Business and Climate Change: Scenario planning at Shell and its analysis of the carbon bubble - Angus Gillespie (4.11.13)


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Angus Gillespie, VP CO2 Shell, shows how Shell has been developing scenarios to explore the future since the early 1970s and using them to allow leaders make better business decisions. Shell Scenarios ask “what if?” questions to explore alternative views of the future and create plausible stories around them. They consider long-term trends in economics, energy supply and demand, geopolitical shifts and social change, as well as the motivating factors that drive change. In doing so, they help build visions of the future. Over time, the Shell Scenarios have gained a global following among governments, academia and other businesses. They have helped deepen understanding of how the world might appear decades ahead.

The new “carbon bubble” phenomenon describes a hypothetical economic bubble that could affect the valuation of fossil fuels based assets. The current price of fossil fuels companies shares is calculated under the assumption that all fossil fuel reserves will be consumed. However, a report published earlier this year by Lord Stern and the think tank Carbon Tracker calculates that at least two-thirds of oil, coal and gas reserves will have to remain underground if the world is to meet existing internationally agreed targets to avoid the threshold for "dangerous" climate change, thus leading to a huge over valuation of these reserves. "The financial crisis has shown what happens when risks accumulate unnoticed," said Lord Stern, a professor at the London School of Economics. He said the risk was "very big indeed" and that almost all investors and regulators were failing to address it.

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Business and Climate Change: Scenario planning at Shell and its analysis of the carbon bubble - Angus Gillespie (4.11.13)

  1. 1. BUILDING AND USING SHELL SCENARIOS Edinburgh University 4th November 2013 Angus Gillespie, VP CO2 Shell International Copyright of Shell Brands International AG November 2013 1
  2. 2. SCENARIO PRACTICES AND CONTENT Copyright of Shell Brands International AG
  3. 3. What is a scenario? The Future The Present Current Realities (mental maps) The Path Multiple Paths FORECAST Alternative Future Images SCENARIOS
  4. 4. The Shell scenario building methodology Scenario 1 Scenario 2 Scenario 3 Scenario 1 Scenario 2 Scenario 3 Scenario 4 Deductive Inductive Vision Alternative scenario Official future Incremental Normative
  5. 5. The time taken to develop scenarios • • • • • • Preparation Orientation Research Organisation Detailed process design Uncovering and widening perspectives Understanding interactions Crystallising insights into simple narratives Generating and testing options Translating that in strategy and plans Communication Scenario Building Workshop Critical uncertainties Synthesis Analysis Write-up Strategic Pathway Workshop Testing Refining Finalisation Strategic pathway 9 -18 months Strategies and Planning Communication Implementation Workshops Implications Goals Timelines Strategies Plans and KPIs Stakeholder engagements Implementation Planning and tracking
  6. 6. The practical use of scenarios in Shell • Ask “what if” questions, not necessarily give answers • Challenge assumptions and mental models • Enrich debate and identify ‘certainties’ • Relevant to our business o Develop or test strategies and plans o Search for resilience o Identify threats and opportunities then develop options o ? Make risky decisions more transparent • Focus on the ‘near future’, i.e. strategy and policy agenda next 1-3 years NOT on scenario horizon
  7. 7. Historical contribution of scenarios to Shell activities Three hard truths and shift from West to East (2007) CO2 as a business (2006) Security and Trust (2005) Networks and challenges to TINA (2001) Business models (1998) TINA and people policies (1995/98) Power (1989/1994) and Renewables (1994) Market liberalisation and globalisation (1992) Sustainable development (1989)
  8. 8. Underlying scenario issues and characteristics The Prosperity Paradox Trapped Transition The Leadership Paradox The Connectivity Paradox Room To Manoeuvre
  9. 9. The 2013 scenarios; an era of volatility and transitions Intensified economic cycles Political and social instability Building a ‘mini-lateral’ world Demographic transitionsurbanisation Challenged environmental boundaries Emerging resources – tight/shale gas and LRS
  10. 10. The 2013 New Lens Scenarios MOUNTAINS OCEANS
  11. 11. The Mountains scenario – “a view from the top” Social political trends Influence concentrates amongst the already powerful, as advantage brings more advantage Economic development slowed by rigidities in structures and institutions However, some secondary policy developments facilitated Energy trends Sluggish economic growth moderates supply/demand tensions Natural gas becomes the backbone of the global energy system A profound shift occurs in global transport and infrastructure Moderated CO2 and resource stresses; CCS takes off
  12. 12. The Mountains scenario 1200 1000 EJ/year 800 600 400 200 0 2000 2010 2020 2030 2040 2050 2060 Year Oil Biomass Gasified Biomass Traditional Geothermal Biofuels Coal Nuclear Solar Natural Gas Biomass/Waste Hydroelectricity Wind Other renewables
  13. 13. The Oceans scenario – “a view from the horizon” Social political trends Energy trends Emerging interests intermittently accommodated Supply/demand tightness and high prices unlock expensive resources and drive user efficiency Core reforms unleash growth – and expectations for further reform Liquid fuels and coal continue to dominate as gas undershoots global hopes, until solar becomes new backbone However, more empowered constituencies hinder some secondary policy advancement High CO2 and resource impacts. CCS only mandated later
  14. 14. The Oceans scenario 1200 1000 EJ/year 800 600 400 200 0 2000 2010 2020 2030 2040 2050 2060 Year Oil Biomass Gasified Biomass Traditional Geothermal Biofuels Coal Nuclear Solar Natural Gas Biomass/Waste Hydroelectricity Wind Other renewables
  15. 15. An energy based comparison of Mountains and Oceans Different political, economic and social trajectories, but each with counter-currents Total energy consumption similar (+80% energy consumption by 2050), but supply/demand shaped very differently; both have extra-ordinary moderation of demand-growth and extra-ordinary acceleration of supply Key energy differences; price trajectories, resource mix, sector-level details and stresses
  16. 16. SCENARIOS AND THE “CARBON BUBBLE” Copyright of Shell Brands International AG
  17. 17. CO2 emissions are a “stock” problem Warming caused by cumulative carbon emissions towards the trillionth tonne. Myles R. Allen, Malte Meinshausen et. al. Nature Vol 458, 30 April 2009
  18. 18. Impact on Companies Carbon Budget Fundamentals of the carbon bubble phenomenon 2 • Countries committed to achieving 2°C; max. stock to 2050 is 1,500 GtCO2 • Already emitted 500 GtCO2, so one trillion 1,000 tonnes remaining to 2050 • 2P reserves have 3,000 GtCO2 of 3,000 emissions embedded in them • Governments pass regulations to limit CO2 Policy emissions to “hit” 2°C • Policies create peak in fossil fuels use and leads to severe price drop Peak • Fossil companies over-valued; investors Bubble should re-assess assets; market crash? Sound logic Logic can be challenged
  19. 19. Key points on the carbon bubble The carbon bubble logic is sound but ... … material growth in energy demand will need fossil fuels. Coal will be most-impacted in the short-term. CCS is a critical technology. Shell is relatively well-positioned for the energy transition.