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The oil industry and the global energy transition

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Presentation at the Follow This / PRI conference in the City of London 'What can investors do to help oil giants commit to Paris", 22 Feb 2018

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The oil industry and the global energy transition

  1. 1. Oil companies and the global energy transition Including source urls as notes Jeremy Leggett 22 Feb 2017
  2. 2. ….and up to 70% cuts by 2050, 34 years from now When the G7 agreed to push for decarbonisation in the Paris Agreement, few believed it would happen 8th Jun 2015
  3. 3. Unexpected result: a clear signal in the Paris Agreement - decarbonisation, as soon as possible 12th Dec 2015
  4. 4. 7th Jan 2016 17th Nov 2016 “Momentum is irreversible – it is being driven not only by governments, but by science, business and global action of all types at all levels” 195 nations issue Marrakech Action Proclamation deeming Paris commitments an “urgent duty”
  5. 5. 7th Jan 2016 28th Jun 2017 “Three years to safeguard our climate”: Christiana Figueres + a host of climate experts Decarbonisation by 2040
  6. 6. 7th Jan 2016 20th Feb 2018 BP projects demand for oil & gas in 2040 +/- same as today even with fast transition to RE and EVs Oil demand - and global emissions - in 2040 higher than today’s even with an ban on petrol engines by 2040 and a “renewables push”
  7. 7. 7th Jan 2016 26th Oct 2017 Potential emissions from reserves of the Carbon Underground 200 are > 6 times their carbon budget The CU 200 are the top 200 publically-quoted companies in size of fossil-fuel reserves 2017 -2050 The Carbon Underground 200TM allocated carbon budget i.e. their pro-rata share of IPCC’s 80% chance of 2˚C (598 GtCO2) 80.4 GtCO2 2017 The Carbon Underground 200TM potential emissions in reserves 491.9 GtCO2 Coal reserves 341.2 GtCO2 Gas reserves 79.3 GtCO2 Oil reserves 71.4 GtCO2
  8. 8. This isn’t “just” about climate change
  9. 9. Global pollution kills 9 million a year and threatens “survival of human societies” 7th Jan 2016 20th Oct 2017 Commission on Pollution and Health, published in the Lancet …most comprehensive medical study to date • Triple AIDS, malaria and TB combined • Almost certainly a significant underestimate • Welfare losses: e $4.6 trillion/year, 6% of GDP • Air pollution is the single biggest cause of death
  10. 10. 7th Jan 2016 2nd Dec 2016 Paris, Mexico City, Madrid and Athens vow at C40 summit to ban diesel vehicles by 2025 David Koch Paris smog
  11. 11. China to ban production of petrol and diesel cars “in the near future”, Vice Minister for Industry says 7th Jan 2016 11th Sep 2017
  12. 12. 7th Jan 2016 28th Jun 2017 Mayors of 7,400 cities vow to meet Obama's climate commitments First meeting of global covenant of mayors, co-chaired by Michael Bloomberg and Maroš Šefčovič
  13. 13. 7th Jan 2016 5th June 2017 Michael Bloomberg: US cities, states and businesses will still meet Paris targets 1,000+ cities, states & businesses, representing a third of US GDP, have joined “We Are Still In”
  14. 14. 7th Jan 2016 26th Jun 2017 250 US mayors endorse switch to 100% renewable energy by 2035 Resolution at the US Conference of Mayors, a bipartisan gathering in Miami Beach
  15. 15. 7th Jan 2016 12th Jul 2017 Corporations pledging 100% renewable power now top 100 RE 100 club now creating around 146 terawatt-hours (TWh) in demand for RE annually…about as much as it takes to power Poland
  16. 16. 7th Jan 2016 23rd Jan 2018 If RE100 were a country, it would be 24th biggest in the world in terms of electricity use 122 members now. Their demand for renewable electricity is up 49%. 25 of them achieved 100% by end 2016. 4x PPA increase in a year. Source: RE100 Progress and Insights report
  17. 17. 7th Jan 2016 12th Dec 2017 Funds managing $26 tn pledge to pressure worst 100 companies on emissions, = 2/3rds global total 225 institutions incl. HSBC Global Asset Management, Calpers, Axa ++, pressing for disclosure and more from Exxon, Coal India, Glencore ++
