of Climate-Related Risks And Opportunities

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Review of Climate-Related Risks and OpportunitiesSeptember 28, 2018

Table of ContentsLetter from the Chairman, President andChief Executive Officer.1About Valero.2Introduction.3Governance and Risk Management.4Climate-Related Risks andOpportunities.6 Climate-Related Risks andOpportunities 450 Scenario Overview Strategy Analysis Summary of Risks andOpportunitiesPerformance Metrics.20 Operating Costs GHG Emission Reductions Flaring Reduction Energy EfficiencyPhysical Risks.24 Securing Our Facilities Emergency Preparedness andResponse Hurricane Preparedness Hurricane HarveyConclusions.28McKee Wind Farm and Refinery,Sunray, Texas2

Letter From Joe GorderWe are proud that Valero has long beencommitted to safe, reliable and environmentallyresponsible operations, and we will continue tointegrate these principles into our actions as weprovide the products necessary for modern life.Our Board of Directors and executivemanagement team are encouraged by theopportunities to meet strong global demand forour products, while at the same time are mindfulof the need to address climate-related risks andopportunities, including physical risks.We are pleased to share with you how weapproach these risks and opportunities. I hopeyou find useful this review of the governance, riskmanagement, strategy, performance metrics andother tools we use to address a future influencedby regional, national and international climaterelated policies and potential physical risks.Through thoughtful leadership and direction fromour Board of Directors and executive managementteam, we believe Valero is well positioned toremain a leading competitor in the energy market.Our products make people’s lives better, so weexpect strong global demand for our productswell into the future. Our investments in flexibleand efficient manufacturing, renewable fuels andthe infrastructure critical to our operations help usmeet today’s needs and prepare for future energymarkets.We welcome continued engagement with ourinvestors on these issues.Joe GorderChairman, President andChief Executive Officer“Our investments in flexibleand efficient manufacturing,renewable fuels and theinfrastructure critical to ouroperations help us meettoday’s needs and prepare forfuture energy markets.”Review of Climate-Related Risks and Opportunities1

About ValeroValero Energy Corporation, through its subsidiaries, is aninternational manufacturer and marketer of transportation fuelsand petrochemical feedstocks.PERULIMAUNITEDKINGDOMHARTLEYALBERT CITYALBIONFORT DODGEAURORA WELCOMEJEAN GAULIN(QUEBEC)IRELANDCHARLES OMINGBURGLINDENBENICIAMOUNT VERNONLONDONWHOLESALE MARKETING PRESENCEBRANDED WHOLESALE PRESENCEVALERO REFINERIESVALERO ETHANOL PLANTSVALERO TERMINALSVALERO OFFICESWILMINGTONMEMPHISSAN ANTONIOMCKEEARDMOREST. CHARLESTHREE RIVERSPORT ARTHUR(CORPUS CHRISTI EAST AND WEST)HOUSTONTEXAS CITYBILL GREEHEYValero, a Fortune 50 company based inSan Antonio, Texas, with approximately 10,000employees, is an independent petroleum refinerand biofuel producer, and its assets include 15petroleum refineries with a combined throughputcapacity of approximately 3.1 million barrelsper day and 11 ethanol plants with a combinedproduction capacity of 1.45 billion gallonsper year. The petroleum refineries are locatedin the United States (U.S.), Canada and theUnited Kingdom (U.K.), and the ethanol plants2MERAUXDIAMOND GREEN DIESELVALERO ENERGY PARTNERS ASSETSPIPELINESPAYMENT SERVICE CENTERSUNRAY WINDare located in the Mid-Continent region of theU.S. In addition, Valero owns the 2% generalpartner interest and a majority limited partnerinterest in Valero Energy Partners LP, a midstreammaster limited partnership, and a 50% interestin Diamond Green Diesel LLC, a producer oflow-carbon liquid fuels. Valero sells its productsin both the wholesale rack and bulk markets, andapproximately 7,400 outlets carry Valero’s brandnames in the U.S., Canada, the U.K., and Ireland.Please visit www.valero.com for more information.

