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Carbon Tracker / Energy Transition Advisors Presentation in Boston & NYC in partnership with Ceres, MSCI and NYSSA - 9/10 July 2014
Carbon Tracker / Energy Transition Advisors Presentation in Boston & NYC in partnership with Ceres, MSCI and NYSSA - 9/10 July 2014
Carbon Tracker / Energy Transition Advisors Presentation in Boston & NYC in partnership with Ceres, MSCI and NYSSA - 9/10 July 2014
Carbon Tracker / Energy Transition Advisors Presentation in Boston & NYC in partnership with Ceres, MSCI and NYSSA - 9/10 July 2014
Carbon Tracker / Energy Transition Advisors Presentation in Boston & NYC in partnership with Ceres, MSCI and NYSSA - 9/10 July 2014
Carbon Tracker / Energy Transition Advisors Presentation in Boston & NYC in partnership with Ceres, MSCI and NYSSA - 9/10 July 2014
Carbon Tracker / Energy Transition Advisors Presentation in Boston & NYC in partnership with Ceres, MSCI and NYSSA - 9/10 July 2014
Carbon Tracker / Energy Transition Advisors Presentation in Boston & NYC in partnership with Ceres, MSCI and NYSSA - 9/10 July 2014
Carbon Tracker / Energy Transition Advisors Presentation in Boston & NYC in partnership with Ceres, MSCI and NYSSA - 9/10 July 2014
Carbon Tracker / Energy Transition Advisors Presentation in Boston & NYC in partnership with Ceres, MSCI and NYSSA - 9/10 July 2014
Carbon Tracker / Energy Transition Advisors Presentation in Boston & NYC in partnership with Ceres, MSCI and NYSSA - 9/10 July 2014
Carbon Tracker / Energy Transition Advisors Presentation in Boston & NYC in partnership with Ceres, MSCI and NYSSA - 9/10 July 2014
Carbon Tracker / Energy Transition Advisors Presentation in Boston & NYC in partnership with Ceres, MSCI and NYSSA - 9/10 July 2014
Carbon Tracker / Energy Transition Advisors Presentation in Boston & NYC in partnership with Ceres, MSCI and NYSSA - 9/10 July 2014
Carbon Tracker / Energy Transition Advisors Presentation in Boston & NYC in partnership with Ceres, MSCI and NYSSA - 9/10 July 2014
Carbon Tracker / Energy Transition Advisors Presentation in Boston & NYC in partnership with Ceres, MSCI and NYSSA - 9/10 July 2014
Carbon Tracker / Energy Transition Advisors Presentation in Boston & NYC in partnership with Ceres, MSCI and NYSSA - 9/10 July 2014
Carbon Tracker / Energy Transition Advisors Presentation in Boston & NYC in partnership with Ceres, MSCI and NYSSA - 9/10 July 2014
Carbon Tracker / Energy Transition Advisors Presentation in Boston & NYC in partnership with Ceres, MSCI and NYSSA - 9/10 July 2014
Carbon Tracker / Energy Transition Advisors Presentation in Boston & NYC in partnership with Ceres, MSCI and NYSSA - 9/10 July 2014
Carbon Tracker / Energy Transition Advisors Presentation in Boston & NYC in partnership with Ceres, MSCI and NYSSA - 9/10 July 2014
Carbon Tracker / Energy Transition Advisors Presentation in Boston & NYC in partnership with Ceres, MSCI and NYSSA - 9/10 July 2014
Carbon Tracker / Energy Transition Advisors Presentation in Boston & NYC in partnership with Ceres, MSCI and NYSSA - 9/10 July 2014
Carbon Tracker / Energy Transition Advisors Presentation in Boston & NYC in partnership with Ceres, MSCI and NYSSA - 9/10 July 2014
Carbon Tracker / Energy Transition Advisors Presentation in Boston & NYC in partnership with Ceres, MSCI and NYSSA - 9/10 July 2014
Carbon Tracker / Energy Transition Advisors Presentation in Boston & NYC in partnership with Ceres, MSCI and NYSSA - 9/10 July 2014
Carbon Tracker / Energy Transition Advisors Presentation in Boston & NYC in partnership with Ceres, MSCI and NYSSA - 9/10 July 2014
Carbon Tracker / Energy Transition Advisors Presentation in Boston & NYC in partnership with Ceres, MSCI and NYSSA - 9/10 July 2014
