WEBINAR: COVID-19 AND IMPACT ON THE US FINANCIAL SYSTEM - Oliver Wyman
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WEBINAR: COVID-19 AND IMPACT ON THE US FINANCIAL SYSTEM Government response, impact on oil & gas July 29th, 2020 Please note that this session was held at a particular point in time (Wednesday, July 29th, 2020, 4pm-5pm EDT), and in light of the rapidly evolving COVID-19 situation, it is possible these discussions are no longer accurate after that date.
CONFIDENTIALITY Our clients’ industries are extremely competitive, and the maintenance of confidentiality with respect to our clients’ plans and data is critical. Oliver Wyman rigorously applies internal confidentiality practices to protect the confidentiality of all client information. Similarly, our industry is very competitive. We view our approaches and insights as proprietary and therefore look to our clients to protect our interests in our proposals, presentations, methodologies, and analytical techniques. Under no circumstances should this material be shared with any third party without the prior written consent of Oliver Wyman. © Oliver Wyman
WEBINAR AGENDA 1 Epidemiological update 2 The Stimulus Debate 3 The surprising impact of COVID-19 on Oil & Gas 4 Q&A © Oliver Wyman 3
OUR PANELISTS
Til Schuermann Douglas Elliott
Partner & Co-Head, Risk Partner, Risk & Public
& Public Policy Policy
Helen Leis Bob Orr
Partner, Health & Life Partner & Head of
Sciences Americas Energy Practice
© Oliver Wyman 4
01
EPIDEMIOLOGICAL
UPDATE
Helen Leis
Partner, Health & Life
Sciences
THE U.S. EXPERIENCE IS A TALE OF TWO SETS OF STRATEGIES AND OUTCOMES
Active cases per million for select states The US is divided between the Northeast and
As of July 27th, 2020 everywhere else
8,000 Forecast launch
• Northeastern states like Massachusetts, New
Florida
7,000 York, and New Jersey drove much of the
growth in the US in the early pandemic, but
6,000 Georgia have since managed to suppress cases
• Now, states in the South and West like
5,000 Florida, Texas, and California that were
relatively spared early in the pandemic are
4,000 Texas seeing substantial case growth with some
Arizona indication of slowing down in recent days
California
3,000 Illinois • Despite a brief respite in the late spring, case
Iowa growth is now accelerating across the
2,000 Midwest in states like Iowa or Illinois,
Massachusetts threatening to become outbreaks of similar
1,000 New Jersey scale to Southern states
New York
0
2/1 2/15 2/29 3/14 3/28 4/11 4/25 5/9 5/23 6/6 6/20 7/4 7/18 8/1 8/15
© Oliver Wyman 6
HOTSPOTS ARE STILL DEALING WITH SUBSTANTIAL DAILY NEW CASES, BUT THERE ARE
EARLY INDICATIONS GROWTH MAY HAVE STABILIZED
Legend:
% Change in new
daily cases (2 weeks)
Circle size: # of active cases
0% or less 1–25%
Testing rates 26–50% 51–100%
>10% indicate
capacity issue,
101+%
suggesting Testing capacity insufficient
confirmed case to capture true case growth
growth is
limited by Fully reopened1
tests, not true
caseload in Partially reopened
FL2
region Partially reclosed (after
reopening)
South/West Rural States Midwest Northeast/Mid-Atlantic
High Risk Moderate-High Risk Moderate–High Risk Moderate Risk
• 9 of 10 states with highest active cases are in • All fully reopened and fared well for multiple • Cases rising across most of the region after • Generally hit hard by initial outbreak
South (CA is 3rd) weeks a number of weeks of flat to declining • Cautiously reopening after case decline,
• Case growth appears to be slowing, but • Though some case counts are still low, growth though many (NY, NJ, DE) have paused
likely a result of limited testing - Several hotspots like Idaho now in top 10 active • Many states (OH, NE, KY, MO, WI, IN, IA, KS reopening plans
states (FL, TX, GA, AZ, LA, AL) have positive cases/capita ) have concerning rise in positive test rates • Several states (MD, CT, VA) have 2 week
test rates of 15-25% • States with low case counts have seen ~50- >5% case growth >50%, increasing risk
• Health system capacity is strained, resulting 75% 2 week case growth (NE, ND, AK, WY),
in regulatory changes in many states increasing risk
1. “Fully reopened” defined as when a majority of high risk businesses, including bars, movie theaters, or gyms, have been reopened with indoor service. This chart does not account for regulatory restrictions that may or may not be in place in
© Oliver Wyman those businesses, including mask wearing or capacity constraints. 2: Florida has considered reclosure of a number of risky venues, including bars, gyms, & restaurants, but ultimately decided to only reclose bars; thus, Florida is still considered 7
“fully reopened”
DOES SLOWING CASE GROWTH SIGNAL THE END OF THIS WAVE?
