3. Financial experts making carbon investment risk visible
today in the capital market.
Anthony Hobley - Chief Executive Officer
Mark Campanale - Founder and Executive Director
Jon Grayson - Chief Operating Officer
James Leaton - Research Director
Luke Sussams - Senior Researcher
Reid Capalino - Senior Researcher
Andrew Grant - Financial Analyst
John Wunderlin - Staff Attorney US
Margherita Gagliardi - Communications Officer
Tracy Trainor - Office Manager
Mark Fulton - Founding Partner at Energy Transition
Advisors (ETA); Advisor to Carbon Tracker Initiative
Paul Spedding - Advisor to CTI
Who we are
5. Our formula
...by translating climate science and policy
into the language of finance.
Our work is aimed to align climate risk
with capital market risk...
7. 7
IEA World Energy Outlook
2012
“…..without a significant deployment of
CCS, more than two-thirds of current
proven fossil-fuel reserves cannot be
commercialised in a 2°C world before
2050”
IEA: “Two-Thirds Fossil Fuels
Unburnable
8. A climate fix would ruin investors
I believe humanity is making
risky bets in the climate
casino. I think it is likely that
humanity will continue to make
these risky bets. In that case
ExxonMobil will be proved right.
But it is always possible that
humanity will wake up and make
the needed investments in rapid
change, driven by the magic of
the market and technological
innovation. If that happened,
fossil fuel reserves would indeed
be stranded. Investors beware:
the risk of that cannot be zero.
9. The Risky Business
Which are the potential
Consequences of climate
change
In the US by region and sector?
Michael Bloomberg
Henry Paulson
Tom Steyer
• Large-scale losses of coastal property and infrastructure
• Extreme heat across the nation threatening labor productivity,
human health, and energy systems
• Shifting agricultural patterns and crop yields
10. Obama on Climate
We’re not going to be able to burn it all.
We’re not going to suddenly turn off a switch
and suddenly we’re no longer using fossil fuels,
but we have to use this time wisely…
11. Ceres & CTI / Carbon Asset Risk
Carbon Asset Risk engagement initiative
co-ordinated by CTI and Ceres, with support from the
Global Investor Coalition on Climate Change.
Investors with over $3 trillion in
assets raised these issues with
45 of the largest fossil fuel
companies.
12. Management issues for investors: oil
Denial
> “We will see it coming”
> “It will happen gradually”
Commercial concerns
> Risk of backlash from investors for not pursuing value added investments
> Management have flexibility over capital expenditure
Shareholder message?
> Low return projects tend to be at greater risk from tax, costs and price –
sensitivity scenarios please
> Growth is over-rated
Conclusion?
Be more disciplined on capital investment and return
to shareholders if necessary
13. Carbon Supply Cost Curves: Evaluating Financial Risk
to Oil Capital Expenditures
CTI report is based on a series of technical papers produced
in collaboration with Energy Transition Advisors, research
consultancy led by Mark Fulton, former Head of Research at
Deutsche Bank Climate Change Advisors.
This analysis assists investors to continue their engagement with
companies over carbon asset risk. It introduces the concept of a
carbon supply cost curve to global oil projects .
All reports can be downloaded at www.carbontracker.org
35. Demand matters
• “New policies” to 450: a 20 mb/d difference in 2035.
• Cumulative demand under NPS is 790 bn barrels; 450 is 720 bn barrels, 10% lower.
• But existing base production can produce 460 bn barrels.
• Net new production and hence new capex is over 20% lower
Source: IEA, Redrawing the energy map
IEA oil oil demand scenarios (mb/d)
0
20
40
60
80
100
120
2010 2015 2020 2025 2030 2035
Current NPS 450 Base
36. Cost curve by production type
Source: Rystad Energy and Energy Security Partners
37. “Unburnable carbon”
0%
5%
10%
15%
Shell BP Total Statoil Eni BG
Traditional Deepwater Heavy oil
“Unburnable” carbon (High cost projects) Price effect of $40 fall in oil prices
Source: HSBC Equity Research based on Wood Mackenzie data (2012)
38. Big oil has been a great long term investment
• Helped by supranormal returns – due to OPEC price support?
• But…..
