transforming oil/gas companies to energy companies: the

© 2020 IHS Markit®. All rights reserved.

Transforming Oil/Gas Companies to Energy Companies: The New NarrativePayne Institute, Colorado School of Mines

6 October, 2020

Atul Arya, Chief Energy Strategist, IHS Markit

[email protected]

mailto:[email protected]

Confidential. © 2020 IHS Markit®. All rights reserved.

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2

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Outline

▪ Recap of 2020

▪ Energy Transition

▪ Future Scenarios

▪ Company Strategies

▪ Conclusions

3


Recap of 2020

4

Confidential. © 2020 IHS MarkitTM. All Rights Reserved.

-12

-9

-6

-3

0

3

6

9

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Pe

rce

nt

ch

an

ge

Real GDP Industrial production Real goods & services trade

The global economy is in recession in 2020

5

Global real GDP, industrial production, and real exports

Source: IHS Markit © 2020 IHS Markit


The world of oil and gas has been radically altered in the 2020

• Greatest demand decline in world oil history: -22 MMb/d in second quarter 2020

• Greatest volume of production cuts in world oil history: -14 MMb/d in second quarter 2020

• President Trump orchestrates global oil supply management deal: Overturns decades of US policy

• Negative crude oil price: -$37/bbl WTI on 20 April

• Halt to international travel: Vast majority of international passenger flights cancelled

• Global economy projected to shrink around 5.5% in 2020: Most severe outcome since World War II

April was the bottom of the oil demand decline but the oil/gas industry is still deeply distressed.

6


While US truck miles traveled have recovered to the pre-pandemic level, US

passenger car miles traveled remain below the 2019 level

7

-60

-50

-40

-30

-20

-10

0

10

9-F

eb

-20

23

-Fe

b-2

0

8-M

ar-

20

22

-Mar-

20

5-A

pr-

20

19

-Apr-

20

3-M

ay-2

0

17

-May-2

0

31

-May-2

0

14

-Jun

-20

28

-Jun

-20

12

-Jul-

20

26

-Jul-

20

9-A

ug-2

0

US weekly vehicle miles traveled compared with last year

Source: IHS Markit, US Department of Transportation

Note: Vehicle miles traveled by all vehicles on all interstate highways. Data are based on permanently installed traffic monitoring

roadway sensors and other passive data observations. © 2020 IHS Markit

Perc

en

to

f th

e s

am

e w

eek o

f 2019

Passenger

cars

Trucks

-3%-3%-2%

-24%

-47%-48%

-49%

-47%-45%

-41%

-37%-35%

-32%

-28%

-24%-22%

-19%-…

-15%

-18%-18%

-17%

-17%

-18%

-60%

-50%

-40%

-30%

-20%

-10%

0%

29

-Fe

b

7-M

ar

14

-Mar

21

-Mar

28

-Mar

4-A

pr

11

-Apr

18

-Apr

25

-Apr

2-M

ay

9-M

ay

16

-May

23

-May

30

-May

6-J

un

13

-Jun

20

-Jun

27

-Jun

4-J

ul

11

-Jul

18

-Jul

25

-Jul

1-A

ug

8-A

ug

Change from a year earlier in US weekly gasoline retail sales in 2020,

OPIS by IHS Markit survey

Source: OPIS by IHS Markit

Note: Each week, OPIS conducts an exclusive weekly survey of 15,000 US gasoline stations that account for 20% of total US gasoline

sales.© 2020 IHS Markit

Ch

an

ge in

weekly

sale

s f

rom

a y

ear

earl

ier


The market balance has moved to slight deficits compared with record

surpluses in first half 2020, while risks to demand are on the downside

8

-10

-8

-6

-4

-2

0

2

4

6

8

10

70

75

80

85

90

95

100

105

110

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

2019 2020 2021

World oil (liquids) demand and production (as of 17 September 2020)


Glo

bal liq

uid

s s

up

ply

an

d d

em

an

d (

MM

b/d

)

Pro

du

cti

on

su

rplu

s/d

efi

cit

(M

Mb

/d)

Outlook

Global oil production

Global oil

demand

Production surplus/deficit

(right scale)


Global upstream capex will take five years to be back to 2019 levels

9

0

100

200

300

400

500

600

700

800

FY'20 Q3 (Base case) FY'20 Q2 FY'20 Q1 (pre-crisis)

Global E&P capex


US

D b

illi

on

Pre-crisis


Energy Transition

10


It takes decades to change global energy mix

11

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020

Oil Gas Coal Hydro Nuclear Renewables

Global Primary Energy Mix by Fuel Type 1900-2020

Notes: *does not include solid waste, biofuels or net trade of electricity and heat

Source: Etemad & Luciani (1900-1980); US EIA Historical Statistics (1981-2010); IIHS Markit 2010-40 © 2016 IHS