It is too early to definitively say, but potential explanations are primarily centered on behavioral change
Risky business closures – Reclosures of bars, gyms, and other risky businesses in hotspots like AZ, CA, LA, and TX are
1 likely limiting risky behavior and helping to limit transmission
Mask mandates – Mask usage in public is now mandated in over 50% of U.S. states, including key hotspots (e.g., AL, CA,
2 LA, TX) – mask wearing demonstrably lowers transmission in states with mandates
Increased public compliance – 75% of Americans are now more likely to wear a mask and engage in social distancing
3 than they were in June, reducing risk1
Testing capacity limits – Alternatively, the answer may simply be driven by data integrity, as significant strain on testing
4 capacity constrains our ability to diagnose true scope of outbreak; 14 states (MS, AZ, FL, AL, ID, KS, SC, NV, GA, MO, TX,
AR, UT, LA) all have >10% positive testing rates
© Oliver Wyman 1. Harris Poll 8
Information as of 7/28/20
HERD IMMUNITY IS A THEORETICAL PROMISE, BUT IF IMMUNITY IS CONFERRED, THE
THRESHOLD REQUIRED MAY BE LOWER THAN PREVIOUSLY THOUGHT
If herd immunity proves feasible, each region will be on a different path; while potential immunity is far off for most, heavily affected epicenters like
NYC may begin to see a dampening effect on transmission
Infected proportion of population Emerging perspective
90% US MSAs • We do not currently know if protective immunity is conferred or for
80% what length of time; If protective immunity does not last long (e.g., 6
70% months), we will not achieve herd immunity
• Assuming immunity is conferred, progress towards herd immunity
60%
varies by region
50%
– Key factors include how hard hit a region was and how effective
40% suppression measures are/were
30% • Additionally, it is likely that herd immunity thresholds differ from
region to region or from population to population
20%
– Heterogeneity of contagiousness (i.e., some patients may be
10%
“super-spreaders”, some may be naturally immune) and of
0% interaction (groups are differentiated in how they interact within
UK
Japan
France
US
Spain
Miami
Germany
Brazil
DFW
LA
NYC
and outside of the group) suggest variability in herd immunity
thresholds
Confirmed Estimated total – low3 Estimated total – high3
• This heterogenous transmission means herd immunity may be more
achievable than we first thought, as long as immunity lasts long
JP DE FR US ES UK BR DFW LA MIA NYC enough
Deaths per 1M5 8 110 460 450 610 680 410 150 370 450 3K
Total Deaths5 1K 9K 30K 148k 28K 46K 88K 1K 5K 3K 23K
Sources: Total confirmed cases by country as reported by Johns Hopkins University as of 7/7/2020; total confirmed cases by US county as reported by US facts as of 7/7/2020; world population as reported by link; total population for MSAs as
© Oliver Wyman reported by Claritas. 1. Estimates for herd immunity for COVID based on R0 of 2–5.7 and a target of R0