Carbon Tracker / Energy Transition Advisors Presentation in Boston & NYC in partnership with Ceres, MSCI and NYSSA - 9/10 July 2014
Carbon Tracker / Energy Transition Advisors Presentation in Boston & NYC in partnership with Ceres, MSCI and NYSSA - 9/10 July 2014
Carbon Tracker / Energy Transition Advisors Presentation in Boston & NYC in partnership with Ceres, MSCI and NYSSA - 9/10 July 2014
Carbon Tracker / Energy Transition Advisors Presentation in Boston & NYC in partnership with Ceres, MSCI and NYSSA - 9/10 July 2014
Carbon Tracker / Energy Transition Advisors Presentation in Boston & NYC in partnership with Ceres, MSCI and NYSSA - 9/10 July 2014
Carbon Tracker / Energy Transition Advisors Presentation in Boston & NYC in partnership with Ceres, MSCI and NYSSA - 9/10 July 2014
Carbon Tracker / Energy Transition Advisors Presentation in Boston & NYC in partnership with Ceres, MSCI and NYSSA - 9/10 July 2014
Carbon Tracker / Energy Transition Advisors Presentation in Boston & NYC in partnership with Ceres, MSCI and NYSSA - 9/10 July 2014
Carbon Tracker / Energy Transition Advisors Presentation in Boston & NYC in partnership with Ceres, MSCI and NYSSA - 9/10 July 2014
Carbon Tracker / Energy Transition Advisors Presentation in Boston & NYC in partnership with Ceres, MSCI and NYSSA - 9/10 July 2014
Carbon Tracker / Energy Transition Advisors Presentation in Boston & NYC in partnership with Ceres, MSCI and NYSSA - 9/10 July 2014
Carbon Tracker / Energy Transition Advisors Presentation in Boston & NYC in partnership with Ceres, MSCI and NYSSA - 9/10 July 2014
Carbon Tracker / Energy Transition Advisors Presentation in Boston & NYC in partnership with Ceres, MSCI and NYSSA - 9/10 July 2014
Carbon Tracker / Energy Transition Advisors Presentation in Boston & NYC in partnership with Ceres, MSCI and NYSSA - 9/10 July 2014
Carbon Tracker / Energy Transition Advisors Presentation in Boston & NYC in partnership with Ceres, MSCI and NYSSA - 9/10 July 2014
Carbon Tracker / Energy Transition Advisors Presentation in Boston & NYC in partnership with Ceres, MSCI and NYSSA - 9/10 July 2014
Carbon Tracker / Energy Transition Advisors Presentation in Boston & NYC in partnership with Ceres, MSCI and NYSSA - 9/10 July 2014
Carbon Tracker / Energy Transition Advisors Presentation in Boston & NYC in partnership with Ceres, MSCI and NYSSA - 9/10 July 2014
Carbon Tracker / Energy Transition Advisors Presentation in Boston & NYC in partnership with Ceres, MSCI and NYSSA - 9/10 July 2014
Carbon Tracker / Energy Transition Advisors Presentation in Boston & NYC in partnership with Ceres, MSCI and NYSSA - 9/10 July 2014
Carbon Tracker / Energy Transition Advisors Presentation in Boston & NYC in partnership with Ceres, MSCI and NYSSA - 9/10 July 2014
Carbon Tracker / Energy Transition Advisors Presentation in Boston & NYC in partnership with Ceres, MSCI and NYSSA - 9/10 July 2014
Carbon Tracker / Energy Transition Advisors Presentation in Boston & NYC in partnership with Ceres, MSCI and NYSSA - 9/10 July 2014
Carbon Tracker / Energy Transition Advisors Presentation in Boston & NYC in partnership with Ceres, MSCI and NYSSA - 9/10 July 2014
Carbon Tracker / Energy Transition Advisors Presentation in Boston & NYC in partnership with Ceres, MSCI and NYSSA - 9/10 July 2014
Carbon Tracker / Energy Transition Advisors Presentation in Boston & NYC in partnership with Ceres, MSCI and NYSSA - 9/10 July 2014
Carbon Tracker / Energy Transition Advisors Presentation in Boston & NYC in partnership with Ceres, MSCI and NYSSA - 9/10 July 2014
Carbon Tracker / Energy Transition Advisors Presentation in Boston & NYC in partnership with Ceres, MSCI and NYSSA - 9/10 July 2014
