Revenue Analysis James Henderson April 2019 The Economics of Energy Corporations (2) A major offshore oil production facility •Multi-billion dollar projects offshore require huge up-front spending •Onshore projects can be more incremental with production Shale oil development in Texas •Each well in a shale development is an individual investment with its own economics •The numbers are smaller, but equally important to investors A giant gas field in West Siberia •Even onshore fields require large infrastructure, and geography / weather play a key role in costs Production Profile 1.Initial surge to peak production 2.Plateau at peak for a number of years 3.Gradual decline towards abandonment 4.Water and solids production increases, undermining performance A conventional oil or gas field production profile Shale Oil Production Profile 1.Immediate surge to peak production 2.Rapid decline over the first few years 3.Long plateau at low production rates A shale oil or gas field production profile Create a theoretical cashflow based on assumptions known to date Oil Production Forecast Key Elements • •Time from first investment to first oil • •Ramp up period • •Peak production • •Peak production period • •Decline rate Let’s model a conventional production profile •Reserves – 1 billion barrels of oil plus 500Bcf of gas • •Start date – 5 years after first investment • •Peak production – 5% of reserves • •Time to peak – 4 years • •Length of peak – 7 years • •Decline rate – 5% • • Domestic supply chain •We are concerned about well to refinery gate in domestic market • • Export supply routes •Export price based on global markets •Domestic price often lower due to subsidies / market constraints • • Some Scenario Planning •We need to have some opinions of fuel prices for our cashflow model • •Future of oil and gas prices is critical to revenues • •Impact of changing energy economy is increasingly evident and needs to be discussed • •Strategic planning departments create a base case and various alternative outcomes around it • •The ultimate conclusion needs to be some price forecasts 0 5 10 15 Africa Other Asia India China OECD Energy transition is underway *Industry excludes non-combusted use of fuels 0 5 10 15 20 Renewables Hydro Nuclear Coal Gas Oil 0 5 10 15 20 20 Transport Other Industry* Non-combusted Buildings Primary energy demand End-use sector Region Billion toe Fuel 13 0 5 10 15 20 1970 1980 1990 2000 2010 2020 2030 2040 Other Africa Other Asia India China OECD Growth in energy demand is driven by increasing prosperity Primary energy consumption by region Billion toe -0.5% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 2000-2010 2010-2020 2020-2030 2030-2040 Primary energy growth and regional contributions % per annum 14 India & Other Asia Differences in the fuel mix across regions 0 1 2 3 4 Coal Oil Gas Hydro Nuclear Renewables US EU China Middle East 5 -400 -200 0 200 400 600 800 China India China Other Asia Middle East China India US India EU Changes 2016-2040† by fuel and region Primary energy demand by fuel and region Renewables Gas Gas Nuclear Oil Renewables Renewables Renewables Coal Oil Coal Oil Coal Coal Coal †Ten largest increases and five largest declines China US EU US EU Billion toe Million toe 0% 10% 20% 30% 40% 50% 0% 20% 40% 60% 80% 100% The transition to a lower carbon fuel mix continues… Shares of primary energy † Non-fossils includes renewables, nuclear and hydro 0 5 10 15 20 Renewables Hydro Nuclear Coal Gas Oil Primary energy consumption by fuel Billion toe Oil Coal Gas Hydro Nuclear Non-fossils Renewables 16 Coal Oil Gas The world continues to electrify… Growth of GDP, power and primary energy % per annum Shares of total power generation 0% 20% 40% 60% 80% 100% 1970 1980 1990 2000 2010 2020 2030 2040 Renewables Hydro Nuclear Gas Oil Coal 0% 1% 2% 3% 4% 5% 1990-2016 2016-2040 GDP Power Total primary energy Primary energy ex power 17 The increasing share of renewables is led by China and OECD Growth of power generation, 2016-2040 6 5 4 3 2 1 0 -1 -2 -3 OECD China India & Other Asia Other Renewables Nuclear Gas Hydro Coal Oil Thousand TWh Shares of power generation, 2016 and 2040 0% 20% 40% 60% 80% 100% Non- fossil Gas Coal & oil OECD China India Other Asia 18 Solar PV learning curve 9 8 7 6 5 4 3 2 1 0 Energy Outlook 2015 Energy Outlook 2018 The outlook for renewables has increased significantly Change to the projected level of renewable power in 2035 Thousand TWh Solar Wind Other 0 20 40 60 80 100 120 0 400 800 1200 1600 2000 2400 2800 $2016/MWh Cumulative capacity, GW 2015 2020 2025 2040 2035 2030 *Cost per MWh of