  18. 18. 7th Jan 2016 12th Dec 2017 ExxonMobil bows to shareholder pressure on climate: will disclose impact of Paris on business At the company AGMs, the board had long opposed such disclosure despite resolutions supported by some of the biggest pension funds New President Darren Woods, replacing Rex Tillerson 14 December
  19. 19. 7th Jan 2016 12th Dec 2016 Fossil fuel divestment doubles to $5tn in a year, and 80% of total funds are now commercial / pension
  20. 20. 7th Jan 2016 16th Nov 2017 Norwegian Central Bank, manager of the oil fund, tells government it should divest from oil and gas Biggest holding end 2016: $5.3 bn in Shell
  21. 21. 7th Jan 2016 12th Dec 2017 World Bank announces it will end financial support for oil and gas exploration from 2019 At present, 1-2% of the Bank’s $280bn per year portfolio goes to oil and gas projects. 28% of its lending will go to climate action by 2020
  22. 22. “Big Oil must pay for climate change. Now we can calculate how much”: leading climate scientists 7th Jan 2016 7th Sep 2017 “Nearly 30% of the rise in global sea level between 1880 and 2010 resulted from emissions traced to the 90 largest carbon producers” Myles Allen, Oxford University, et al
  23. 23. San Francisco and Oakland sue five oil companies for damages from rising seas 7th Jan 2016 21st Sep 2017 Public nuisance cases requiring payment for sea walls etc Against BP, Shell, Chevron, ConocoPhillips, and ExxonMobil
  24. 24. Lawyer who helped extract $200 bn from Big Tobacco is now taking on Big Oil 7th Jan 2016 22nd Dec 2017 Steve Berman represents Oakland and San Francisco in a lawsuit vs Exxon, Shell, Chevron, ConocoPhillips, and BP for causing sea-level rise
  25. 25. 7th Jan 2016 10th Jan 2018 New York sues big oil companies for climate change damage and “deliberate deception” ExxonMobil leads rebuttals: “a complete fabrication that was conceived, paid for, and executed by anti-oil and gas activists” Mayor Bill de Blasio
  26. 26. 7th Jan 2016 15th Feb 2018 ExxonMobil sues its suers, alleging a conspiracy to suppress its freedom of speech on climate At least 30 people and organizations are targeted, including the attorneys general of New York and Massachusetts
  27. 27. 7th Jan 2016 10th Jul 2017 Just 100 companies are responsible for 71% of greenhouse gases since 1988 Source: Carbon Disclosure Project
  28. 28. 7th Jan 2016 18th Sep 2015 A new dimension in corporate lawsuits …all about cheating on emissions limitations
  29. 29. 350 300 250 200 150 100 50 0 7th Jan 2016 5th Jan 2017 “Solar Could Become the Cheapest Power on Earth” In recent auctions solar at <$30 MWh Is already < half average price of coal Average solar price may be < coal by 2025 2009 2012 2015 2018 2021 2024 2027 2030 2033 2036 2039 CCGTSolar Wind Coal $MWh
  30. 30. 7th Jan 2016 1st Dec 2017 US coal-fired power plant to be shut down and replaced by solar Wisconsin utility WEC Energy’s 1,190MW Pleasant Prairie plant to be replaced by a 350 MW solar farm
  31. 31. 7th Jan 2016 6th Jul 2017 EVs will be cheaper than conventional cars in most countries by 2020-2025 54% of new vehicles & 33% of all light vehicles on roads by 2040 ….Bloomberg New Energy Finance hikes its annual prediction again
  32. 32. 7th Jan 2016 2nd Oct 2016 Carmakers embrace an electric future at Paris motor show Daimler Chairman Dieter Zetsche unveils the Mercedes-Benz EQ
  33. 33. 7th Jan 2016 5th Jul 2017 First major carmaker calls time on ICE-only cars: Volvo to use electric motors in all cars from 2019 x Jean Claude Van Damme in a famous Volvo ad
  34. 34. China's Chongqing Changan to sell only EVs from 2025 7th Jan 2016 19th Oct 2017
  35. 35. 7th Jan 2016 12th Mar 2017 National Grid and Google: investigating DeepMind AI in balancing supply and demand on the UK grid
  36. 36. Crown Prince Shaikh Mohammad Bin Zayed Al Nahyan, Abu Dhabi: “I promise you, my brothers and sisters, we will be celebrating.” 7th Jan 2016 16th Jan 2016 “In 50 years, when we ship off the last barrel of petrol, we will not be sad”
  37. 37. “Saudi Arabia Plans $2 trillion Megafund for Post-Oil Era” 7th Jan 2016 1st Apr 2016 Mohammed Bin Salman, Deputy Crown Prince: “Within 20 years, we will be an economy or state that doesn’t depend mainly on oil.”
