Oil & investor risk
description
Transcript of Oil & investor risk
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Oil & investor risk
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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?
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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
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Underlying trends
• High Capex (increasing cost per flowing barrel)
• Escalating operating costs
• Rising operational risk (upstream & down)
• Low or negative growth
• Tighter margins
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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
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Heading for 6oC
1000ppm – 6oC
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Tar sands – inflated ambitions
Scenario Current Policies
New Policies
450 Announced Projects
Mb/d 4.6 4.1 3.3 7.7
2035 tar sands production under different IEA scenarios
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Demand: Policy pressures
• Energy Security• Volatile oil prices• Climate change
DEMAND DESTRUCTION
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Declining oil demand forecasts
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Peak demand?
• IEA (2010) 450S = 2018
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High oil price = high volatility
The Breakpoint
Zone (CERA)
a company will not invest in a project that requires a $100/bbl break even if the 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)
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Production cost curve
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Reserves replacement
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Reserves Replacement
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Long Term?
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Long Term?
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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?
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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