building and operating a plant over its lifetime. Excludes subsidies, tariffs and the cost of grid integration. North America, utility scale PV, levelized costs* 0% 20% 40% 60% 80% 100% ET RE push Alternative scenario: more sustained support for renewables Renewables share of power growth, 2016-2040 Change in carbon intensity of power, 2016-2040 -20% 0% 20% 40% 60% 80% ET RE push Gas-fired power Coal-fired power Change in gas and coal power output, 2016-2040 -100% -80% -60% -40% -20% 0% ET RE push EFT 2020 2030 2040 0 1 2 3 4 5 1990 2000 2010 Other Other Asia India China OECD Global coal demand flatlines, with falls in China and OECD Billion toe Coal consumption by region -1% 0% 1% 2% 3% 4% 5% 1970- 1980- 1990- 2000- 2010- 2020- 2030- 1980 1990 2000 2010 2020 2030 2040 Other Asia OECD India China Other Total Coal consumption growth and regional contributions % per annum 2020 2030 2040 0 100 200 300 400 500 1990 2000 2010 Industry Non-combusted Power Buildings Transport Growth in natural gas demand… Bcf/d 600 Gas consumption by sector Gas share by sector 0% 10% 20% 30% 40% 50% 1990 2000 2010 2020 2030 2040 Industry Buildings Transport Non-combusted Power Less gas switching Renewables push Faster transition Even faster transition Prospects for gas demand could be dampened Gas demand growth 2016-2040 % per annum -0.5% 0.0% 0.5% 1.0% 1.5% Gas share of primary energy 1990-2040 15% 17% 19% 21% 23% 25% 2.0% 27% 1990 2000 2010 2020 2030 2040 Evolving transition Less gas switching Renewables push Faster transition Even faster transition Evolving transition Growth of fuels used in transport slows… Billion toe Transport energy consumption by mode Contributions to transport energy consumption growth 0 1 2 3 4 5 2040 Non-road* Trucks Cars** 0 1 2 3 4 5 2016 2040 Income per head Efficiency gains Population growth 2016 *Aviation, Marine and Rail **Includes 2- and 3- wheelers Billion toe 350 300 250 200 150 100 50 0 -50 -100 2000- 2005- 2010- 2015- 2020- 2025- 2030- 2035- 2005 2010 2015 2020 2025 2030 2035 2040 India China Other non-OECD OECD Total 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 2000 2010 2020 2030 2040 Other* Electricity Gas Oil Transport demand continues to be dominated by oil… Transport energy consumption by fuel type Billion toe Transport energy consumption growth by region Mtoe *Other includes biofuels, gas-to-liquids, coal-to-liquids, hydrogen 25 2 4 6 8 2010 2020 2030 2040 EU China US The passenger car parc grows substantially... 0.5 1.0 1.5 2.0 2.5 10 0.0 0 2000 2010 2020 2030 2040 2000 *ICE vehicles includes hybrid vehicles which do not plug into the power grid Battery electric Plug-in hybrid ICE* Passenger car parc by type Fuel economy of new cars Billions of vehicles Litres/100km** **Based on the NEDC (New European Drive Cycle), gasoline fuel 26 0 40 50 2016 2020 2025 2030 2035 2040 Electricity Gas Liquids Road transport will be affected by the mobility revolution… Vehicle kilometres (Vkm) by fuel type New mobility share of total Vkm Trillion km 0% 30% 40% 2016 2020 2025 2030 2035 2040 Private - autonomous Shared - autonomous Shared - human driver Trucks 30 20% 20 10% 10 Cars excludes 2- and 3- wheelers 27 Cars Liquid fuel use in cars is broadly flat… Changes in liquids demand from cars: 2016-2040 Mb/d 18.7 22.6 18.2 2.5 2.0 18.6 45 40 35 30 25 20 15 10 5 0 2016 Growth in demand for travel Tightening in vehicle efficiency standards Shared mobility EVs 2040 Switch to EVs Other gains in fuel efficiency 0% 20% 40% 60% 80% 2016 2020 2030 2040 Evolving transition ICE ban Alternative scenario: impact of faster growth in electric cars… Electric car sales as a share of total car sales Share 100% Share of total passenger Vkm powered by electricity 0% 20% 40% 60% 80% Share 100% 2016 2020 2025 2030 2035 2040 Evolving transition ICE ban 29 Some infrastructure and technology issues •Battery prices have been falling at 21% p.a. since 2008 •They could reach $100/kwh by 2025, at which point a car battery would cost around $6,000 •Charging infrastructure has also expanded rapidly, with a CAGR of 95% •Policy plays a key role – China has plans to build 5 million charging points by 2020 • • Battery prices ($/kwh) Charging stations worldwide Behavioural economics could suggest rapid growth •Consumer adoption will be vital to the success of electric vehicles •If consumers start to think of EVs as an attractive and superior technology, then historical analogies suggest a rapid growth trajectory •A key element in the decision will be cost, and the debate therefore centres on battery technology • US household penetration of new technologies EV