The VoLo Foundation 2C Scenario Analysis - Oil & Gas Industry - - PowerPoint PPT Presentation

The VoLo Foundation

Andrew Stevenson May 2018

2°C Scenario Analysis - Oil & Gas Industry

Climate change poses one of the most substantial but least analyzed long-term investment risks.

Goldman Sachs Research

$0 $500 $1,000 $1,500 $2,000 $2,500 $3,000 $3,500 $4,000 $4,500 $5,000 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 $2016 Billions

Cumulative Natural Loss Events

(source Munich Re, NOAA)

US Natural Loss Events Global Insured Natural Loss Events Global Natural Loss Events

5 Macro Level Financial Risks

Oil and Gas Industry

Cl Climate-Re Related Risk Factors rs

Under a 2°C Scenario, oil and natural gas demand will need to slow relative to business as usual.

20 40 60 80 100 120 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 Million Barrel per Day

Global Liquids Demand

• 1. Demand

10 20 30 40 50 60 70 80 90 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 Million Barrels per Day BOE

Natural Gas Demand

EIA Sustainable Development Scenario (SDS) EIA New Policy Scenario (NPS)

EIA Sustainable Development Scenario (SDS) EIA New Policy Scenario (NPS)

Cl Climate-Re Related Risk Factors rs

Lower demand could create both a volumetric and price based risk to future cash flows.

• 2. Cash Flows
• $100
• $50

$0 $50 $100 $150 $200 $250 $300 $350 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 2042 2044 2046 2048 2050 2052 2054 2056 2058 2060 2062 2064

Billion

Net Cash Flows for 50 Largest Private Oil & Gas Companies

BAU 2C Low Risk Case 2C High Risk Case

Source: VoLo Foundation estimates, IEA WEO 2017, Wood Mackenzie Upstream Data Tool Q4 2017

Cl Climate-Re Related Risk Factors rs

Reductions in net cash flows would lower estimates for the value of assets on balance sheets.

• 3. Asset Values

$0 $500 $1,000 $1,500 $2,000 $2,500 BAU 2C Low Risk Case 2C High Risk Case Billions

Net Present Value of Assets for the 50 Largest Private Oil and Gas Companies

Source: VoLo Foundation estimates, IEA WEO 2017, Wood Mackenzie Upstream Data Tool Q4 2017

Cl Climate-Re Related Risk Factors rs

Slowing output and cash flows would likely lower debt coverage ratios, especially for debt beyond 2040.

• 4. Debt Repayment
• $100
• $50

$0 $50 $100 $150 $200 $250 $300 $350 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 2042 2044 2046 2048 2050 2052 2054 2056 2058 2060 2062 2064 Billions

Debt Profile of the 50 Largest Private Oil and Gas Companies

Debt Maturing BAU 2C Low Risk Case 2C High Risk Case

Source: VoLo Foundation estimates, IEA WEO 2017, Wood Mackenzie Upstream Data Tool Q4 2017, Bloomberg

Cl Climate-Re Related Risk Factors rs

State-owned oil company decline rates are roughly equal to the IEA’s 2040 2°C supply gap.

• 5. Sovereign

2 4 6 8 10 12 14 16 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 Million Barrels per Day

Supply Gap in Global Oil Production

Capital-assisted decline rate of 5 largest State-owned Oil Companies Supply Gap between Capital-assisted production and IEA SDS 10 20 30 40 50 60 70 80 90 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 Million Barrels per Day

Global Oil Production

Oil IEA NPS Oil IEA 2°C Capital-assised decline of existing production

Company Level Risks

Oil and Gas Industry

The VoLo Foundation uses a three step process to measure exposure to climate-related financial risk

Step 1 - Create a business as usual (BAU) profile Step 2 - Create a Sustainable Development Scenario (2°C) profile Step 3 - Compare asset values under the BAU and 2°C Scenarios

A A possible approach ch to quantifying cl climate-re related financial risk

$- $5,000 $10,000 $15,000 $20,000 $25,000 $30,000 2018 2022 2026 2030 2034 2038 2042 2046 2050 2054 2058 2062 Millions

Net Cash Flows

Step 1 Create a Business as Usual (BAU) Company Profile

The Business as Usual (BAU) company profile includes estimates for oil and gas production, spending, cash flows and the net present value (NPV) of all upstream projects under the IEA’s New Policy Scenario (NPS). As an example, under the IEA’s NPS business as usual scenario, Exxon Mobil was forecast to produce 41.6trln BOE of liquids and gas through 2064, generating total net cash flows of $619bln with an NPV of $162bln.