  38. 38. First major utility business model U turn: E.On to pursue renewables and energy services 7th Jan 2016 1st Dec 2014
  39. 39. 7th Jan 2016 6th Dec 2017 More than half of EU’s coal-fired power stations are lossmaking, and almost all will be by 2030 Analysis of >600 power plants by Carbon Tracker estimates €22bn of losses could be avoided by phasing out coal by 2030
  40. 40. 7th Jan 2016 5th Dec 2017 All major EU power utilities commit to carbon- neutral power ‘well before’ 2050 Eurelectric secretary-general Kristian Ruby
  41. 41. 7th Jan 2016 11th Nov 2017 “GE and Siemens: power pioneers flying too far from the sun” 2010: Analysts expect 300 large gas turbines to be sold each year 2017: 122 sold Joe Kaeser, CEO, Siemens John Flannery, CEO, GE
  42. 42. 7th Jan 2016 12th Feb 2018 “A Powerful Mix of Solar and Batteries Is Beating Natural Gas” e.g. Arizona PS Co opts for a First Solar solar-battery project cheaper than gas / California PUC requires PG&E to use batteries over gas
  43. 43. 7th Jan 2016 6th Feb 2018 “How Tesla's big battery is bringing Australia’s gas cartel to heel” RenewEconomy: gas companies manufacture shortages to hike prices for frequency control …and the big battery kicks in much cheaper
  44. 44. “If $100 was too high for the world, $50 is too low for the industry. It will have to be somewhere in between.” John Hess CEO, Hess Corporation Despite huge cuts, most oil majors couldn’t even cover their costs at $50 oil in 2016 7th Jan 2016 2nd April 2017
  45. 45. “Energy companies buy time by paying debt interest with more debt” 7th Jan 2016 25th July 2016 W&T Offshore: offering bondholders 45% of equity plus more debt notes deferring cash payments due 7th Jan 2016 25th July 2016
  46. 46. Oil and gas extraction has been the least profitable US industry over the last year 7th Jan 2016 24th Sep 2017 Negative net profit averaging almost 7% on average over the 12 months to end July
  47. 47. 1940: 6 in 7 barrels used by Allies in WW2 come from the US 1950: Car use and oil imports soar Nov 1990 Peak 1977 Alaska 2008: Fracking in shale 2014 Price collapse …recovery 7th Jan 2016 31st Jan 2018 Shale pushes US oil output above 10 mbd: to heights last seen in 1970
  48. 48. The shale business hasn’t funded itself at any oil price 7th Jan 2016 27th Dec 2017 Even at $100 oil prices in 2012 and 2013, the 33 companies spent more money producing shale energy than they made from operations 33 shale-weighted E&P companies in the 4 main shale oil plays: Free cash flow Source: Bloomberg
  49. 49. 7th Jan 2016 1st June 2017 Michael Bloomberg: US cities, states and businesses will still meet Paris targets “The Global Oil & Gas Industry Is Cannibalizing Itself To Stay Alive” 75% of operating cash flow just to pay interest The Debt Wall Amount of bonds below investment grade that the US energy companies need to pay back each year
  50. 50. “Has the US shale drilling revolution peaked?” 7th Jan 2016 18th Oct 2017
  51. 51. 7th Jan 2016 29th Apr 2017 “More Rigs Don't Mean More U.S. Gas …producers are running hard to stand still.” Rigs double since August… …and production drops
  52. 52. Long awaited EPA study concludes that fracking does contaminate US drinking water 7th Jan 2016 5th June 2016 Both industry and EPA had said it did not until this report
  53. 53. 7th Jan 2016 2nd June 2016 Scottish parliament bans fracking
  54. 54. 7th Jan 2016 24th June 2016 Germany bans fracking
  55. 55. 7th Jan 2016 15th Feb 2018 Netherlands bans fracking Shale gas “not an option”, economics minister tells parliament
  56. 56. France bans fracking and oil extraction in all of its territories 7th Jan 2016 20th Dec 2017 • President Macron says he wants to lead the world in race for renewables • Lawmakers hope the ban will be “contagious”