IntroductionBenicia Refinery,Benicia, CaliforniaValero remains committed to being the lowest-cost, safest operator in our industryas we provide reliable and affordable transportation fuels and petrochemicalfeedstocks for the modern world, while serving the needs of our employees,communities and other stakeholders.Investors increasingly ask how climate-relatedissues may impact their portfolio investments.To this end, several organizations have proposedframeworks through which companies cananalyze and communicate these issues. Theseorganizations include the Financial StabilityBoard (FSB) and the Sustainability AccountingStandards Board, among others. In June 2017,the FSB’s Task Force on Climate-related FinancialDisclosures (TCFD) issued final recommendationsfor use by companies in the disclosure ofclimate-related financial information to investorsand other stakeholders. These recommendationshave been endorsed by a number of countriesand large financial asset managers; accordingly,we developed this report generally in line with theTCFD recommendations to examine the climaterelated risks and opportunities in our business.This report enhances Valero’s disclosure of ourgovernance, risk management, strategy andperformance metrics regarding climate-relatedissues. This report also includes a review of theresilience of our business strategy taking intoconsideration a potential transition to a lowercarbon economy consistent with the InternationalEnergy Agency’s (IEA) hypothetical 450 PPMScenario (450 Scenario). The 450 Scenario isReview of Climate-Related Risks and Opportunitiesone of many published scenarios that examineenergy supply and demand in a world wherepolicy actions have been taken to attempt tolimit the global average temperature rise to twodegrees Celsius. We continue to disclose materialrisks associated with climate issues in our AnnualReport on Form 10-K.The “Governance and Risk Management” sectionof this report discusses how our governanceprocesses address the physical and regulatoryrisks and opportunities that may arise fromclimate-related issues. The “Strategy Analysis”section of this report demonstrates how Valero’sstrategy positions us to compete in future energymarkets, even in a carbon-constrained economysuch as the 450 Scenario, which forecasters,including the IEA, do not project as likely. Finally,the “Performance Metrics” and “Physical Risks”sections of this report detail the measurementtools and systems we use to address climaterelated risks and opportunities.Valero remains committed to being the lowestcost, safest operator in our industry as we providereliable and affordable transportation fuels andpetrochemical feedstocks for the modern world,while serving the needs of our employees,communities and other stakeholders.3

Governance and Risk ManagementThe Nominating/Governance and Public PolicyCommittee of our Board of Directors (Committee)provides oversight of climate-related risks andopportunities inherent in our business. Pursuantto its charter, the Committee is charged to reviewand discuss with company management, at leastannually, Valero’s strategy and performance inassessing and responding to climate-relatedrisks and opportunities.1 The Committee iscomposed solely of independent directors whohave qualifications appropriate for their oversightrole. The Committee regularly reports to thefull Board of Directors regarding climate issuesunder the Committee’s purview. We believe thatthis is an effective structure to provide Board ofDirectors oversight of climate-related risks andopportunities.At least once per year, our executive managementteam has a formal strategic planning meetingwith our full Board of Directors. This meetingcovers all aspects of Valero’s businesses,including the impact of global climate policieson the company’s outlook. In 2017, our Boardof Directors and executive management teamagreed to review Valero’s business strategyresilience and to issue this report. Our Board ofDirectors is also active in reviewing, and retainsfinal authority regarding, major capital projectsand significant acquisitions or divestitures. Thecurrent and potential impact of climate-relatedrisks and opportunities are considered as part ofthis oversight.Valero’s executive management team assessesand manages climate-related risks andopportunities through an interdisciplinaryapproach that coordinates the views of ourcommercial, operational, regulatory, legal andgovernment affairs groups into long-term strategicplanning. This effort is overseen by a seniorexecutive who reports to our Chief ExecutiveOfficer and has direct reporting duties to theCommittee.In addition, we have well-developed managementstructures central to decision-making and riskmanagement, as noted on the following page:Valero Headquarters,San Antonio, Texas4