Source: Wood Mackenzie Upstream Data Tool Q4 2017 Source: Wood Mackenzie Upstream Data Tool Q4 2017

1,000 2,000 3,000 4,000 5,000 6,000 2017 2020 2023 2026 2029 2032 2035 2038 2041 2044 2047 2050 2053 2056 2059 Boe/d

Net Production

Gas Liquids

The 2°C profile includes estimates for oil and gas production, spending, cash flows and the (NPV) of projects based on lower oil and gas demand consistent with the IEA’s 2°C Sustainable Development Scenario (SDS).

Step 2 Create a 2°C scenario Company Profile

50% 60% 70% 80% 90% 100% 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040

Percentage of New Policy Scenario Production

Liquids Demand Natural Gas Demand

Source: WEO 2017

Under a 2°C Low Risk scenario, which uses the same Base Case oil and gas price curves used in the BAU profile, Exxon Mobil is estimated to produce 36.6trln BOE of oil and gas generating $521bln in net cash flows with a net present value of $147bln. Under the 2°C High Risk Case, which uses Low Price oil and gas assumptions, production would also be estimated at 36.6bln BOE of oil and gas generating $189bln in net cash flows with a net present value of $52bln.

Step 2 Create a 2°C scenario Company Profile

1,000 2,000 3,000 4,000 5,000 6,000 2018 2021 2024 2027 2030 2033 2036 2039 2042 2045 2048 2051 2054 2057 2060 2063 kboe/d

Net Production

Gas 2C Liquid 2C BAU

• Source: IEA WEO 2017, Wood Mackenzie Upstream Data Tool Q4 2017, VoLo Foundation estimates

$(10,000) $(5,000) $- $5,000 $10,000 $15,000 $20,000 $25,000 $30,000 2018 2021 2024 2027 2030 2033 2036 2039 2042 2045 2048 2051 2054 2057 2060 2063 Millions

Net Cash Flows

6C BAU Case 2C Low Risk Case 2C High Risk Case

Source: IEA WEO 2017, Wood Mackenzie Upstream Data Tool Q4 2017, VoLo Foundation estimates

Lastly, the net present value of assets (NPV) under the BAU Case and the 2°C Low Risk cases profile are compared using a Climate Risk Ratio which is calculated as follows for Exxon Mobil:

Step 3 Compare asset values under BAU and 2°C scenarios

A 9.35% Climate Risk Ratio implies that around 9% of Exxon Mobil’s assets could potentially be at risk under oil and natural gas demand conditions consistent with the IEA’s 2°C Scenario case. Company Climate Risk Ratio = Total Asset Value

• NPV of Assets

under 2C Low Risk Scenario / NPV of Assets under BAU Scenario

Exxon Mobil 9.35% = 100%

• $147.21bln

/ $162.37bln

Climate Risk Ratio Calculation – Exxon Mobil

Rankings and Scorecards

Oil and Gas Industry

Climate-related Financial Risk Rankings

The Climate Risk Ratio is used to rank companies from least to most exposed to climate-related financial risk.

Climate Risk Ranking Company Climate Risk Ratio 1 Origin Energy 3.15% 2 Ecopetrol 3.56% 3 Santos 3.66% 4 INPEX Corporation 5.39% 5 KOGAS 5.44% 6 Eni 6.65% 7 Woodside Petroleum Investors 6.70% 8 Repsol 6.92% 9 OMV 7.03% 10 Private Investors 7.14% 11 Encana Corporation 7.18% 12 Total 7.28% 13 Cabot Oil & Gas 7.46% 14 Shell 7.68% 15 Murphy Oil 7.74% 16 BHP Billiton 7.91% 17 BP 8.20% 18 Chevron 8.21% 19 Statoil 8.44% 20 Range Resources Corp 8.70% 21 Kosmos Energy 8.72% 22 Southwestern Energy 8.87% 23 LUKOIL 8.94% 24 Conoco Phillips 9.06% 25 Exxon Mobil 9.35% Climate Risk Ranking Company Climate Risk Ratio 26 Gazprom 9.41% 27 Petrobras 9.92% 28 Apache 10.03% 29 JAPEX 10.15% 30 Oil India 10.56% 31 Noble Energy 10.59% 32 Hess Corporation 10.59% 33 Marathon Oil 10.69% 34 Glencore 10.70% 35 Rosneftegaz 10.83% 36 Husky Energy 10.84% 37 Anadarko 11.07% 38 Tullow Oil 11.09% 39 EOG Resources 11.22% 40 Devon Energy 11.27% 41 Chesapeake Energy 11.31% 42 Occidental Petroleum 11.62% 43 Suncor Energy 12.08% 44 Newfield Exploration 12.50% 45 Canadian Natural Resources 12.57% 46 Cenovus Energy 13.41% 47 Continental Resources 14.09% 48 California Resources 14.22% 49 Pioneer Natural Resources 14.45% 50 Denbury Resources 15.86%

Climate-related Financial Risk Scorecards

All 50 companies reviewed are given a climate risk scorecard to allow investors to compare profiles.