More recently, energy addition not transition

12

Fuel Mix Energy

2000 2018

Coal 23% 26%

Oil 36% 31%

Gas 21% 23%

Nuclear 7% 5%

Hydro 2% 3%

Biomass 10% 10%

Renewables 1% 2%

Fuel Mix Electricity

2000 2018

Coal 39% 38%

Oil 8% 2%

Gas 18% 23%

Nuclear 17% 10%

Hydro 17% 16%

Biomass 1% 3%

Renewables 0% 8% (including solar & wind)


Recent Emissions History

13


Notwithstanding drop in emissions due to the pandemic, CO2

concentrations continue to increase …

14


Focus on emission reductions from power generation

Little progress in all other sectors

15


Future Scenarios

16


“Autonomy” Scenario: Gas demand plateaus in 2030s Oil and gas account for 44% of energy demand in 2050, renewables share to grow to 20%

0

1,000

2,000

3,000

4,000

5,000

6,000

1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

Oil Natural gas Coal Hydro Nuclear Renewables* Modern biomass** Other***

Autonomy: Primary energy demand by fuel, 1990–2050

MM

toe

© 2020 IHS Markit

32%

26%

23%

5%

2%

Source: IHS Markit

21%

4%

7–8%

9%

20%

24%

Note: *Includes solar, wind, geothermal, and ocean energy. **Includes biofuels and biomass (industry, electricity, district heat, and refining). ***Includes solid waste, traditional biomass, ambient heat,

net trade of electricity, or heat.

Share in 2019 Share in 2050

Oil

Gas

Coal

Renewables

17


The future of oil demand faces epic uncertainty

60

70

80

90

100

110

120

1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

History Rivalry Autonomy

Global oil (liquids) demand scenario

MM

b/d

Notes: includes biofuels and LPGs © 2020 IHS Markit

Rivalry

Autonomy

© BP p.l.c. 2020 Energy Outlook | bp week: September 2020

Oil consumption

Outlook for oil demand

Change in oil demand, 2018-2050

0

20

40

60

80

100

120

2000 2010 2020 2030 2040 2050

Rapid

Net Zero

Business-as-usual

-80

-70

-60

-50

-40

-30

-20

-10

0

10

Rapid Net Zero Business-as-usual

Non-transport

Other transport³

Other road²

Passenger cars¹

Mb/d Mb/d

1) includes 2/3 wheelers2) trucks and buses3) aviation, marine and rail


0

1000

2000

3000

4000

5000

6000

2000 2010 2020 2030 2040 2050

Base case Autonomy

Primary natural gas demand


Bc

m

0

20

40

60

80

100

120

2000 2010 2020 2030 2040 2050

Base case Autonomy

Primary liquids demand

Note: Excludes biofuels, coal to liquids/gas to liquids, and refinery © 2020 IHS Markit

Pri

mary

liq

uid

s, M

Mb

/dNatural gas demand expected to be more resilient than oil demand

20


Renewables expected to make 75% of future growth in power generation

0 1,000 2,000 3,000

China

Europe and CIS

North America

Asia Pacific

Latin America

India

Middle East

Africa

Coal Gas Other non-renewable Renewable

Operating capacity, by fuel source, 2019

Source: IHS Markit

Note: Other conventional includes large hydro, nuclear, and oil.

© 2020 IHS Markit

GW

-1,000 0 1,000 2,000 3,000

China

Europe and CIS

North America

Asia Pacific

Latin America

India

Middle East

Africa

Coal Gas Other non-renewable Renewable

Net capacity additions, 2019–50


GW

21


Company Strategies

22


Investors continue to retreat from energy sector

23

0%

5%

10%

15%

20%

25%

30%

35%

Tech Health care Financials Industrials Energy Utilities

S&P 500 sector weighting

Energy

Source: Bloomberg LP © 2020 IHS Markit


While oil/gas sector returns have been in single digits for nearly a decade…

24

$0

$20

$40

$60

$80

$100

$120

0%

5%

10%

15%

20%

25%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Median corporate ROACE (left axis) Average Brent price ($/bbl; right axis)

Global Integrated Oil Companies: Corporate return on average capital employed

Source: IHS MarkitNote: Includes data for BP, Chevron, Eni, Equinor, ExxonMobil, Shell, and Total.

© 2020 IHS Markit


…Low carbon returns are becoming competitive to oil and gas and less

volatile

25

Engineering, such as

leverage and selling

developed assets into new

vehicles, could allow

companies to deliver higher

returns from power

9.0%8.5% 8.2%

7.5%6.8%

6.1%5.3%

4.2%

-2.7%

-5%

0%

5%

10%

Ren f

uels

Oil

& g

as

Effic

ien

cy

Win

d m

fg

Utilit

ies

Sto

rag

e

Low

C p

ow

er

Sola

r m

fg

Ele

c v

eh

icle

s

Median annual operating return on invested capital since 2010


7.8%7.5%

6.0%

4.4%

3.2%2.9%

1.4%

0.7% 0.5%

0%

2%

4%

6%

8%

Oil

& g

as

Sola

r m

fg

Win

d m

fg

Ren f

uels

Ele

c v

eh

icle

s

Sto

rag

e

Effic

ien

cy

Utilit

ies

Low

C p

ow

er

SD of median annual operating return


*Excludes hydrogen/fuel cells sector due to values that are not meaningful.

