PEF: Shifting in Global Energy Industry

Energy & Natural Resources

November 2019

Nick Sharma, Executive Director, Nick.Sharma@ihsmarkit.com

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Toward the energy transition: Projections, policies, and progress

1. What is the outlook for energy demand?

2. Are government policies on the right track?

3. Will renewables and carbon capture deliver on their promise?

4. How are companies responding to the challenge?

5. Conclusions

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1 What is the outlook for energy demand?

With global population to hit 10 billion by 2050, energy demand will rise in all
scenarios, with SE Asia primary energy demand doubling
Global primary energy by fuel type South-East Asia primary energy by fuel type
20,000 2,000
18,000 Other
Modern biomass
16,000 Renewables
Hydro 1,500
14,000 Nuclear Modern biomass
Renewables
12,000
MMtoe

Hydro

MMtoe
10,000 Gas Gas 1,000 Gas
8,000
6,000 Oil Oil 500 Oil
4,000
2,000 Coal
Coal Coal
0 0
1990 2018 Rivalry Discord Autonomy 1990 2018 Rivalry Discord Autonomy
2050
Coal Oil Natural gas 2050
Coal Oil Natural Gas
Nuclear Hydro Renewables*
Hydro Nuclear Renewables*
Modern biomass** Other***
Modern biomass** Other***
*Renewables includes solar, wind, geothermal, ocean energy. **Modern biomass includes biofuels and *Renewables includes solar, wind, geothermal, ocean energy. **Modern biomass includes biofuels and biomass
biomass (industry, electricity, district heat, refining).*** Other includes solid waste, traditional biomass, ambient (industry, electricity, district heat, refining).*** Other includes solid waste, traditional biomass, ambient heat, net trade
heat, net trade of electricity, or heat. of electricity, or heat.
Source: IHS Markit © 2019 IHS Markit Source: IHS Markit © 2019 IHS Markit

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2 Are government policies on the right track?

Climate policies targeting changes in power sector emission intensity require

firm emission targets, generation targets, incentives and carbon-pricing
IHS Markit Power Supply Transition Index, October 2019
10
9
8
7
6
5
4
3
2
1
0

Coal Zero carbon Natural gas

Note: The index ranges from 0 to 10, with stronger policy frameworks scoring on the higher end of the index.
Only countries with a zero-emission power supply would be able to score a perfect 10 on the index. *Saudi
Arabia does not have coal-fired generation. Policies relating to oil-fired generation were used in place of coal-
fired generation policies in this index. **The index for the United States applies to federal-level policies only.

Source: IHS Markit © 2019 IHS Markit

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3 What is the outlook for renewables and carbon capture?

Renewables will account for more than 70% of new power generation
capacity globally from 2019 onwards
Operating capacity, by fuel source, 2018 Net capacity additions, 2019‒50
China China
Europe Europe
North America North America
Asia Pacific Asia Pacific
Latin America Latin America
India India
Middle East Middle East
Africa Africa

0 1,000 2,000 -500 500 1,500 2,500

GW GW
Coal Gas Other conventional Renewables Coal Gas Other conventional Renewables
Note: Rivalry scenario. Other conventional includes large hydro, nuclear, and oil. China Note: Rivalry scenario. Other conventional includes large hydro, nuclear, and oil. China
excluding Hong Kong, Macao, and Taiwan. excluding Hong Kong, Macao, and Taiwan.
Source: IHS Markit © 2019 IHS Markit Source: IHS Markit © 2019 IHS Markit

In 2018, renewables accounted for 16% (USD 304 Bn) of total investment in the energy sector

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3 What is the outlook for renewables and carbon capture?