Source: msn.com
39. Performance has been dreadful for 3-5 years
• Undeperformance despite high oil prices. Why? Source: msn.com
41. Capital employed driven by accelerating capex
• Ratio of capex to depreciation at a 10 year high
3000
3100
3200
3300
3400
3500
3600
3700
3800
3900
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014e
Capex/production ($/boe)
Production (000boe/d) RHS
0%
50%
100%
150%
200%
250%
300%
0
5
10
15
20
25
30
35
40
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Capex Clean Depreciation
Ratio (RHS)
Unit capex and production Depreciation and capex ($bn)
42. Swap Capex for DDA
• Capex adjusted earnings would halve, more than doubling its PE
13 15
7
0
5
10
15
20
25
30
35
40
45
50
Stated Clean Capex adjusted
Post tax Tax DDA / Capex
Source: Shell data Source: Zacks Investment Research
Adjusting Shell’s 2013 earnings ($bn) RDSA PE (x)
43. Portfolio opportunities and returns
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
FortHills(w/oupgrader)
Joslyn(w/oupgrader)
QCLNG
PearlGTL
Prelude
IchthysLNG
Block31PSVM
TangguhLNG
YemenLNG
Cardamomdeep
Clov
Qatargas-4
MadDogComplex
ClairRidge
Guara
Jubilee
Source: HSBC Equity Research based on Wood Mackenzie data (2012)
Internal rate of return for different project types (%, post tax: 2012 data)
44. Capital intensity
• High capital intensity means longer payback periods – and often lower returns
0 20 40 60 80 100 120 140
Offshore
Offshore
Tar Sands
Arctic
Mega project
Thousands
Capex per barrel of capacity ($)
Source: Industry reports
45. High cost assets = operational gearing
• A $20 move in oil prices reduces average margins by nearly 25%
• Bitumen margins fall by 50-80%
0 20 40 60 80 100
Exxon realisation (liquids)
Synthetic (Upgraded Bitumen)
Bitumen
Costs
Cash margin
Exxon cash margins (2013, $/boe)
Source: Exxon
46. Shell’s cost curve
• Like most majors, Shell has a wide range of projects with a wide range of break-even costs
• For shareholder returns and to reduce risk, companies should focus on low cost projects
0
20
40
60
80
100
120
140
160
180
200
0 5,000 10,000 15,000 20,000 25,000 30,000 35,000
Breakevenoilprice($/bbl)
Potential 2014 - 2050 Production (mmbbl)
Below USD/boe 60 USD/boe 60-80 USD/boe 80-100
USD/boe 100-120 USD/boe 120-150 Above USD/boe 150
$80/bbl Breakeven Oil Price
Shell potential future oil production by $/bbl breakeven oil price
Source: Rystad Energy, CTI analysis 2014
47. High cost often equals high carbon
• High carbon issues
– Heavy oil: More energy to produce, more energy to refine
– Tar sands: More energy to produce, more energy to refine, more capital intensive (steel and concrete)
– Arctic: Harsh environment needs more steel and concrete
Rank Name Country Region Category
2014-2025
capex
% of total 2014-
2025 capex
% of total capex on
undeveloped projects
requiring $80/bbl
Required
Breakeven
Oil Price Status*
($M) (%) (%) ($/bbl)
1 Bosi, NG Nigeria Atlantic Ocean, NG Deep water 5,381 2% 7% 112 Under study
2 Pierre River, CA Canada Alberta, CA Oil sands (mining) 6,543 2% 8% 100 - 113 Deferred
3 Vicksburg, US United States Gulf of Mexico deepwater, US Ultra deepwater 2,141 1% 3% 100 Under study
4 Carmon Creek, CA Canada Alberta, CA Oil sands (in-situ) 3,429 1% 4% 99 Approved
5 Bolia, NG Nigeria Atlantic Ocean, NG Deep water 2,711 1% 4% 93 Not disclosed
6 Aktote, KZ Kazakhstan Atyrau, KZ Conventional 2,188 1% 3% 90 Not disclosed
7 Parque dos Doces, BR Brazil Espirito Santo, BR Ultra deepwater 1,912 1% 2% 90 - 121 Not disclosed
8 Bobo (OPL 322), NG Nigeria Atlantic Ocean, NG Ultra deepwater 3,074 1% 4% 86 Not disclosed
