Oil & investor risk

Summary
• Oil industry going deeper and dirtier (oil at any cost)
• IOCs face rising costs & risks
• Assuming 2oC will not be achieved
• Triad of policy pressures causing demand destruction
• Peak demand could leave IOCs stranded at the wrong
end of the production cost curve
• Is RRR a disincentive for change?
 Dirtier & Deeper

• Shedding alternatives to concentrate in oil & gas

• More extreme environments (ultra-deep, offshore
Arctic)
• Unconventional (tar sands, kerogen, CTL, GTL, tight
oil and shale gas)
• EOR
 Underlying trends

• High Capex (increasing cost per flowing barrel)

• Escalating operating costs
• Rising operational risk (upstream & down)
• Low or negative growth
• Tighter margins
 Industry bullish on Demand

• Population rising
• Middle classes growing in non-OECD
• Few viable alternative transport fuels
• Assumes stagnant policy and tech. progress
• Assume 2oC won’t be achieved
 Heading for 6oC

1000ppm –
6oC
 Tar sands – inflated ambitions

2035 tar sands production under different IEA scenarios

Scenario Current New 450 Announced

Policies Policies Projects

Mb/d 4.6 4.1 3.3 7.7

 Demand: Policy pressures
• Energy Security
• Volatile oil prices
• Climate change

DEMAND
DESTRUCTION
Declining oil demand forecasts
 Peak demand?

• IEA (2010) 450S = 2018

 High oil price = high volatility

a company will not invest in a project that

requires a $100/bbl break even ifZone
the(CERA)
The Breakpoint

average oil price is $100/bbl. …the

company will require a degree of comfort,
which we calculate here is around $25/bbl,
to make an investment in a marginal
project.
(Deutsche Bank: Dec 2010)
Production cost curve
Reserves replacement
Reserves Replacement
Long Term?
Long Term?
 Reserves are key
• RRR demands constant reacquisition of a non-
renewable and fast disappearing resource
• Can we really expect 100% RRR ad-infinitum?
• Current reserves reporting reveals little about relative
exposure to rising risks & costs
• What is the alternative?
 WANTED! New Metrics
• Signal that RRR is no longer key
• Enhance risk assessment of reserves additions
• Incorporate climate risk into reserves additions
• Value alternative business models
• Reward alternatives
• Encourage diversification