  57. 57. 7th Jan 2016 9th Nov 2016 Monterey county, a significant drilling target, votes to ban fracking despite oil industry lobbying blitz
  58. 58. 7th Jan 2016 3rd Feb 2018 Exxon publishes its climate risk assessment: growth through 2040 while burning almost unfettered Current reserves of 20 BBOE will need replacing with a further 35 BBOE …and all of this 55 BBOE is burnable with a 2˚C scenario, they say Energy mix 2016 to 2040 Average annual growth rate: 0.9% Growth rates 2016 to 2040
  59. 59. 1 Electric Vehicle = 15 barrels of oil / year Source:Bloomberg 20 10 15 5 0 2010 2020 20252015 2030 2035 2040 Millionsofbarrelsofoilperday Oil displaced by projected rise of electric vehicles Previous crashes happened with excess supply of 2m barrels/day 2023 Another oil crash? 24th Feb 2016 $31 Demand under “threat”: “Another oil crash is coming and there may be no recovery”
  60. 60. 7th Jan 2016 2nd Feb 2017 Carbon Tracker: Electric cars and cheap solar “could halt fossil fuel growth by 2020” COAL …demand peak 2020 GAS …demand curtailedOIL …demand plateau from 2020 TOTAL FOSSIL FUELS …demand peak 2020 Least fossil-fuel intensive scenario: High PV / EV low 2012 2020 2030 2040 2050 2012 2020 2030 2040 2050 2012 2020 2030 2040 2050 2012 2020 2030 2040 2050 Source: Expect The Unexpected
  61. 61. The core oil and gas climate (and indeed survival) argument…. ….is that burning gas is less bad for global warming than burning coal
  62. 62. True ….depending on leakage
  63. 63. “Future of natural gas hinges on staunching methane leaks” 7th Jan 2016 11th July 2016 EPA data collection programme underway on 10s of 1000s of oil and gas operations. Some drillers have committed to <1% emissions.
  64. 64. “The data confirm that we can and must do more on methane.” 2nd Mar 2016 2nd Mar 2016 29th Feb 2016 xEPA Chief: Methane emissions from oil and gas “substantially higher than we thought”
  65. 65. 7th Jan 2016 28th Apr 2016 The U.S. oil and gas boom is having global atmospheric consequences, NOAA reports Fully 2% of rising global ethane concentrations from Bakken Shale
  66. 66. NASA-led team shows oil & gas industry responsible for largest share of recent rising methane emissions 7th Jan 2016 20th Dec 2017 New measurements reconciling isotopic data suggest fossil fuels contributed 12–19 Tg CH4 per year of c. 25 Tg CH4 per year since 2006
  67. 67. “The long twilight of the big oil companies”7th Jan 2016 27th May 2016 FT View: “Fossil fuel producers face a future of slow and steady decline” 2nd Mar 2016 2nd Mar 2016 27th May 2016
  68. 68. 7th Jan 2016 19th Sep 2016 “Big Oil was never that big a money-maker, Goldman Sachs says” Oil price (Brent, real) CROCI BP Shell ExxonMobil
  69. 69. 7th Jan 2016 3rd Aug 2017 “Oil has a crisis of faith” “The likeliest culprit is fear that, even if oil prices aren't falling further, they are low enough to affect E&P firms' growth plans”
  70. 70. 7th Jan 2016 1st Jul 2017 “Oil Company Wins Over Investors by Promising to Stop Looking for Oil” “Suncor shares outperformed every major North American oil company from June 2016 to May, as well as the S&P 500 index”
  71. 71. 7th Jan 2016 21st Jun 2017 c. $2.3 trillion of capex should not be deployed by 2025 if the OGI is to keep to a 2˚C budget Within 2˚C budget (IEA 450) …50% probability Business as usual Capex($bn,real2017: 69publicallytradedcompanies) Historic Latest report: Two Degrees of Separation Based on CTI & Rystad analysis $1.6 tn oil $700 bn gas …of which $200bn LNG
  72. 72. 7th Jan 2016 16th Aug 2017 “Shell takes $14bn gas gamble with world’s biggest floating structure” FLNG vessel Prelude Length 488 metres
