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Pricing Carbon in Hydrocarbon Portfolios
Climate change risks and opportunities for oil and
gas companies
Laurent Milliat,...
Content



    I.     The necessary “decarbonisation” of the economy




    II.    Increasingly stricter carbon regulatio...
The necessary “decarbonisation” of the economy
 3
Unsustainable energy and emission trends
     Between now and 2030, a dangerous 40-45% rise in energy-related CO2 emission...
A required transition towards a low carbon future
    Developed countries need to cut CO2 emissions by 25% to 40% from 199...
Increasingly stricter carbon regulations
 6
Global and regional carbon regulations are crucial
    A range of carbon regulations will affect energy companies

    “Cl...
Cap-and-trade regimes (and other carbon taxes…)
    Economic tools are implemented in an increasing number of regions

   ...
Differentiated carbon profiles of fossil fuels
 9
Full life cycle GHG emissions profiles
     Coal GHG intensity is twice Natural gas’s GHG intensity

     All fossil fuels...
Pricing carbon in some European upstream portfolios
11
An upstream portfolio analytical framework
     European companies have various exposures to lower or higher GHG-intensive...
Significant GHG liabilities associated with 2020e production
      GHG liabilities ranging in average from <1% to 68% of c...
Takeaways
 14
Takeaways
     The transition to lower carbon business models


            The issue for energy companies is not anymore ...
Disclaimer




      Le présent document a un caractère purement informatif, il ne comporte aucune offre de vente ou d'ach...
Adresses




     Luxembourg                  Australie                    Suisse                           Bahreïn
     D...
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Research Paper May 2009 - Pricing Carbon in Hydrocarbon Portfolios: Climate Change Risks and Opportunities for Upstream Assets

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Laurent Milliat, Sustainability Analyst - Dexia Asset Management - Belgium

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Research Paper May 2009 - Pricing Carbon in Hydrocarbon Portfolios: Climate Change Risks and Opportunities for Upstream Assets