REOPENING SCHOOLS IS A CRITICAL AND HOTLY DEBATED ISSUE – IT LIKELY CAN BE DONE SAFELY WHEN COMMUNITY SPREAD IS LOW • America’s economic system can not function fully without schools, placing economic pressure on reopening • Pediatric welfare also depends on in-person learning; students are falling behind and are at greater risk of abuse, neglect, or food insecurity How do we ensure schools are able to reopen safely? • Manage community transmission below risky levels – Keeping community spread low will reduce the likelihood of transmission events within schools, protecting students and teachers • Levy mask mandates in and out of schools – mask mandates demonstrably lower transmission within communities, lowering risk of children contracting or spreading the disease • Shut down or materially alter operations of highest risk businesses – businesses like bars, gyms, or live music venues are some of the riskiest venues to keep open, and shutting them down will have less impact on the economy than keeping schools closed • Increase testing, particularly in the private sector – Existing US testing capacity is not sufficient to capture and mitigate full extent of risk from COVID; By increasing testing both within schools and among private businesses, unexpected spread and outbreaks can be identified quickly and contained • Prioritize return of less risky age groups – multiple studies have suggested children younger than 10 are less at risk of spreading the disease than any other age group, while transmission from those aged 10-19 may be more common than in adults1; adopting hybrid schedules that prioritize younger students may reduce risk and substantially reduce the burden of childcare of younger parents 1. CDC © Oliver Wyman 10
FINDING THE OPTIMAL R(t) BALANCE – REGIONS SHOULD STRIVE TO KEEP AS MUCH OF
THE ECONOMY OPEN AS POSSIBLE WITHOUT RISK OF SERIOUS OUTBREAK
Case growth – long haul suppression
Rapid Case Growth
Limited suppression measures until public health strain is too high, followed by broad,
reactive suppression measures in response
Rapid progress towards herd immunity during “open” periods1
Economic instability driven by need to reclose broadly when case counts rise too
high
Risk Threshold
Population less willing to “reclose”, leading to lower compliance and less effective
suppression
Managing Rt
Proactively tighten & ease suppression to maintain balance & keep Rt just below risk
Case Growth per Day
threshold; proper testing important to accurately calculate Rt
Economy is as open as possible without threatening health infrastructure
Maximal herd immunity without overwhelming health system
Limited need for reactive, destabilizing suppression measures
Cautious suppression
Targeted suppression measures levied well before growth approaches risk threshold
Limited public health risk
Lower case count enables targeted suppression
Next 12+ Longer road to herd immunity
Months Higher likelihood of extended unemployment/economic disruption
© Oliver Wyman 1. Assumes protective immunity is conferred and lasts long enough for herd immunity to be impactful 11Information as of 7/28/20
MASK MANDATES ARE HIGHLY CORRELATED TO CURRENTLY FLAT OR DECLINING CASE
GROWTH
Washington Montana North Dakota • Mask mandates are highly correlated with declining case growth
Minnesota
New Hampshire – Evidence suggests that up to 450k cases may have been avoided
Wisconsin Vermont due to mask mandates as of May 221
Oregon South Dakota Maine
Wyoming Massachusetts – Daily case rates declined by up to two percentage points after
Iowa Michigan West signing a mask mandate, with the effect increasing over time1
Idaho Virginia New York
Nebraska
Nevada Utah Illinois Pennsylvania
California Ohio
Colorado Missouri Rhode Island
Kansas Connecticut
Indiana New Jersey • Though mandates are most common in the hard-hit Northeast,
Kentucky Virginia
Maryland evidence suggests efficacy in other regions
Arizona New Mexico Oklahoma Washington, D.C.
