The VoLo Foundation 2°C Scenario Analysis - Oil & Gas Industry Andrew Stevenson May 2018
Climate change poses one of the most substantial but least analyzed long-term investment risks. Goldman Sachs Research Cumulative Natural Loss Events (source Munich Re, NOAA) $5,000 $4,500 $4,000 $3,500 $2016 Billions $3,000 $2,500 $2,000 $1,500 $1,000 $500 $0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 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 1. Demand Under a 2 ° C Scenario, oil and natural gas demand will need to slow relative to business as usual. Global Liquids Demand Natural Gas Demand 120 90 80 Million Barrels per Day BOE 100 70 Million Barrel per Day 60 80 50 60 40 30 40 20 20 10 0 0 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 EIA Sustainable Development Scenario (SDS) EIA Sustainable Development Scenario (SDS) EIA New Policy Scenario (NPS) EIA New Policy Scenario (NPS)
Cl Climate-Re Related Risk Factors rs 2. Cash Flows Lower demand could create both a volumetric and price based risk to future cash flows. Net Cash Flows for 50 Largest Private Oil & Gas Companies $350 $300 $250 $200 Billion $150 $100 $50 $0 -$50 -$100 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 2042 2044 2046 2048 2050 2052 2054 2056 2058 2060 2062 2064 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 3. Asset Values Reductions in net cash flows would lower estimates for the value of assets on balance sheets. Net Present Value of Assets for the 50 Largest Private Oil and Gas Companies $2,500 $2,000 $1,500 Billions $1,000 $500 $0 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 4. Debt Repayment Slowing output and cash flows would likely lower debt coverage ratios, especially for debt beyond 2040. Debt Profile of the 50 Largest Private Oil and Gas Companies $350 $300 $250 $200 Billions $150 $100 $50 $0 -$50 -$100 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 2042 2044 2046 2048 2050 2052 2054 2056 2058 2060 2062 2064 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
Climate-Re Cl Related Risk Factors rs 5. Sovereign State-owned oil company decline rates are roughly equal to the IEA’s 2040 2 ° C supply gap. Global Oil Production Supply Gap in Global Oil Production 90 16 80 14 Million Barrels per Day 70 Million Barrels per Day 12 60 10 50 8 40 6 30 4 20 2 10 0 0 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 Oil IEA NPS Capital-assisted decline rate of 5 largest State-owned Oil Companies Oil IEA 2°C Supply Gap between Capital-assisted production and IEA SDS Capital-assised decline of existing production
Company Level Risks Oil and Gas Industry
A A possible approach ch to quantifying cl climate-re related financial risk 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
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. Net Production Net Cash Flows 6,000 $30,000 5,000 $25,000 4,000 $20,000 Millions Boe/d 3,000 $15,000 2,000 $10,000 1,000 $5,000 0 $- 2017 2020 2023 2026 2029 2032 2035 2038 2041 2044 2047 2050 2053 2056 2059 2018 2022 2026 2030 2034 2038 2042 2046 2050 2054 2058 2062 Gas Liquids Source: Wood Mackenzie Upstream Data Tool Q4 2017 Source: Wood Mackenzie Upstream Data Tool Q4 2017
Step 2 Create a 2°C scenario Company Profile 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). Percentage of New Policy Scenario Production 100% 90% 80% 70% 60% 50% 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 Liquids Demand Natural Gas Demand Source: WEO 2017
� � � � � Step 2 Create a 2°C scenario Company Profile 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. Net Cash Flows Net Production $30,000 6,000 $25,000 5,000 $20,000 4,000 $15,000 kboe/d $10,000 3,000 Millions $5,000 2,000 $- 1,000 $(5,000) $(10,000) 0 2018 2021 2024 2027 2030 2033 2036 2039 2042 2045 2048 2051 2054 2057 2060 2063 2018 2021 2024 2027 2030 2033 2036 2039 2042 2045 2048 2051 2054 2057 2060 2063 6C BAU Case 2C Low Risk Case 2C High Risk Case Gas 2C Liquid 2C BAU Source: IEA WEO 2017, Wood Mackenzie Upstream Data Tool Q4 2017, VoLo Foundation estimates Source: IEA WEO 2017, Wood Mackenzie Upstream Data Tool Q4 2017, VoLo Foundation estimates
Step 3 Compare asset values under BAU and 2°C scenarios 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: Climate Risk Ratio Calculation – Exxon Mobil NPV of Assets NPV of Assets Climate Risk Total Asset Company = - under 2C Low / under BAU Ratio Value Risk Scenario Scenario Exxon Mobil 9.35% = 100% - $147.21bln / $162.37bln 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.
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 Climate Risk Climate Risk Climate Risk Company Company Ranking Ratio Ranking Ratio 1 Origin Energy 3.15% 26 Gazprom 9.41% 2 Ecopetrol 3.56% 27 Petrobras 9.92% 3 Santos 3.66% 28 Apache 10.03% 4 INPEX Corporation 5.39% 29 JAPEX 10.15% 5 KOGAS 5.44% 30 Oil India 10.56% 6 Eni 6.65% 31 Noble Energy 10.59% 7 Woodside Petroleum Investors 6.70% 32 Hess Corporation 10.59% 8 Repsol 6.92% 33 Marathon Oil 10.69% 9 OMV 7.03% 34 Glencore 10.70% 10 Private Investors 7.14% 35 Rosneftegaz 10.83% 11 Encana Corporation 7.18% 36 Husky Energy 10.84% 12 Total 7.28% 37 Anadarko 11.07% 13 Cabot Oil & Gas 7.46% 38 Tullow Oil 11.09% 14 Shell 7.68% 39 EOG Resources 11.22% 15 Murphy Oil 7.74% 40 Devon Energy 11.27% 16 BHP Billiton 7.91% 41 Chesapeake Energy 11.31% 17 BP 8.20% 42 Occidental Petroleum 11.62% 18 Chevron 8.21% 43 Suncor Energy 12.08% 19 Statoil 8.44% 44 Newfield Exploration 12.50% 20 Range Resources Corp 8.70% 45 Canadian Natural Resources 12.57% 21 Kosmos Energy 8.72% 46 Cenovus Energy 13.41% 22 Southwestern Energy 8.87% 47 Continental Resources 14.09% 23 LUKOIL 8.94% 48 California Resources 14.22% 24 Conoco Phillips 9.06% 49 Pioneer Natural Resources 14.45% 25 Exxon Mobil 9.35% 50 Denbury Resources 15.86%
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