Renewable LCOE ranges are expected to converge and enter increasingly in

competition with marginal fossil fuel costs, driving further additions
Renewable LCOE by market, 2015 Renewable LCOE by market, 2030
200 200
180 Japan 180 Japan
160 160
Kenya France
LCOE ($/MWh)

LCOE ($/MWh)
140 140
120 Germany 120
Mainland
100 China United 100 Mainland
Kingdom China
80 80 Japan United States
India Spain
60 60 Kenya
Gas range France
40 40 Spain Germany
Coal range Australia
20 20 United
Australia Kingdom United States
0 0
10% 30% 50% 10% 30% 50%
Capacity factor Capacity factor
Onshore wind Offshore wind Solar PV, utility scale Onshore wind Offshore wind Solar PV, utility scale
Note: Dots represent typical levelized cost of electricity (LCOE) for a given technology. LCOE
in real 2018 US dollars. PV = photovoltaic. Note: Dots represent typical LCOE for a given technology. LCOE in real 2018 US dollars.
Source: IHS Markit © 2019 IHS Markit Source: IHS Markit © 2019 IHS Markit

Battery module costs have dropped by 80% since 2012 and continue to decline. Another 60% drop in costs are expected
over the next decade. Can batteries replace gas turbines in providing peaking services?
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3 What is the outlook for renewables and carbon capture?

Indonesia still has vast renewables potential, which has yet to be exploited

Are long-term objectives Renewable Low cost System Fuel Local content/ Electricity
being met? targets power supply reliability diversification supply chain access

7
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4 How are companies responding to the challenge?

Carbon capture project activity has returned to growth but remains well
behind the levels required…nature based solutions need firm carbon pricing
Count of all large integrated CCS and CCUS projects Estimate of global potential nature based solution GHG reductions in 2030 under
in various stages of development, July 2019 US$100 carbon price (MMtCO2e)
75 753 130
Outlook to 2025: 35 813
147
projects with maximum 265
cumulative capacity of
60 ~60 MMtCO2
Number of projects

1,462

45

30

10,137
15

Reforestation Natural Forest Management Improved Rice Cultivation

0
Mid-2013 2014-2015 Mid-2016 2017-2018 Mid-2019 Grazing Peatland Restoration Avoided Peatland
Operational Construction Development Intensity Impacts
Planned Proposed Removed** Avoided Coastal Impacts -
Note: *Includes all projects in various stages of development, from early to advanced, regardless of likelihood. **Canceled,
Mangroves
on hold, or otherwise removed for lack of credible information. Large projects capture and/or store more than 500,000 metric
tons of CO
Source: 2 per
IHS year.The Global CCS Institute NETL CCUS Database, MIT Carbon Capture and
Markit,
Storage Project Database © 2019 IHS Markit Source: IHS Markit, Bronson et.al.2017 © 2019 IHS Markit

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4 How are companies responding to the challenge?

All Change! Current drivers of portfolio choice have become even more
complex

“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.
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4 Company responses

European players are driving the low-carbon investments, but across a

diverse array of sectors
Low-carbon investments among global oil & gas companies Low-carbon investments since 2010, by number of deals

18
$4,000
16
14
12

# of deals
$3,000 10
8
$ million

$2,000 4
2
0

$1,000

Biofuels CCUS Demand response

$0 Distribution Efficiency Electric vehicles
2010 2011 2012 2013 2014 2016 2017 2018 2019
Fusion Gas generation Misc. low-carbon generation
Biofuels Distribution Electric vehicles Natural gas fuel Solar generation Solar manufacturing
Fusion Natural gas fuel Misc. low-carbon generation
Storage Tidal Trading
Solar generation Solar manufacturing Storage
Trading Wind generation Upstream operations Wind generation
Notes: Includes acquisitions, direct investments, and venture capital investments, for transactions with disclosed deal values. Notes: Includes acquisitions, direct investments, and venture capital investments.
Source: IHS Markit © 2019 IHS Markit Source: IHS Markit © 2019 IHS Markit

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4 Company responses

Integration, not diversification?

- European IOCs leading efforts, but other global IOCs / Independents and NOCs largely absent

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5 Conclusions

Conclusion on “Energy Transition’

• The exponentially growing focus on ‘climate change’ will cause fundamental changes in opportunities and
risks for companies and countries.

• With more stringent policies are on the rise to tackle power and emissions, renewables will account for 70%
of new generation capacity

• However, renewables share of the global energy mix will still only range from 10-20% by 2050, thereby
cementing the key role of fossil fuels, but with variance by region and fuel type

• The game changer will be the ability of renewables to meet base-load requirements, which will required a
continued trend of lower cost for renewable pricing, and introduction of battery storage

• On a company front, oil & gas organizations will need to take multiple approaches to reduce the carbon
intensity of their operations and portfolios, while maintaining growth – there is no magic switch

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