carbon tracker / energy transition advisors presentation in boston & nyc in partnership with...
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Carbon Tracker / Energy Transition Advisors Presentation in Boston & NYC in partnership with Ceres, MSCI and NYSSA - 9/10 July 2014TRANSCRIPT
Mark CampanaleFounder and Executive Director
Financial experts making carbon investment risk visible today in the capital market.
Anthony Hobley - Chief Executive OfficerMark Campanale - Founder and Executive DirectorJon Grayson - Chief Operating OfficerJames Leaton - Research DirectorLuke Sussams - Senior ResearcherReid Capalino - Senior ResearcherAndrew Grant - Financial AnalystJohn Wunderlin - Staff Attorney USMargherita Gagliardi - Communications OfficerTracy Trainor - Office Manager
Mark Fulton - Founding Partner at Energy Transition Advisors (ETA); Advisor to Carbon Tracker InitiativePaul Spedding - Advisor to CTI
Who we are
Our funders
Our formula
...by translating climate science and policy into the language of finance.
Our work is aimed to align climate riskwith capital market risk...
Our research path
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
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.
The Risky Business
Which are the potential Consequences of climate changeIn the US by region and sector?
Michael BloombergHenry PaulsonTom Steyer
• Large-scale losses of coastal property and infrastructure
• Extreme heat across the nation threat ening labor productivity,
human health, and energy systems
• Shifting agricultural patterns and crop yields
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…
Ceres & CTI / Carbon Asset Risk
Carbon Asset Risk engagement initiative co-ordinated by CTI and Ceres, with support from theGlobal Investor Coalition on Climate Change.
Investors with over $3 trillion in assets raised these issues with 45 of the largest fossil fuel companies.
Management issues for investors: oilDenial
> “We will see it coming”> “It will happen gradually”
Commercial concerns> Risk of backlash from investors for not pursuing value added investments> Management have flexibility over capital expenditure
Shareholder message?> Low return projects tend to be at greater risk from tax, costs and price – sensitivity scenarios please> Growth is over-rated
Conclusion?
Be more disciplined on capital investment and return to shareholders if necessary
Carbon Supply Cost Curves: Evaluating Financial Risk to Oil Capital Expenditures
CTI report is based on a series of technical papers produced in collaboration with Energy Transition Advisors, research consultancy led by Mark Fulton, former Head of Research at Deutsche Bank Climate Change Advisors.
This analysis assists investors to continue their engagement with companies over carbon asset risk. It introduces the concept of a carbon supply cost curve to global oil projects .
All reports can be downloaded at www.carbontracker.org
Mark CampanaleFounder and Executive Director
Mark Fulton
Founding Partner atEnergy Transition Advisors
Advisor to Carbon Tracker Initiative
Paul Spedding
Advisor toCarbon Tracker and Energy Transition Advisors
Demand risk and fossil fuel valuation
19791980
19811982
19831984
19851986
19871988
19890
20
40
60
80
100
120
Oil
19841985
19861987
19881989
19901991
19921993
0
20
40
60
80
100
120
European gas
20032004
20052006
20072008
20092010
20112012
020406080
100120140160
US gas
Falling demand associated with weak prices
19701972
19741976
19781980
19821984
19861988
19901992
19941996
19982000
20022004
20062008
20102012
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
0
20
40
60
80
100
120
140
Change in demand Oil price (real)
1990srecession
1980srecession 2008
financialcrisis
1973-5recession
Real oilPrice
2013 ($)
Annualdemandchange
Source: BP Statistical Review of World Energy 2013
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)
20102011
20122013
20142015
20162017
20182019
20202021
20222023
20242025
20262027
20282029
20302031
20322033
20342035
0
20
40
60
80
100
120
Current NPS 450 Base
Cost curve by production type
Source: Rystad Energy and Energy Security Partners
“Unburnable carbon”
0%
5%
10%
15%
Shell BP Total Statoil Eni BG
Traditional Deepw ater Heav y oil
“Unburnable” carbon (High cost projects) Price effect of $40 fall in oil prices
Source: HSBC Equity Research based on Wood Mackenzie data (2012)
Big oil has been a great long term investment
• Helped by supranormal returns – due to OPEC price support?• But…..