Arkansas
Texas Tennessee North Carolina – Despite proximity to the current outbreak centers in the south
and west, both Kentucky and New Mexico have mostly avoided
Missi
ssippi Alabama Georgia
South Carolina serious case growth
Louisiana
Florida
Alaska • Many states have employee only mask mandates in effect; effects
of these on case rates are insignificant1
Hawaii
• Efficacy of newly instituted mandates remains to be seen
– New epicenters (CA, TX, NC, etc.) have recently instituted
mandates, but efficacy partially relies on public compliance
LEGEND: Masks recommended in public
Masks required in public post June 1st
Masks required in public pre June 1st
1.Health Affairs
© Oliver Wyman 12KEEPING COMMUNITY SPREAD LOW LIKELY REQUIRES HIGH RISK BUSINESSES TO STAY
CLOSED OR SIGNIFICANTLY CHANGE OPERATIONS
Risk of reopening
Less risky More risky Most risky
Can easily accommodate and enforce distancing, PPE, Can reasonably implement safety protocols, but contact Can not reasonably enforce safety protocols; indoors with
hygiene protocols, and capacity limits; preferably outdoors above recommended levels is likely; indoor activities that limited circulation; mass gatherings or events not
facilitate transmission conducive to distancing; spaces conducive to
• Car dealerships
• In-store retail yelling/singing
• Takeout • Movie theaters
• Dine-in restaurants
• Medical appointments • Office space (i.e., corporate buildings) • Bars
• Outdoor recreation (e.g., golf, fishing, tennis) • Public transit • Concerts or sporting events
• Appointment-based personal services (e.g., nail salon, • Religious services
barbershop) • Gyms/fitness studios
Reopening risky businesses should take place under specific circumstances and with abundant safety measures
Reopening should likely wait until cases are extremely The “new normal” requires new standards and operating Authorities should be prepared to reclose if necessary
low procedures • It is likely too early to fully determine the impact of
• New daily cases wereFEW STATES HAVE ADEQUATE TESTING CAPACITY TO ADDRESS EXISTING CASE GROWTH
New cases per thousand (including undetected cases) by tests per thousand for each state
As of July 27th, 20201
0.55
Below average testing, above average cases Above average testing, above average cases
0.50 Florida
New cases per thousand (7-day rolling average)
Mississippi
0.45 Louisiana
0.40
Alabama
0.35 Arizona Tennessee
Nevada Georgia
South Carolina
0.30 Texas
These states may lack Idaho
0.25 the infrastructure to Oklahoma
detect a resurgence Missouri Arkansas California
Strongest existing
0.20 of cases rapidly Wisconsin North Dakota North Carolina capacity
Kansas Iowa
Utah
Indiana New Mexico
0.15 Kentucky Alaska
Minnesota
Below average testing, Colorado Maryland Above average testing, below average cases
0.10 below average cases Wyoming Washington Illinois
District of Columbia
Michigan
0.05 Hawaii
Massachusetts New York
New Hampshire Vermont New Jersey
Maine
0.00
0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4 2.6 2.8 3.0 3.2 3.4 3.6 3.8 4.0 4.2 4.4 4.6 4.8 6.4
New tests per thousand (7-day rolling average)
1. Quadrants determined using the average of state-level new tests per thousand (7-day rolling average) and average of state-level new cases per thousand (7-day rolling average)
© Oliver Wyman 14SUPPLEMENTAL PRIVATE SECTOR TESTING IS OPERATIONALLY CHALLENGING AND
EXPENSIVE, BUT IS IMPORTANT IN RETURN-TO-WORK SCENARIOS
Some private institutions are currently or planning …Though operational and cost considerations
to regularly and broadly test their workforce… have limited wider adoption
• Private sector testing will be highly industry specific, with • Cost and frequency of testing are biggest prohibitors
vulnerable employers like airlines implementing earlier – Testing should occur multiple times a week, preferably daily, to
– Testing at locations with high likelihood of spreading events or ensure cautious behaviour
vulnerable populations (schools, prisons, long-term care facilities) – At $100-150 per test, cost quickly becomes substantial for any
• Universities are among the most common organizations planning company with multiple employees tested multiple times a week
to ramp up private testing – Certain groups, like the Broad Institute in Boston, have limited
– Many universities are ramping up in-house capabilities or costs toFULL RECOVERY DEPENDS ON A SUCCESSFUL VACCINE, BUT TIMELINE IS UNCERTAIN
A successful vaccine manufactured and deployed at scale is the only certain path to eradication
How long could that take?
• The optimistic timeline suggests a vaccine could be commercially available in mid to late 2021
• The best comparison we have is the development of H1N1 vaccines under similar circumstances, though we are already past the 6mo it took for a vaccine to be approved in
that scenario
H1N11
6 months until vaccine approval; 12 months critical conditions; 18 months until end of pandemic
Mar 2009 Apr 2009 Summer 2009 July 2009 Sep 2009 Dec 2009 Aug 2010
First world-wide US Gov declares Source region Vaccine clinical FDA approves four Vaccine available WHO declares end
case emerges state of emergency possibly under control trials begin H1N1 vaccines broadly of pandemic
What is the current status of leading candidates?