Apache Net WI production Liquid 2C

Gas 2C Liquid 2C BAU

• Exxon Mobil

Business as Usual (BAU) Assessment1 2 Climate Agreement Low Risk Case2 2 Climate Agreement High Risk Case3

Production (kboe)

Gas

20,417,556 18,443,819 18,443,819

Liquids

21,247,573 18,154,171 18,154,171

Total

41,665,130 36,597,990 36,597,990

Cash Flow (bln)

Total Net Cashflow4

$619.28 $521.34 $189.13

Net Present Value (NPV)5

$162.37 $147.20 $52.69

Climate Risk Ratio = 1 - (NPV 2 / NPV BAU)

9.35% 67.55%

Climate Risk Ranking6

25/50

• 1. Estimates based on Wood Mackenzie estimates for currently commercial projects over the period from 2018 to 2064
• 2. Assumes oil and gas output is reduced over time in line with the IEA’s 2C Scenario (2C production/BAU production) using Wood Mackenzie's BAU price curve
• 3. Assumes oil and gas output is reduced over time in line with the IEA’s 2C Scenario (2C production/BAU production) using Wood Mackenzie Low Price Curve
• 4. Net Cash Flow = (Net Revenue – Royalty Payments – Capex – Opex – Government Take)
• 5. Calculated using a 10% discount rate
• 6. Ranking is from lowest to highest exposure

Net Production Net Cash Flow

Net Production

Apache Net WI production Liquid 2C

Gas 2C Liquid 2C BAU

• Chevron

Business as Usual (BAU) Assessment1 2 Climate Agreement Low Risk Case2 2 Climate Agreement High Risk Case3

Production (kboe)

Gas

12,376,464 11,230,446 11,230,446

Liquids

15,649,324 13,431,879 13,431,879

Total

28,025,788 24,662,325 24,662,325

Cash Flow (bln)

Total Net Cashflow4

$583.20 $497.00 $276.10

Net Present Value (NPV)5

$166.76 $153.08 $80.96

Climate Risk Ratio = 1 - (NPV 2 / NPV BAU)

8.21% 51.45%

Climate Risk Ranking6

18/50

• 1. Estimates based on Wood Mackenzie estimates for currently commercial projects over the period from 2018 to 2064
• 2. Assumes oil and gas output is reduced over time in line with the IEA’s 2C Scenario (2C production/BAU production) using Wood Mackenzie's BAU price curve
• 3. Assumes oil and gas output is reduced over time in line with the IEA’s 2C Scenario (2C production/BAU production) using Wood Mackenzie Low Price Curve
• 4. Net Cash Flow = (Net Revenue – Royalty Payments – Capex – Opex – Government Take)
• 5. Calculated using a 10% discount rate
• 6. Ranking is from lowest to highest exposure

Net Production Net Cash Flow

GHG Emissions Ratings

Oil and Gas Industry

GHG Emissions of Fossil Fuels

More work still needs to be done to understand the emission-based quality of each company’s production.

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 490 495 500 505 510 515 520 525 530 535 540 1965 1971 1977 1983 1989 1995 2001 2007 2013 2019 2025 2031 2037 2043 2049

Percent of Total Oil Produced used in Estimate

Kg CO2 per Barrel

GHG Emissions per Barrel of Oil Produced

(source Climate Oil Index, Wood Mackenzie Upstream Data Tool, VoLo Foundation estimates)

Average GHG Emissons per Barrel Percentage of Total Oil Production 100 200 300 400 500 600 700 800

U.S. Texas Eagle Ford Volatile Nigeria Agbami United Arab Emirates Murban Canada Hibernia Mexico Chuc Russia Romashkinskoye Angola Girassol Libya Waha Russia Chayvo Angola Takula UK Forties Blend Norway Oseberg Iraq Kirkuk Iran Marun Nigeria Escravos Beach Iraq Zubair Nigeria Bonny Canada Cold Lake CSS Dilbit U.S. California Midway Sunset

Kg CO2 per Barrel

Total GHG Emissions per Barrel of Oil

(source Climate-Oil Index)

Key Macro Takeaways

1. Clear, consistent, and comparable metrics can be developed to measure climate-related financial risk. 2. Keeping temperatures from rising more than 2°C may expose oil and gas companies to a number of financial risks related to demand, price, cash flows, asset values, debt repayment, and sovereignty rights. 3. Companies that assume that natural decline rates will allow them to continue to fully develop their asset bases even under a 2°C case may not be fully considering how SOEs will response if demand declines. 4. While most of the oil and gas industry’s $1trln of debt is short-dated and manageable, companies with debt obligations that extend beyond 2040 are more likely to exposed to climate-related financial risk. 5. More work still needs to be done on the data front to incorporate GHG estimates into climate-risk models.