Source: msn.com
Performance has been dreadful for 3-5 years
• Undeperformance despite high oil prices. Why? Source: msn.com
Returns deteriorating despite rising oil prices
• Oil price quadruples…• Returns halve…
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 20130
5
10
15
20
25
30
0
20
40
60
80
100
120
ROCE (%) Brent
Shell reported ROCE
Source: Shell
Capital employed driven by accelerating capex
• Ratio of capex to depreciation at a 10 year high
20042005
20062007
20082009
20102011
20122013
2014e0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
3000310032003300340035003600370038003900
Capex/production ($/boe)Production (000boe/d) RHS
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
0
5
10
15
20
25
30
35
40
0%
50%
100%
150%
200%
250%
300%
Capex Clean DepreciationRatio (RHS)
Unit capex and production Depreciation and capex ($bn)
Swap Capex for DDA
• Capex adjusted earnings would halve, more than doubling its PE
Stated Clean Capex adjusted0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
50,000
12,638 15,1176,969
Post tax Tax DDA / Capex
Source: Shell data Source: Zacks Investment Research
Adjusting Shell’s 2013 earnings ($bn) RDSA PE (x)
Portfolio opportunities and returns
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
Fort
Hills
(w/o
upg
rade
r)
Josl
yn (w
/o u
pgra
der)
QC
LNG
Pear
l GTL
Prel
ude
Icht
hys
LNG
Bloc
k 31
PSV
M
Tang
guh
LNG
Yem
en L
NG
Car
dam
om d
eep
Clo
v
Qat
arga
s-4
Mad
Dog
Com
plex
Cla
ir R
idge
Gua
ra
Jubi
lee
Source: HSBC Equity Research based on Wood Mackenzie data (2012)
Internal rate of return for different project types (%, post tax: 2012 data)
Capital intensity
• High capital intensity means longer payback periods – and often lower returns
Offshore
Offshore
Tar Sands
Arctic
Mega project
0 20,000 40,000 60,000 80,000 100,000 120,000 140,000
Capex per barrel of capacity ($)
Source: Industry reports
High cost assets = operational gearing
• A $20 move in oil prices reduces average margins by nearly 25%• Bitumen margins fall by 50-80%
Exxon realisation (liquids)
Synthetic (Upgraded Bitumen)
Bitumen
0 10 20 30 40 50 60 70 80 90 100
CostsCash margin
Exxon cash margins (2013, $/boe)
Source: Exxon
Shell’s cost curve
• Like most majors, Shell has a wide range of projects with a wide range of break-even costs• For shareholder returns and to reduce risk, companies should focus on low cost projects
020406080
100120140160180200
0 5,000 10,000 15,000 20,000 25,000 30,000 35,000
Brea
keve
n oi
l pric
e ($
/bbl
)
Potential 2014 - 2050 Production (mmbbl)
Below USD/boe 60 USD/boe 60-80 USD/boe 80-100USD/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
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 Category2014-2025
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 study2 Pierre River, CA Canada Alberta, CA Oil sands (mining) 6,543 2% 8% 100 - 113 Deferred3 Vicksburg, US United States Gulf of Mexico deepwater, US Ultra deepwater 2,141 1% 3% 100 Under study4 Carmon Creek, CA Canada Alberta, CA Oil sands (in-situ) 3,429 1% 4% 99 Approved5 Bolia, NG Nigeria Atlantic Ocean, NG Deep water 2,711 1% 4% 93 Not disclosed6 Aktote, KZ Kazakhstan Atyrau, KZ Conventional 2,188 1% 3% 90 Not disclosed7 Parque dos Doces, BR Brazil Espirito Santo, BR Ultra deepwater 1,912 1% 2% 90 - 121 Not disclosed8 Bobo (OPL 322), NG Nigeria Atlantic Ocean, NG Ultra deepwater 3,074 1% 4% 86 Not disclosed9 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 ($80/bbl+ BEOP) projects
Source: CTI and Rystad
Returns and price to book
• Shell’s current Price/Book ratio is 1.4x• Sustaining a 1.5x Price/Book ratio needs projects with returns of around 20%
30%
25%
20%
15%
10%
0.0 0.5 1.0 1.5 2.0 2.5
NPV uplift at different IRR rates ($ value per $ capex @ 10% cost of capital)
Source: Own estimates
Price to book history (RDS)
• Price to book: A market indicator of perceived value added
Source: Morningstar
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
Backup Slides
True OPEC cost curve
• Social costs push OPEC’s required price to around $100
Source: APIC, Arab Petroleum Investments Corporation
Non OPEC cost curve
• Demand out till 2035 could be met at a non-OPEC marginal price of $80-90
54
Material value at risk in 10 year plus phase
• Around 40% of a company’s NPV is still at risk post 10 years
0%
5%
10%
15%
20%
25%
30%
35%
1-5 5-10 10-15 15-20 20-25 25-30 30 bey ond
Net present value profile under business as normal
Oil demand
Tax and efficiency
Source: Exxon
Tax on gasoline ($)
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
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)
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
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
05
10152025303540
3000035000400004500050000550006000065000700007500080000
Oil price (nominal $) Demand (mb/d): RHSSource: BP Statistical Review of World Energy 2013
Source: IEA, 29 January 2014
Coal prices
Oil prices and demand
Lead times
Lead times can be 10 years plus
Source: Shell letter / Shell presentations
Non-OPEC versus OPEC
• 1979 demand slip increased OPEC’s spare capacity
• Similar trend to 2020 driven by unconventionals – barring OPEC supply interruptions
• Position in 2020-2030 dependent on demand scenario
Source: BP 2030 World Energy Outlook
Energy sources to 2050
• 2050 oil demand: 4DS is around 100mb/d, 2DS is around 60mb/d.
Note: For reference, we convert from EJ to MBPD at a rate of 1 EJ = 0.48 MBPD of oil. Source: IEA
Total primary energy supply in the IEA 6DS, 4DS, and 2DS scenarios, 2009-2050 (Exejoules)
Part of the answer: Costs and tax take more of the “oil” cake
• Industry cash flow over 2010-14 was the same as 2000-2004• Costs have doubled – effectively halving cash returns
Split of upstream revenues ($/boe)