Vaccine program Initial results Current stage Manufacturing scale / timeline
Oxford - AstraZeneca • Results from Phase I/II trial showed • Undergoing Phase II/III trial with 10,00 • Manufacturing partners lined up to produce
production of a strong immune response with participants in UK, Brazil, South Africa 2B doses (via AstraZeneca and Serum Institute
co-occurrence of manageable, mild / • Considering adding Human Challenge Trials of India) and distributed in partnership with
moderate side effects GAVI and CEPI
Moderna • Results from Phase I trial demonstrated all • Granted FDA fast track (5/12) • Partnership with Catalent (100M initial doses)
participants produced antibodies, but had • Currently undergoing Phase IIa (dosage) and b and Lonza to produce 1B doses annually
significant side-effects in a dose-dependent (efficacy) trials
manner • Beginning Phase III trials on July 27, targeting
30,000 participants
Pfizer-BioNtech • Results from Phase I/II trial showed that a 2 • Granted FDA fast track (7/13) for 2 out of 4 • Targeting 100M doses by end of 2020, >1.2B
dose vaccination elicited strong antibody investigational vaccines doses by end of 2021
response, but had frequent mild-moderate • Preparing for Phase IIb/III trial targeting
adverse effects 30,000 participants late July / August
© Oliver Wyman Sources: H1N1 timeline (link), Credit Suisse Equity Research, Nature (link), Artis Ventures (link), Biocentury (link) and DowJones 1602
THE STIMULUS
DEBATE
Douglas Elliott
Partner, Risk & Public
PolicyOVERVIEW OF THE STIMULUS DEBATE
ECONOMIC BACKGROUND POLITICAL BACKGROUND
KEY QUESTIONS A FEW PREDICTIONS
© Oliver Wyman 18ECONOMIC BACKGROUND
• Economic output has taken a huge hit, falling 10-15%,
depending on how you measure it, between February and
May
• The CBO projects economic output over the next 12 months
will be $1.3 T lower than if the economy were operating at
full potential
• The course of the pandemic and the health policy measures
used to contain it will strongly influence the extent of the
damage
• The next largest influence will be the degree of fiscal stimulus
• Household incomes in May were actually 5% higher than in
February due to massive government aid
• But much of the existing stimulus is rolling off this summer,
with additional unemployment benefits ending this week,
unless there is new legislation
© Oliver Wyman 19POLITICAL BACKGROUND
• Politics, especially in this election year, makes it
virtually certain additional stimulus will be
passed soon
• Democrats are united around the idea of a further
massive stimulus (with the House passing a $3
Trillion package)
• The Administration wants to boost the economy
heading into the elections, but not at the expense
level the Democrats support
• There are some Republican deficit hawks in
Congress who are pushing back against a large
stimulus program
• However, many Congressional Republicans want a
sizeable stimulus, meaning there will be an overall
majority to pass legislation
© Oliver Wyman 20KEY QUESTIONS
What is the
SIZE OF THE PROGRAM
How much is in the form of
GRANTS VS. LENDING
Which
SECTORS OF THE ECONOMY
will receive aid
© Oliver Wyman 21A FEW PREDICTIONS
There will be substantial money Businesses will benefit from
an extension / expansion of
for households through direct
the Paycheck Protection
grants, payroll tax cuts or other Program
means
There will be money for
The total size will testing and tracing,
be in the range of despite earlier opposition
$1 Trillion
© Oliver Wyman 22A FEW PREDICTIONS
• Congress will try to get more bang for the buck on its previous authorization for
Treasury to use funds to back Fed lending programs
- Pushing the Fed / Treasury to make the Main Street Lending Program work better
- Pushing Treasury to allocate more funds to back Fed programs, including new ones
- Commercial real estate lending could be part of this
- Congress may throw in some more money to back lending programs, beyond the
PPP
• States and municipalities will get some funding, especially now that Red states are
being hit as hard as some Blue ones were
© Oliver Wyman 2303
THE SURPRISING
IMPACT OF COVID ON
OIL & GAS
Bob Orr
Partner & Head of
Americas Energy PracticeTHE INITIAL COVID-19 OUTBREAK HAS RESULTED IN ~27% DECLINE IN OIL DEMAND,
DRIVING OIL PRICES DOWN
2020 Global oil products demand (million barrels/day) Demand shock is
unprecedented and affected
-27% primarily road and jet fuels
Decline of Despite May/June demand
oil demand pick-up, pace of demand
recovery is still uncertain and
uneven across global markets,
with 2nd COVID outbreaks a
concrete threat
New environment is placing
significant pressure on regions
Jan Feb Mar Apr May Jun with higher cash production
costs
© Oliver Wyman 25AS A RESULT, OIL & GAS CO’S ARE SIGNIFICANTLY IMPACTED AND HAVE ENACTED
SURVIVAL AND REPOSITIONING MEASURES
CAPEX CUTS DIVIDENDS/SHARE BUY BACK LAYOFFS
-20% -28% -30% ~2/3 Suspension of
share buyback -10-15% -15%
dividend cuts
© Oliver Wyman 26SO, WHAT SHOULD OIL AND GAS COMPANIES EXPECT IN THE NEXT 18-24 M?