  73. 73. 7th Jan 2016 20th June 2016 Shell puts revamped shale arm at heart of future growth strategy
  74. 74. 7th Jan 2016 7th Jan 2018 Growth of Shell’s oil and gas operations in the next decade will depend on shale production: CEO With “a little bit of help from the oil price going up, we now see that we can significantly accelerate investment into this opportunity”
  75. 75. 7th Jan 2016 1st Aug 2013 Shell writes off $2 billion in shale The idea of a shale revolution spreading from the US across the world is “a little bit overhyped,” says CEO Peter Voser
  76. 76. 7th Jan 2016 29th Jun 2017 After $13bn of writedowns, BHP chairman says $20bn US shale investment was “a mistake” Jacques Nasser: “If we knew (in 2011) what we knew today, we wouldn't do it, of course we wouldn't do it”
  77. 77. 7th Jan 2016 3rd Oct 2016 “Big oil should exercise capital discipline as prices rise” …& appoint a Head of Memory So says Paul Spedding, ex Global Co-Head of Oil And Gas Research at HSBC, now an advisor to Carbon Tracker
  78. 78. 7th Jan 2016 3rd Nov 2016 Shell CEO: “no-one makes money from renewables” Ben van Beurden
  79. 79. 7th Jan 2016 3rd Nov 2016 “I did talk to him …to point out that we are making profits …with solar energy priced at $0.05 per kWh.” Paddy Padmanathan CEO, ACWA Power
  80. 80. Shell and Eni face trial in Italy in March 2018 over alleged billion-dollar corrupt payment in Nigeria 7th Jan 2016 20th Dec 2017 Global Witness alleges “The Nigerian people lost out on over $1bn, equivalent to the country’s entire health budget.” Shell e-mail forwarded to then CEO Peter Voser
  81. 81. Big oil and gas companies are unsurprisingly taking out hedge bets…
  82. 82. 7th Jan 2016 18th Oct 2017 Statoil powers up world's first floating windfarm off coast of Scotland The $200m 30 MW Hywind project
  83. 83. Statoil takes first stake in utility-scale solar 7th Jan 2016 19th Sep 2017 Their first major move in solar is a 40% stake in a 162 MW Scatec project in Brazil (when you do, its still all about oil & gas)
  84. 84. 7th Jan 2016 7th Aug 2017 Shell to supply electricity to commercial users in the UK from 2018
  85. 85. Shell to supply energy to UK households after takeover of First Utility 7th Jan 2016 21st Dec 2017 £200 – 300 million for access to 850,000 homes to compete with the vulnerable Big 6 and create a platform for expansion to other markets
  86. 86. Shell buys electric car charging company 7th Jan 2016 12th Oct 2017 One of Europe’s largest, with 30,000 electric charge points
  87. 87. 7th Jan 2016 15th Dec 2017 BP to reenter solar market with 43% $200m stake in developer Lightsource
  88. 88. 7th Jan 2016 6th Feb 2018 BP CEO Bob Dudley: “Its not a race to renewables” Only $0.5 bn of its $15-16bn capex will be invested in clean energy. DAC test site, Squamish, Canada Not like in 2000 then… A BP “Beyond Petroleum” advert, 2000
  89. 89. One (former) oil and gas company has already shown that total transition is possible….
  90. 90. 7th Jan 2016 13th June 2016 Dong Energy - Danish Oil and Natural Gas - now 75% renewables …enjoys most successful IPO of 2016 $16.5 bn market cap, $2.6 bn proceeds of IPO
  91. 91. DONG changes its name to reflect near-100% transition to renewables 7th Jan 2016 2nd Oct 2017 Named after the Danish electricity pioneer, to reflect its “profound strategic transformation from black to green energy.” on track for a 95% renewable footprint by 2023
  92. 92. It can be done!
  93. 93. It must be done!
  94. 94. …a saga spanning 2013-2017 www.jeremyleggett.net As told in… Update edition published 15.2.18.

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