Amy Myers JaffeDavid M. Rubenstein Senior Fellow for
Energy and the EnvironmentCouncil On Foreign Relations
Project LINK Meeting 2019“Coping with Stranded Asset Risk”June 18, 2019
The Science of Unburnable Carbon
2
3
Markets Recognize That Science of Stranded Assets is Real: 2009 Stock Market Aggregate Loss = 2.48% of market capitalization
$1,061,565
$27,050
Aggregate capitalization
Unburnable disclosure losses
Griffin, Lont, Jaffe, Dominguez-Faus, Energy Economics, Fall 2015
Management can still pivot to adapt to new market circumstances.
Some of the largest oil and gas companies such as Total and Statoil are already making strategic changes.
101 – 250 Quads
51 – 100 Quads
6 - 30 Quads
31 - 50 Quads
0 – 5 Quads
250 – 1500 QuadsNatural Gas
Oil
Unburnable Fuel Reserves Before 2050 Under 2°C Scenario
Source: University College London
0
50
100
150
200
250
300
350
China
Kazakh
stan
United St
ates
Nigeria
Libya
Russia
UAE
KuwaitIra
qIra
n
Canada
Saudi A
rabia
Venezuela
Billi
ons o
f Bar
rels
Proven Oil Reserves
Larger and Expensive Resources Most at Risk for Stranding
• Canada – Oil Sands Reserves are 166.3billion barrels
• Venezuela – Orinoco Belt reserves are 235 billion. Some other regions are damaged beyond repair such as the El Furrial Field.
• Russian Arctic oil reserves are 90 billion barrels and 47 trillion cubic meters of gas
• Will countries developtheir unconventional oil from shale? (Mexico, Colombia, Paraguay,Algeria, Jordan, South Africa, Argentina, Russia…)
Peabody Energy stock collapse from 2015-2016 highlights risk of disorderly decapitalization as competitive market conditions change and carbon gets repriced more accurately
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CORNERSTONE MACRO: FIVE YEAR MODEL: $50-$55/B WTI IS TOO LITTLE; $65/B SEEMS TOO MUCH
Source: CORNERSTONE MACRO
2
4
6
8
10
12
14
Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20
Mb/dSensitivity of US Shale Crude Oil Production to WTI Prices
$50$55$60$65$70
-1,500
-1,200
-900
-600
-300
0
300
600
900
1,200
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
million barrelsmillion barrels per day
s/d implied stock change
end year inventorysurplus (rhs)
Central Scenario
sensitivity of 5 year global oil balance to shale production growthglobal stock change (Mb/d) running shale model at various WTI prices
2019 2020 2021 2022 2023$50 -0.9 -1.5 -2.4 -3.6 -5.6$55 -0.6 -0.5 -0.8 -1.6 -3.6$60 -0.1 0.7 1.1 0.7 -0.6$65 0.2 2.1 3.8 4.1 3.5$70 0.5 3.6 4.7 5.2 4.3$75 0.7 4.1 5.5 5.7 4.7
Is the WTI Boom-Bust Price Cycle Shortening?
• Shorter cycle times for oil price rises potentially weakens the investment response in regions with large scale conventional reserves that take longer to develop.
9Source: CORNERSTONE MACRO
DATA SCIENCE IS DELIVERING FOR US TIGHT OIL: TECHNOLOGY IS BRINGING ABUNDANCE
Shorter cycle times will leave NOCs with less capital flexibility.NOCs likely to have more difficulty staving off declines in mature fields.
Majors are favoring short cycle projects such as shale in the Americas, brownfield extensions and development of satellite reserves. Interest in long cycle projects like Venezuelan heavy oil
and Arctic development is sinking. Longer term, any higher oil prices could breed structural decline in oil use, creating intractable problem for OPEC.
Rising Oil Production Potential VS NOC Supply RiskCorruption Scandals, Failing States, and States Raiding NOC Finances
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Technology Revolution is ushering in exponential gains in productivity, via transportational logistics, automation, big data, material science and biotech, artificial intelligence, 3-D printing.
This revolution dramatically change the way we produce, sell and use energy.
Old v. New Forces Impacting Long Term Oil Demand
~ 100 MIL BBL/DAY(current)
TECHNOLOGY
LEGISLATIVE + TAX POLICY
ENERGY EFFICIENCY (energy per GDP declining)
MILLENNIALS REJECT VEHICLE OWNERSHIP
GROWTH OF ALTERNATIVE ENERGY
POPULATION GROWTH
EMERGING ECONOMY EXPANSION
EXPANDING GLOBAL MIDDLE CLASS
74 MIL BBL/DAY(2 degrees)
Potential impact of increased shared mobility/autonomous vehicles: Oil consumption highly sensitive to changes in VMT
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30% Higher VMT
50% Lower VMT
Baseline
0
10
20
30
40
50
60
70
80
90
100
2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050
million bbl/day
Oil Consumption Sensitivity to VMT
ICE Ban Oil Consumption
0
10
20
30
40
50
60
70
2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050
mm
boe/
day
BAU -- 4 Degree Shift
Energy demand is expected to peak in OECD. Could China be next?
Change in energy demand, 2016-40 (Mtoe)
GDP across developing world might slow due to climate change, migration, and slowdown in global trade.
India1 005
420
SoutheastAsia
China 790
United States-30
Japan-50
Europe-200
270Central and South America
485
Africa
135 Eurasia
480Middle
East
How Will Producers Respond?
§ Since reserves under the ground will depreciate over time, it makes commercial sense to accelerate production now while demand is still robust
§ Green paradox: Higher the likelihood of carbon tax or restrictions, the more it will encourage producers to accelerate production
§ Geopolitical implications: petro-states responding to loss of strategic stature by shifting to harder power measures to raise importance on world stage
§ Anticipation of failing national budgets is destabilizing legitimacy of petro-governments and prompting intensification of repression
HOW DOES THE UNITED NATIONS PROMOTE A SOFTER LANDING?
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