share of sales and fleet, end of period Optimistic longer term scenarios see dominance by EVs although the variations in outcome are wide The impact on oil demand could be very significant •A loss of even 5 million bpd would be huge, given that oil demand has historically grown by around 1mmpd per annum •However, would a price collapse slow the switch away from oil? Other Middle East Africa Other Asia China India 105 100 95 90 85 80 110 2016 OECD Non-OECD 2016 Non-OPEC decline Non-OPEC growth OPEC Russia Brazil US Growing demand for liquid fuels in emerging economies 2040 level Demand Supply Mb/d 20 40 120 140 Trucks Non-combusted Buildings Cars Non-road Industry Power Liquids demand grows materially over the period to 2040 0.0 0.5 100 1.5 80 1.0 60 2.0 2.5 2005- 2010- 2015- 2020- 2025- 2030- 2035- 2010 2015 2020 2025 2030 2035 2040 Power Industry Transport Buildings Non-combusted Total Mb/d, average annual growth Mb/d Liquids demand Liquids demand growth 0 -0.5 2000 2010 2020 2030 2040 Cars include 2- and 3- wheelers. Trucks include most SUVs in North America. Transport Non-road includes aviation, marine and rail Carbon emissions continue to grow in the ET scenario 0 5 10 15 25 1970 1980 1990 2000 2010 2020 2030 2040 Evolving transition Faster transition Even faster transition Transport Industry & Buildings CCUS* Carbon emissions Reductions versus ET scenario Billion tonnes CO2 Billion tonnes CO2 in 2040 40 0 2 4 6 8 10 12 35 Power 30 Faster transition 20 Even faster transition *Carbon capture use and storage 0 10 20 30 40 Evolving transition Even faster transition Energy intensity Other sectors CC&S Power Fuel switching Alternative scenario: impact on global energy system Primary energy consumption by fuel 0 5 10 15 20 2016 ET FT EFT Renew. Hydro Nuclear Coal Gas Oil Billion toe Carbon emissions in 2040: EFT versus ET scenario Billion tonnes CO2 2040 Alternative Scenarios for Oil Demand •Broad range of scenarios based on development of energy economy •Spread between high and low demand is over 40mmbpd •New supply will be needed though; existing fields will inevitably decline Oil production is dominated by three countries •Saudi Arabia, Russia and the US account for more than one third of global oil output • •The Middle East is the dominant region, accounting for around 35% of output • •OPEC countries generate 42% of the world’s oil, giving the cartel a strong lever over prices • •Many traditional non-OPEC countries are now in decline, other than the US trolololo OPEC meeting Dominate exports Russia taking a more important role Oil becoming geo-political key again given 3 big producers Impact of OPEC •OPEC accounts for around 40% of global oil production •It tries to act as a cartel to control the oil price within an “acceptable” range •Most recent cut was in November 2016 – price has risen from $45 per barrel to $70 OPEC is a volatile organisation •The budgets of OPEC countries need high oil prices •The politics of the Middle East provides a clear risk to oil production OPEC decisions about future oil production and oil prices are critical for new projects •Need to maximise oil revenues • •Historic strategy to preserve oil for future generations • •Now the question is whether there is a long-term future for oil? • •Largest reserve holders risk failing to monetise resources • •Low cost producers do not want to allow higher cost producers to take market share • •How to find the optimal balance? Current strategy – avoid very low oil prices by cutting production •What happens next? An oil glut from US shale or an oil shortage due to lack of investment and growing demand? OPEC and Russian compliance with 2016 agreement has been patchy Monitoring stock levels is key in the short-term High or rising stock levels mean oversupply of oil, generally leading to lower prices The oil price has been volatile •Politics and economics have played a role –OPEC and Non-OPEC compliance with production cuts –US imposition of sanctions on Iran, but then granting exemptions President Trump and his tweets have triggered responses The Oil Price – A Volatile History •Range over the past decade has been $140 to $25 per barrel •Price has more than doubled in the past two years •10 year average is $79 per barrel, 5 year average is $68 Let’s make an oil price forecast! •Base case • •Upside case • •Downside case • •Disaster (worst) case • •Does the investment need to work in all of these scenarios? Gas Price Gas market has been developing, especially in Europe Gas increasingly priced relative to competing gas supply, not relative to oil Global gas prices text •text