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@carbontracker.org

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

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20

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Oil

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0

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40

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European gas

20032004

20052006

20072008

20092010

20112012

020406080

100120140160

US gas

Falling demand associated with weak prices

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19741976

19781980

19821984

19861988

19901992

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20062008

20102012

-6%

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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

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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

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30

0

20

40

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80

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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

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2007

2008

2009

2010

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2012

2013

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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%

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45%

50%

Fort

Hills

(w/o

upg

rade

r)

Josl

yn (w

/o u

pgra

der)

QC

LNG

Pear

l GTL

Prel

ude

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hys

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k 31

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LNG

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en L

NG

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dam

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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%

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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

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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)