  1. 1. Pricing Carbon in Hydrocarbon Portfolios Climate change risks and opportunities for oil and gas companies Laurent Milliat, CFA Sustainability Analyst Money does not perform. People do.
  2. 2. Content I. The necessary “decarbonisation” of the economy II. Increasingly stricter carbon regulations III. Differentiated carbon profiles of fossil fuels IV. Pricing carbon in some European upstream portfolios 2
  3. 3. The necessary “decarbonisation” of the economy 3
  4. 4. Unsustainable energy and emission trends Between now and 2030, a dangerous 40-45% rise in energy-related CO2 emissions Energy-related CO2 emissions in the IEA 2008 Reference Scenario Increasing energy demand supplied by fossil fuels Energy consumption highly correlated with economic growth: x10 over 20th century 80% of current needs supplied by fossil fuels (oil 35%, coal 25%, gas 20%) Source: IEA World Energy Outlook (2008) Rising combustion of fossil fuels driving up greenhouse-gas (GHG) emissions Oil and gas sector is directly involved in this unsustainable trend, with CO2 emissions from: its own operations: 5% of global GHG emissions its products: 29% of global GHG emissions IEA Reference scenario is unsustainable: role of non-OECD countries (97% of BAU emissions increase) A “business-as-usual” scenario would take the world to dangerous levels of GHG concentrations 4
  5. 5. A required transition towards a low carbon future Developed countries need to cut CO2 emissions by 25% to 40% from 1990 levels by 2020 How to reduce energy-related CO2 emissions? Energy-related CO2 emissions = Population * GDP/capita * Energy intensity (Primary Energy/GDP) * Carbon intensity (CO2 emissions/primary energy) Lower the energy intensity of the economy Investing in energy efficiency: IEA: energy efficiency has the largest and cheapest energy-related CO2 emissions abatement potential (65% by 2020 and 57% by 2030) McKinsey estimates: $170 billion investment per year over the next 13 years will cut world energy demand growth by more than half and generate an average annual rate of return of 17% Lower the carbon content of our energy No silver bullet, but energy transition with a range of solutions: coal to gas switching, renewables (hydro, wind, solar, biomass etc.), Carbon Capture and Storage (CCS), nuclear etc. 5
  6. 6. Increasingly stricter carbon regulations 6
  7. 7. Global and regional carbon regulations are crucial A range of carbon regulations will affect energy companies “Climate change is the greatest market failure the world has ever seen” Nicholas Stern, the former chief economist of the World Bank Global and regional carbon regulatory trends A post-Kyoto international climate framework is in the process of being defined Climate regulations are gaining support in many regions Europe: at the forefront of climate change regulations (20 / 20 / 20 targets by 2020) North America: Climate bill in the US (passage in 2009/2010?) Asia-Pacific: Australia’s Carbon Pollution Reduction Scheme, new Japanese government Specific climate regulatory tools targeting energy companies Energy companies are likely to face increased scrutiny of their life cycle GHG emissions A range of climate regulatory tools with profound implications for the energy sector Low carbon fuel standards (and other energy standards…) Cap-and-trade regimes (and other carbon taxes…) 7
  8. 8. Cap-and-trade regimes (and other carbon taxes…) Economic tools are implemented in an increasing number of regions EU Emissions Trading Scheme Caps CO2 emissions at 21% below 2005 levels by 2020 Main burden falls on electric utilities (full auctioning from 2013) but energy-intensive sectors (including refineries) should only receive free allowances up to an industry benchmark US: a federal cap-and-trade legislation by 2012? An economy-wide federal cap-and-trade legislation including mobile sources Waxman-Markey bill passed House of Representatives; Kerry-Boxer bill faces Senate hurdle A range of carbon regulations in other regions Scandinavian countries, France, Australia, New Zealand, Japan, Canada Lower subsidies or higher fiscal pressure on the oil and gas sector Pricing carbon should be understood as an insurance premium 8
  9. 9. Differentiated carbon profiles of fossil fuels 9
  10. 10. Full life cycle GHG emissions profiles Coal GHG intensity is twice Natural gas’s GHG intensity All fossil fuels are carbon intensive but there are some significant differences: Median estimates of full life cycle GHG emissions for major primary fossil fuels (gCO2e/MJ) Source: Dexia AM estimates 10
  11. 11. Pricing carbon in some European upstream portfolios 11
  12. 12. An upstream portfolio analytical framework European companies have various exposures to lower or higher GHG-intensive projects European companies’ exposure to different hydrocarbons in terms of potential reserves from the Top 230 projects Source: Dexia AM estimates Upstream producers impacted by the full life cycle GHG-intensity of their portfolio Directly: responsible for the cost of GHG emissions arising from their own operations Indirectly: benefit or suffer from lower or higher life cycle GHG-intensity of their upstream resources through differentiated demand volumes and pricing trends 12
  13. 13. Significant GHG liabilities associated with 2020e production GHG liabilities ranging in average from <1% to 68% of companies’ 2008 operating income European companies’ GHG liabilities associated with 2020e production from 230 projects Source: Dexia AM estimates Key question is the burden sharing of carbon cost along the energy value chain Companies will bear the direct cost of their operations but are likely to pass a significant part of it to end customers GHG liabilities are not high enough to be a major short term financial risk. But, more widely priced GHG emissions will have a material impact on the energy sector 13