Notes: Low-carbon segments based on companies included in the WilderHill New Energy Global Innovation Index; Utilities companies include those in the iShares Global Utilities ETF; Oil & gas companies include 29 multijurisdiction upstream-focused IOCs covered as part of IHS

Markit's Upstream Company Strategies team.


Companies are making different climate-related choices

▪ Diversify into growth areas

▪ Integrate vertically in the energy value chain

▪ Create technology breakthroughs

▪ Cut costs and cut emissions drastically

▪ Shift business mix and narrow focus

▪ Divest/downsize hydrocarbon investments

▪ Return more to shareholders and less back to the business

▪ Be the last man standing

▪ All of the above

26


E&P organizations are taking multiple approaches to reduce the carbon

intensity of their operations and portfolios

28

Climate concerns from multiple

stakeholders

• Regulatory: Carbon tax

• Environmental: Paris Agreement (2016)

• Financial: Task Force on Climate-related

Financial Disclosure (TFCD)

Reduce carbon intensity of core E&P

operations

• Increase operational efficiency,

identify and mitigate GHG emissions

• Life-cycle approach to carbon reduction

(e.g., wells to wheels analysis, reduce

end-use carbon produced)

• Change composition of resource portfolio

Energy transition

• Greater electrification of the global economy

• Long transition period where fossil and

renewable energy sources coexist

Technology

• New low-cost technologies to precisely

locate and accurately measure

greenhouse gas (GHG) emissions

• Use of digital technologies to manage

complexity of more diverse energy supply

mix Expand into clean energy value

chain

• Seek new business lines that build on

existing capabilities including carbon

capture, use and storage (CCUS)

• Reenter clean tech at more mature

technology stages

Upstream industry drivers and responses of GHG reduction

© 2019 IHS MarkitSource: IHS Markit


BP Chevron Eni Equinor ExxonMobil Repsol Shell Total S.A.

Reduce direct operational emissions

Promote natural gas and LNG

Solar

Wind

Biofuels

Geothermal

Hydropower

Power transmission/distribution

EVs/charging infrastructure

Batteries/storage

Fuel cells

Carbon capture, utilization, and storage

Nature-based solutions (carbon sinks)

Current development focus and/or stated part of current strategy

Existing area of research and/or discussed as potential investment area

Global Integrateds: Current activities in the low-carbon segment

© 2019 IHS MarkitSource: IHS Markit Note: Includes only direct investments and R&D; excludes venture capital investments.

Alternative energy/low-carbon strategies among Global IOCs vary considerably

“There is no single solution to tackling climate change. A transformation of the global energy system is needed, from

electricity generation to industry and transport", said Ben van Beurden, Shell's CEO.

30


Companies setting and revising emission targets – Europeans IOCs leading

31

Dates when oil and gas companies’ have set and updated their

emission reduction targets, including Scope 3Carbon Performance in European integrated oil and gas*

* These assessments are made on a provisional basis by TPI

** TPI currently includes volumes from BP’s Crude Oil sales business in its assessment, which BP

indicates exclusively comprises financial trading.

Ref: ‘Carbon Performance of European Integrated Oil and Gas Companies’,

www.transitionpathwayinitiative.org/tpi/publications/58.pdf?type=Publication

http://www.transitionpathwayinitiative.org/tpi/publications/58.pdf?type=Publication


Report Name / Month 2019

33


Conclusions

37


The current turmoil in the global economy and energy markets will impact

the Energy Transition – but how?

FASTERSLOWER

• Volatility, low returns and bankruptcies make oil & gas an

increasingly unattractive investment; increased investor pressure

on IOCs to accelerate portfolio migration

• Governments of hydrocarbon producing countries increase their

efforts at economic diversification

• Real life demonstration that even a short term drop in emissions

can bring significant climate and environmental benefits

• Increased stakeholder recognition that a post Covid-19 world

cannot afford further economic damage from climate change

(fires, floods…)

• Structural changes to work & social mobility models exacerbate

already stagnating market for ICE vehicles

• Fossil fuels (re)gain price advantage over renewables

• Policy measures on emissions and sustainability take a

back seat as governments recover from providing fiscal

and monetary stimulus

• Energy companies cut spending on clean technologies to

repair balance sheets

• Cash-strapped public less willing to pay for green energy

• Reduction in use of ‘unsafe’ public transport, increased

use of private vehicles

• Renewable technology supply chains are rebuilt to reduce

dependence on China, increasing costs and delaying

capacity ramp up

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