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Oil & investor risk

Oil & investor risk. Summary. Oil industry going deeper and dirtier (oil at any cost) IOCs face rising costs & risks Assuming 2 o C 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

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Oil & investor risk

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  1. Oil & investor risk

  2. 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?

  3. 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

  4. Underlying trends • High Capex(increasing cost per flowing barrel) • Escalating operating costs • Rising operational risk (upstream & down) • Low or negative growth • Tighter margins

  5. 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

  6. Heading for 6oC 1000ppm – 6oC

  7. Tar sands – inflated ambitions 2035 tar sands production under different IEA scenarios

  8. Demand: Policy pressures • Energy Security • Volatile oil prices • Climate change DEMAND DESTRUCTION

  9. Declining oil demand forecasts

  10. Peak demand? • IEA (2010) 450S = 2018

  11. High oil price = high volatility 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) The Breakpoint Zone (CERA)

  12. Production cost curve

  13. Reserves replacement

  14. Reserves Replacement

  15. Long Term?

  16. Long Term?

  17. 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?

  18. 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

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