  14. 14. Takeaways 14
  15. 15. Takeaways The transition to lower carbon business models The issue for energy companies is not anymore to deny climate change but to do better than their competitors in integrating life cycle GHG analysis in their standard business activities There is a need to move from low quality voluntary environmental disclosures towards the full financial reporting of GHG liabilities embedded in upstream portfolios Despite the current economic downturn affecting oil prices and energy demand, we think that long term investors should factor the carbon constraint in their energy investment decisions Carbon free energies and energy conservation will have a sustainable competitive advantage that is not sufficiently reflected yet Copenhagen: the next milestone on the road to a low carbon future 15
  16. 16. Disclaimer Le présent document a un caractère purement informatif, il ne comporte aucune offre de vente ou d'achat d'instruments financiers, il ne constitue pas un conseil en investissement et ne confirme aucune transaction, quelle qu'elle soit, sauf convention contraire expresse. Les informations reprises dans ce document nous ont été transmises par différentes sources. Dexia Asset Management apporte le plus grand soin dans le choix des sources de données ainsi que dans la transmission de ces informations. Toutefois, des erreurs ou omissions dans ces sources ou dans ces processus ne peuvent pas être exclues à priori. Dexia AM ne peut être tenue responsable de dommages directs ou indirects résultant de l'utilisation du présent document. Le contenu de celui-ci ne peut être reproduit que moyennant l'accord écrit préalable de Dexia AM. Les droits de propriété intellectuelle de Dexia AM doivent être respectés à tout moment. Attention : Si le présent document mentionne des performances passées d’un instrument financier ou d’un indice financier ou d’un service d’investissement, fait référence à des simulations de telles performances passées ou comporte des données relatives à des performances futures, le client est conscient que ces performances et/ou prévisions ne sont pas un indicateur fiable des performances futures. De plus, Dexia AM précise que : dans le cas où il est précisé qu’il s’agit de performances brutes, la performance peut être influencée par des commissions, redevances et autres charges. dans le cas où la performance est exprimée en une autre monnaie que celle du pays de résidence de l’investisseur, les gains mentionnés peuvent se voir augmentés ou réduits en fonction des fluctuations du taux de change. Si le présent document fait référence à un traitement fiscal particulier, l’investisseur est conscient qu’une telle information dépend de la situation individuelle de chaque investisseur et qu’elle est susceptible d’être modifiée ultérieurement. Le présent document n’est pas une recherche en investissement telle que définie à l’article 24, §1 de la directive 2006/73/CE du 10 août 2006 portant mesures d'exécution de la directive 2004/39/CE du Parlement européen et du Conseil. Si la présente information est une communication publicitaire, Dexia AM tient à préciser qu’elle n’a pas été élaborée conformément aux dispositions légales arrêtées pour promouvoir l'indépendance de la recherche en investissements, et qu’elle n'est soumise à aucune interdiction prohibant l'exécution de transactions avant la diffusion de la recherche en investissements. Dexia AM invite les investisseurs à toujours consulter le prospectus avant d'investir dans un de ses fonds. Le prospectus et d'autres informations relatives aux fonds sont disponibles sur le site www.dexia-am.com. Mention importante concernant l'analyse de durabilité L’analyse de durabilité de Dexia AM se fonde sur différentes sources d’informations développées au sein de l'équipe IRD de Dexia AM, entre autres : les études sectorielles et les analyses de sociétés réalisées par des analystes de durabilité de Dexia AM, "Dexia AM's Sustainability Analysis Research Methodology 2006", "Methodology Guidelines November 2005" par Franca Morroni, "Dexia AM SRI Business Case 2004", les principes directeurs IRD de Dexia AM et les diverses recherches menées depuis 1996, ainsi que sur les informations de fournisseurs de données IRD sélectionnés. 16
  17. 17. Adresses Luxembourg Australie Suisse Bahreïn Dexia Asset Management Ausbil Dexia Ltd Dexia Asset Management Dexia Asset Management Luxembourg SA Veritas House – Level 23 Luxembourg SA Luxembourg S.A., Middle East 136, route d’Arlon 207 Kent Street succursale de Genève Representative Office 1150 Luxembourg Sydney NSW 2000 2, rue de Jargonnant Bahrain Financial Harbour, Tél. : + 352 2797-1 Tél. : + 61 2 925 90 200 1207 Genève Financial Center, West Harbour Tél. : + 41 22 707 90 00 Tower, Level 23 Belgique Italie King Faisal Highway Dexia Asset Management Pays-Bas PO Box 75766 Dexia Asset Management Luxembourg SA Dexia Asset Management Manama Belgium Succursale Italiana Nederlands bijkantoor Tél. : + 973 1750 99 00 rue Royale, 180 1000 Bruxelles Corso Italia 1 Lichtenauerlaan 102-120 Tél. : + 32 2 222 52 42 20122 Milano 3062 ME Rotterdam Canada Tél. : + 39 02 31 82 83 62 Tél. : + 31 10 204 56 53 Dexia Asset Management France Luxembourg SA Espagne Allemagne Canadian Representative Office Dexia Asset Management SA Dexia Asset Management Dexia Asset Management 77, King Street West 40, rue Washington Luxembourg SA Luxembourg SA Royal Trust Tower (32nd floor) 75408 Paris Cedex 08 Sucursal en España Zweigniederlassung Deutschland Toronto, Ontario Tél. : + 33 1 53 93 40 00 Calle Ortega y Gasset, 26 An der Welle 4 Tél. : + 1 416 974 9055 28006 Madrid 60422 Frankfurt Tél. : + 34 91 360 94 75 Tél. : + 49 69 7593 8823 17

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