We use long-term product supply anddemand scenarios and forecasts as partof our capital allocation process. Thesescenarios and forecasts incorporate thepotential impacts of climate-related risks andpolicy changes, among many other factors. We use a four stage “phase-gate” processfor project development and execution thatconsiders regulatory risks and opportunitiesbefore a capital project can move forward.This process also applies higher return oninvestment thresholds for projects withgreater financial and regulatory uncertainty.Major capital projects must be approvedby the Board of Directors after having beenthrough this process. With the continuing global demand for the energyproducts we produce, even in carbon-constrainedscenarios, we believe Valero is well-positioned toremain a thriving company. Our governance andrisk-management processes allow us to maintainresilient business strategies for various businessand regulatory environments over time.St. Charles Refinery,Norco, LouisianaOur Commitment to Excellence ManagementSystem (CTEMS) is a proprietary systematicapproach to planning, executing, checkingand acting to improve every day workactivities across all of our operations. CTEMShas nine elements:1. Leadership accountability2. Protecting people and the environment3. People and skills development4. Operations reliability and mechanicalintegrity5. Technical excellence and knowledgemanagement6. Change management7. Business competitiveness8. External stakeholder relationships9. Assurance and reviewRisks related to regulatory issues and physicalrisks to our facilities are among the risksassessed as we implement CTEMS at Valero. We continually engage with stakeholdersand monitor current and proposed climateand environmental-related policies, lawsand regulations to help us shape effectivebusiness strategies.Review of Climate-Related Risks and Opportunities5

Climate-Related Risks and OpportunitiesGlobal energy supply must increase to meetthe demand created by a growing worldpopulation that desires access to the standardof living enjoyed by developed countries. Liquidtransportation fuels are reliable, affordable andscalable, and are thus forecast to continue tobe an important source of energy well into thefuture. Petrochemical feedstocks provide thebuilding blocks for the products that consumersdemand in everyday life. Most energy demandforecasts indicate continued growth in the useof liquid transportation fuels and petrochemicalfeedstocks.We review multiple energy demand projections aspart of our strategic planning process to informour views on energy demand. These includeproprietary scenarios from private energy marketconsultants, published scenarios from agenciessuch as the IEA, and forecasts from governmentagencies such as the U.S. Energy InformationAdministration (EIA). These projections generallyextend 20 to 30 years into the future, which weconsider relevant in light of the long-lived natureof our assets.The IEA’s Current Policies Scenario, a scenariothat incorporates existing climate policies,forecasts that world oil demand would increaseto approximately 117 million bpd in 2040, from92.5 million bpd in 2015.2 The IEA’s New PoliciesScenario, a scenario that incorporates existingclimate policies as well as an assessment ofresults likely to occur from implementation ofannounced climate policies, forecasts that worldoil demand would increase to approximately 103million bpd in 2040.3 The New Policies Scenariofurther projects that biofuel demand wouldincrease to 4.2 million bpd in 2040, from 1.6million bpd in 2015.46

Our strategic actions in light of these forecastshave made Valero a low-cost, efficient andreliable supplier of liquid transportation fuelsand petrochemical feedstocks to the world. Ourpetroleum refineries operate in coastal locationswith significant operating cost advantages andthe ability to export fuel to meet developingcountry demand, or in niche markets that enjoyraw material cost or product margin advantages.Our ethanol plants are located near abundantraw material, have some of the lowest operatingcosts in the industry and have the ability toexport to meet world demand. Our midstreamassets help us improve the performance of ourfuels manufacturing facilities through ownershipof raw material or finished product logisticsassets that supply those facilities or distributetheir products. Throughout Valero’s history, wehave proactively managed our business portfoliothrough acquisitions and divestitures and havemade selective investments to build a systemof assets that we expect to thrive under mostenergy demand forecasts, and we will continue tooptimize our portfolio as conditions demand.We closely follow existing and proposedclimate-related policies such as vehicle mileagestandards, electric vehicle mandates, low-carbonfuel standards and carbon taxes. Whenappropriate, we act in a strategic fashion tocapture opportunities related to these policies. Forexample, our investment in the Diamond GreenDiesel joint venture capitalizes on the growingdemand for low-carbon liquid fuels.Diamond Green Diesel,Norco, LouisianaReview of Climate-Related Risks and Opportunities7