PRICE
Crude Prices have
progressively recovered to
DEMAND $40s/bbl and likely to remain
Pace of demand recovery at $30-$50/bbl
is still uncertain with
demand impact likely
extending beyond 2021 SUPPLY
New environment is changing oil
geopolitical balance and positioning
again US shale as the natural swing
producer
© Oliver Wyman 271. Americas Demand
AMERICAS: OIL MARKETS WILL RECOVER SLOWER THAN INITIALLY EXPECTED, WITH A
DEGREE OF SUSTAINED DEMAND DESTRUCTION
Total Products Demand 1
[MMbbl/d]
33
32 OW Fast recovery
2020E: 27.4 MMbbl/d
31 2021E: 30.6 MMbbl/d
30 30 -2% at end of 2021 compared to
29 Pre-COVID Baseline2
28
27 OW Gradual recovery
26 2020E: 27.1 MMbbl/d
26
2021E: 29.7 MMbbl/d
25 -4% at end of 2021 compared to
24 24 Pre-COVID Baseline2
23
22
22 EIA Pre-COVID Baseline2 OW Slow recovery
21 2020E: 26.5 MMbbl/d
OW Fast Recovery
2021E: 29.1 MMbbl/d
20 OW Gradual Recovery
-7% at end of 2021 compared to
OW Slow Recovery Pre-COVID Baseline2
1 Historical Oil Demand
0
Mar- May- Jul- Sep- Nov- Jan- Mar- May- Jul- Sep- Nov-
20 20 20 20 20 21 21 21 21 21 21
1) Based on scenario outputs of the Oil Navigator 2) Pre-COVID Baseline based on EIA forecast from January 2020 // Source: Oliver Wyman Analysis
© Oliver Wyman 282. Crude price
WE EXPECT OIL PRICES TO BE IN THE $30–50 RANGE OVER THE NEXT 12–24 MONTHS
DRIVING DRILLING ACTIVITY DRIVING DOWN
Oil (WTI) – historical and forecasts Total US rig count – oil vs natural gas
$/barrel, Q3 2019–2021 (forecast) # of rigs
60 58 1,600
2008 price recovery
(20–50)%
40 2014 price recovery below 1,400
Q4 ‘19
20
1,200
Forecast
0
Q3 ’19 Q4 ’19 Q1 ’20 Q2 ’20 Q3 ’20 Q4 ’20 Q1 ’21 Q2 ’21 Q3 ’21 1,000
Oil
Natural gas (Henry hub) prices – historical and forecasts 800
$/million Btu, Nov 2019–2021 (forecast) 600 -61%
4
400
2 Gas
200
Forecas
0 t 0
Q3 ’19 Q4 ’19 Q1 ’20 Q2 ’20 Q3 ’20 Q4 ’20 Q1 ’21 Q2 ’21 Q3 ’21 2013 2014 2015 2016 2017 2018 2019 Q1’20 Q1’21Q4’21
Source: EIA, Reuters, Company public reports, JP Morgan, Goldman Sachs, Bank of America, Citi, Credit Suisse, Morgan Stanley, Pira, S&P Global Platts, Shell Q1 ’20 earnings, Baker Hughes, Oliver Wyman analysis
© Oliver Wyman 29BESIDES THE SUSTAINED CHALLENGES, THIS CRISIS PRESENTS UNIQUE OPPORTUNITIES
FOR OIL COMPANIES
Certainly this situation has caused a lot of distress in our industry, but it
Another round is in need of consolidation. There's too much fixed cost. Investors have
of market too many choices. Your market cap's not relevant anymore.
consolidation? Ryan Lance – ConocoPhillips Chairman and CEO, April 30
Increased push Today, we’re a hydrocarbon company. But we will become a different
towards type of energy company over time with decarbonization.
decarbonization? Bernard Looney – BP CEO, May 13
I fundamentally believe we have a core role to play in the energy
Time for energy transition: the capabilities that we have, the scale that we bring, the
transition? insights, and everything else.