Carbon Tracker / Energy Transition Advisors Presentation in Boston & NYC in partnership with Ceres, MSCI and NYSSA - 9/10 July 2014
Carbon Tracker / Energy Transition Advisors Presentation in Boston & NYC in partnership with Ceres, MSCI and NYSSA - 9/10 July 2014
Carbon Tracker / Energy Transition Advisors Presentation in Boston & NYC in partnership with Ceres, MSCI and NYSSA - 9/10 July 2014
Carbon Tracker / Energy Transition Advisors Presentation in Boston & NYC in partnership with Ceres, MSCI and NYSSA - 9/10 July 2014
Carbon Tracker / Energy Transition Advisors Presentation in Boston & NYC in partnership with Ceres, MSCI and NYSSA - 9/10 July 2014
Carbon Tracker / Energy Transition Advisors Presentation in Boston & NYC in partnership with Ceres, MSCI and NYSSA - 9/10 July 2014
Carbon Tracker / Energy Transition Advisors Presentation in Boston & NYC in partnership with Ceres, MSCI and NYSSA - 9/10 July 2014
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Carbon Tracker / Energy Transition Advisors Presentation in Boston & NYC in partnership with Ceres, MSCI and NYSSA - 9/10 July 2014

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Carbon Tracker / Energy Transition Advisors Presentation in Boston & NYC in partnership with Ceres, MSCI and NYSSA - 9/10 July 2014

Carbon Tracker / Energy Transition Advisors Presentation in Boston & NYC in partnership with Ceres, MSCI and NYSSA - 9/10 July 2014

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  • 1. Mark Campanale Founder and Executive Director
  • 2. 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
  • 3. Our funders
  • 4. 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...
  • 5. Our research path
  • 6. 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
  • 7. 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.
  • 8. 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
  • 9. 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…
  • 10. 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.
  • 11. 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
  • 12. 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
  • 13. Mark Campanale Founder and Executive Director mark@carbontracker.org
  • 14. Mark Fulton Founding Partner at Energy Transition Advisors Advisor to Carbon Tracker Initiative
  • 15. Paul Spedding Advisor to Carbon Tracker and Energy Transition Advisors
  • 16. Demand risk and fossil fuel valuation 0 20 40 60 80 100 120 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 Oil 0 20 40 60 80 100 120 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 European gas 0 50 100 150 200 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 US gas
  • 17. Falling demand associated with weak prices 0 20 40 60 80 100 120 140 -6% -4% -2% 0% 2% 4% 6% 8% 10% 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 Change in demand Oil price (real) 1990s 1980s recession 2008 financial crisis 1973-5 recession Real oil Price 2013 ($) Annual demand change Source: BP Statistical Review of World Energy 2013
  • 18. 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
  • 19. Cost curve by production type Source: Rystad Energy and Energy Security Partners
  • 20. “Unburnable carbon” 0% 5% 10% 15% Shell BP Total Statoil Eni BG Traditional Deepwater Heavy oil “Unburnable” carbon (High cost projects) Price effect of $40 fall in oil prices Source: HSBC Equity Research based on Wood Mackenzie data (2012)
  • 21. Big oil has been a great long term investment • Helped by supranormal returns – due to OPEC price support? • But….. Source: msn.com
  • 22. Performance has been dreadful for 3-5 years • Undeperformance despite high oil prices. Why? Source: msn.com