450 Scenario OverviewIn order to further inform our planning processes,we followed the TCFD recommendation toreview the resilience of our business strategyunder multiple demand scenarios. Given thatthe consensus view among energy forecastersis that demand for liquid transportation fuelsand petrochemical feedstocks will increase, webelieve our business strategies are resilient undermost scenarios. However, we also followed theTCFD recommendation to review the resilience ofour business strategies taking into considerationa potential transition to a lower-carbon economyconsistent with a two-degree scenario such as the450 Scenario.parts per million and results in a 50% chance tolimit the global average temperature rise to twodegrees Celsius by 2100.5This section of the report focuses on ahypothetical transition to a lower-carbon economyunder the 450 Scenario. In 2040, under thisscenario, world oil demand would decrease toapproximately 73 million bpd from 92 million bpdin 2015.6 The transportation sector would see asignificant portion of this reduction.In contrast to the changes seen in thetransportation sector, consumption of oil forpetrochemical feedstocks in the 450 Scenario islargely the same as in the New Policies Scenario.The 450 Scenario is IEA’s hypothetical carbonThere are fewer substitution options away fromtransition scenario that begins with a view ofoil available in the petrochemical industry, so bywhere the energy sector needs to be to meet2040 the IEA predicts production of petrochemicalcarbon goals in 2040, and worksConfidentialback to theand privilegedfeedstocks– for internalwilluseaccountonlyfor over 20% of total oilpresent. This scenario is aimed at limiting carbondemand in the 450 Scenario, versus 12% of totaldioxide concentrations in the atmosphere to 450oil demand in 2015.7IEA World Oil Demand By ScenarioIEA World Oil Demand By Scenario117120101.9100Million 2015*Historical Data202520402040Current Policies202520402040New Policies202520402040450 Scenario“Scenarios are not intended to represent a full description of the future, but rather tohighlight central elements of a possible future and draw attention to the key factors 2thatwill drive future developments. It is important to remember that scenarios are hypotheticalconstructs; they are not forecasts or predictions, nor are they sensitivity analyses.”- TCFDThe Use of Scenario Analysis in Disclosure of Climate-Related Risks and Opportunities8

Confidential and privileged – for internal use onlyIEA World Biofuel Demand 450 ScenarioIEA World Biofuel Demand 450 Scenario10986Million bpdThe IEA expects biofuel to see substantialgrowth in the 450 Scenario amid stronggovernment support and consumer demand.In the 450 Scenario, IEA projects biofueldemand will increase by 7.4 million bpd onan energy equivalent basis to gasoline anddiesel from 2015 levels.8 This is an increaseof 462%. Much of this production increaseis projected to come from advanced biofuel,rather than crop-based biofuel, throughadvancements in production technology.While scenarios provide an importantbenchmark against future possibleconditions, scenarios do not act as forecastsof the future, as the complexities andpressures countries and energy markets facemake accurate long-term predictions verydifficult.441.620.2020002015Historical Data20252040450 ScenarioValero Ethanol Plant - Mount Vernon, IndianaReview of Climate-Related Risks and Opportunities9

Strategy AnalysisOur refining strategy analysis examines the competitive advantages of the North American refiningsector and the impact of reduced refined product demand in the 450 Scenario on refining capacity andtrade flow on a regional basis. Our renewables strategy analysis primarily considers the opportunitiespresented by the significantly increased demand for biofuel projected in the 450 Scenario, while ourmidstream strategy analysis contains a perspective on how the impacts of a 450 Scenario on refinedproduct and biofuel demand could present both risks and opportunities.Lower energy costs and advantaged NorthAmerican crude oil result in a lower cost toproduce transportation fuel in North America as1012 Month Moving Average (MBPD)CanadaMexicoOther Latin 09'170'15Crude oil is the primary raw material used inpetroleum refineries. The North American refiningsector benefits from oil produced in the U.S.and Canada that often trades at location-relateddiscounts compared to the price of similarquality crude oil traded on international markets.Although the 450 Scenario does not containspecific projections for U.S. and Canadian crudeoil production to 2040, the IEA has indicated thatNorth American shale oil production will remainresilient even in a carbon-constrained scenario.10We see evidence of this trend in trade flow dataregarding U.S. transportation fuel exports. Thevolume of U.S. exports has grown significantlysince the beginning of the shale revolution, withthe majority of exports originating in the U.S. GulfConfidentialandmarketsprivileged –inforMexicointernal useonlyLatinCoastto supplyandAmerica.U.S. Product Exports12 Month Moving Average (MBPD)U.S. Product Exports'13Refinery operating expenses can be influencedby a number of factors, but one of the keydrivers is energy costs. Natural gas is the primaryenergy used in North America to power refineryprocesses. The North American refining sectorbenefits from lower natural gas costs comparedto most global competitors as a result of theshale gas revolution. Consistent with many otherforecasts, the IEA projects North America willcontinue to mainta

Review of Climate-Related Risks and Opportunities 3 Introduction Investors increasingly ask how climate-related issues may impact their portfolio investments. To this end, several organizations have proposed frameworks through which companies can analyze and communicate these issues. These organizations include the Financial Stability

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