9 Athabasca Oil Sands Project, CA Canada Alberta, CA Oil sands (mining) 7,235 2% 9% 83 - 85 Ongoing
10 Bonga, NG Nigeria Atlantic Ocean, NG Deep water 5,297 2% 7% 83 Under development/study
- Total Top 10 Discoveries - - 39,912 12% 52% - -
- Other projects - - 37,112 11% 48% - -
- Total - - 77,024 23% 100% - -
*as understood based on company disclosures
Shell's 10 largest high-cost ($80/bbl+ BEOP) projects
Source: CTI and Rystad
48. Returns and price to book
• Shell’s current Price/Book ratio is 1.4x
• Sustaining a 1.5x Price/Book ratio needs projects with returns of around 20%
0.0 0.5 1.0 1.5 2.0 2.5
30%
25%
20%
15%
10%
NPV uplift at different IRR rates ($ value per $ capex @ 10% cost of capital)
Source: Own estimates
49. Price to book history (RDS)
• Price to book: A market indicator of perceived value added
Source: Morningstar
50. Conclusions
• Weak demand can cause price pressure (2020-2030?)
• Industry continues to develop high cost fields which increases
oil price risk
• Industry returns have fallen due to tax and inflation removing
much of the benefit from higher prices. Ongoing trend?
• Capital intensive projects – such as tar sands – have also
played an important role in lowering returns. Ongoing trend?
• Lower returns will lead to further derating (Price/Book)
• Value destruction: Oil price risk and project risk
52. True OPEC cost curve
• Social costs push OPEC’s required price to around $100
Source: APIC, Arab Petroleum Investments Corporation
53. Non OPEC cost curve
• Demand out till 2035 could be met at a non-OPEC marginal price of $80-90
54. 54
Material value at risk in 10 year plus phase
• Around 40% of a company’s NPV is still at risk post 10 years
0%
5%
10%
15%
20%
25%
30%
35%
1-5 5-10 10-15 15-20 20-25 25-30 30 beyond
Net present value profile under business as normal
57. High Carbon = High Cost
The “carbon” cost of extraction for a high
carbon crude can be four times that of
the lowest
Carbon intensity rises with:
• Crude gravity (heavy crude needs more
upgrading= high carbon)
• Flaring of associated gas
• Distance to market
58. Energy sources to 2050
Note: For reference, we convert from EJ to MBPD at a rate of 1 EJ = 0.48 MBPD of oil. Source: IEA
Total primary energy supply in the IEA 6DS, 4DS, and 2DS scenarios, 2009-2050 (Exejoules)
59. The lesson of 1979 (oil) and 2013 (coal)
• 1979
– Five years of weak
demand
– Nearly 20 years of
falling/flat oil prices
• 2013
– The rise of cheap
shale gas had a
swift impact on coal
prices
30
40
50
60
70
80
0
5
10
15
20
25
30
35
40 1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
Oil price (nominal $) Demand (mb/d): RHS
Source: BP Statistical Review of World Energy 2013
Source: IEA, 29 January 2014
Coal prices
Oil prices and demand
60. Lead times
Lead times can be 10 years plus
Source: Shell letter / Shell presentations
61. Non-OPEC versus OPEC
• 1979 demand slip increased
OPEC’s spare capacity
• Similar trend to 2020 driven by
unconventionals – barring OPEC
supply interruptions
• Position in 2020-2030
dependent on demand scenario
Source: BP 2030 World Energy Outlook
62. Energy sources to 2050
• 2050 oil demand: 4DS is around 100mb/d, 2DS is around 60mb/d.
Note: For reference, we convert from EJ to MBPD at a rate of 1 EJ = 0.48 MBPD of oil. Source: IEA
Total primary energy supply in the IEA 6DS, 4DS, and 2DS scenarios, 2009-2050 (Exejoules)
63. Part of the answer: Costs and tax take more of the “oil” cake
• Industry cash flow over 2010-14 was the same as 2000-2004
• Costs have doubled – effectively halving cash returns
Split of upstream revenues ($/boe)