  • 23. Returns deteriorating despite rising oil prices • Oil price quadruples… • Returns halve… 0 20 40 60 80 100 120 0 5 10 15 20 25 30 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 ROCE (%) Brent Shell reported ROCE Source: Shell
  • 24. Capital employed driven by accelerating capex • Ratio of capex to depreciation at a 10 year high 3000 3100 3200 3300 3400 3500 3600 3700 3800 3900 0.0 5.0 10.0 15.0 20.0 25.0 30.0 35.0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014e Capex/production ($/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 ($bn)
  • 25. Swap Capex for DDA • Capex adjusted earnings would halve, more than doubling its PE 13 15 7 0 5 10 15 20 25 30 35 40 45 50 Stated Clean Capex adjusted Post tax Tax DDA / Capex Source: Shell data Source: Zacks Investment Research Adjusting Shell’s 2013 earnings ($bn) RDSA PE (x)
  • 26. 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)
  • 27. 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
  • 28. 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, $/boe) Source: Exxon
  • 29. Shell’s cost curve • Like most majors, Shell has a wide range of projects with a wide range of break-even costs • For shareholder returns and to reduce risk, companies should focus on low cost projects 0 20 40 60 80 100 120 140 160 180 200 0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 Breakevenoilprice($/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
  • 30. 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 ($80/bbl+ BEOP) projects Source: CTI and Rystad
  • 31. Returns and price to book • Shell’s current Price/Book ratio is 1.4x • Sustaining a 1.5x Price/Book ratio needs projects with returns of around 20% 0.0 0.5 1.0 1.5 2.0 2.5 30% 25% 20% 15% 10% NPV uplift at different IRR rates ($ value per $ capex @ 10% cost of capital) Source: Own estimates
  • 32. Price to book history (RDS) • Price to book: A market indicator of perceived value added Source: Morningstar
  • 33. 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
  • 34. Backup Slides
  • 35. True OPEC cost curve • Social costs push OPEC’s required price to around $100 Source: APIC, Arab Petroleum Investments Corporation
  • 36. Non OPEC cost curve • Demand out till 2035 could be met at a non-OPEC marginal price of $80-90
  • 37. 54 Material value at risk in 10 year plus phase • Around 40% of a company’s NPV is still at risk post 10 years 0% 5% 10% 15% 20% 25% 30% 35% 1-5 5-10 10-15 15-20 20-25 25-30 30 beyond Net present value profile under business as normal
  • 38. Oil demand
  • 39. Tax and efficiency Source: Exxon Tax on gasoline ($)
  • 40. 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
  • 41. 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)
  • 42. 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 $) Demand (mb/d): RHS Source: BP Statistical Review of World Energy 2013 Source: IEA, 29 January 2014 Coal prices Oil prices and demand
  • 43. Lead times Lead times can be 10 years plus Source: Shell letter / Shell presentations
  • 44. Non-OPEC versus OPEC • 1979 demand slip increased OPEC’s spare capacity • Similar trend to 2020 driven by unconventionals – barring OPEC supply interruptions • Position in 2020-2030 dependent on demand scenario Source: BP 2030 World Energy Outlook
  • 45. Energy sources to 2050 • 2050 oil demand: 4DS is around 100mb/d, 2DS is around 60mb/d. Note: For reference, we convert from EJ to MBPD at a rate of 1 EJ = 0.48 MBPD of oil. Source: IEA Total primary energy supply in the IEA 6DS, 4DS, and 2DS scenarios, 2009-2050 (Exejoules)
  • 46. Part of the answer: Costs and tax take more of the “oil” cake • Industry cash flow over 2010-14 was the same as 2000-2004 • Costs have doubled – effectively halving cash returns Split of upstream revenues ($/boe)

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