Ben van Beurden – Shell CEO, June 09
© Oliver Wyman 30THE IMPERATIVE TO ADVANCE DECARBONIZATION STEMS FROM GROWING CARBON RISKS
AND LOW-CARBON OPPORTUNITIES
Reasons to decarbonize
Increasing incorporation of climate and transition risk into credit ratings,
Growing impacting cost of capital1
risks for
carbon- Investor and shareholder advocacy and divestment. Risk of stranded assets
intensive
IOCs Expanding carbon regulations, especially carbon pricing schemes
and efficiency standards
Improved margins available to some renewables and low-carbon tech.,
Growing in part due to policy incentives, in part due to lower traditional investment returns
opportuniti
es in low- Potential boost to share price and market valuation
carbon
sector Growth in renewables and low-emissions tech. driven by customer demand and societal
reputation
© 1. A study
Oliver by CDP found that companies not prioritizing decarbonization receive higher coupon rates, especially on medium- and long-term bonds
Wyman 31OIL CO’S ARE IN EARLY STAGES OF DECARBONIZATION. SOME HAVE SET
AMBITIOUS TARGETS BUT HAVE LIMITED PLANS ON HOW TO GET THERE
Oliver Wyman Decarbonization Maturity Framework In line with current
Paris pledges
In line with 2
degrees and below
Stages of decarbonization
Small steps Shifting gears Low-carbon champion Carbon Neutrality
• Small operational/ • Modification of operations • New technologies and • Near zero emissions from
process improvements to cut carbon processes to cut carbon operations
• Evaluation of emissions • Partial portfolio shift towards • Decarbonization • Vast majority of
and goals to reduce non hydrocarbon products fully integrated investment toward
• Beginning to integrate into financial and carbon mitigation
Description
decarb. into portfolio portfolio decisions and low-carbon
decision-making
• Strong investment into • Focus shifts externally to
and investment
low-carbon innovation facilitate societal
• Some divestment from high-
and R&D decarbonization
carbon assets
Scope 1,2 and 3 physical
Carbon intensity1 60-75 40-60 10-40 < 10
(CO2-e/MJ) Severity of the actions and weight on overall portfolio
IOC
IOC IOC
IOC Former
IOC
IOC IOC
IOC
IOC
IOC IOC
IOC
1. Without offsets or credits
Example: Today 2050 under current targets
© Oliver Wyman 32REACHING NEUTRALITY REQUIRES A REDEFINITION OF THE O&G PRODUCT PORTFOLIO
OVER COMING YEARS AND DECADES
Modeled evolution of product and asset portfolio
% of MJ, with resulting physical CI in g CO 2-e/MJ above bars – assumes consistent total energy production MODELED EXAMPLE
In line with current In line with 2 degrees
Paris pledges and below
Starting physical CI 75-95 60-75 40-60 10-40 < 10
(all emission scopes)
based on average
emissions across the
value chain Low-CI fuels1
of a boe, for average Renewable power
industry portfolio
Natural gas
Non-combustible oil product
Light oil based combustible product 2
Heavy oil based combustible product2
Low-carbon Carbon
Small steps Shifting gears
champion Neutrality
1. Includes low-CI biofuels, green or blue hydrogen, electric vehicle charging, etc. || 2. American Petroleum Institute (API) gravity < 35 for Heavy and API gravity > 35 for Light in this example
Source: OW Analysis
© Oliver Wyman 33THANK YOU FOR YOUR ATTENTION!
1
The current COVID-triggered crisis has created a
unique shock to the industry and caused significant
impact on oil and gas companies, currently still
recovering
2 We are headed for a “new normal” characterized
by lower demand, low prices, a stronger OPEC+
alliance and reinforcement of US shale as natural
swing producer
3 Despite sustained challenges, we see market
consolidation, decarbonization and energy transition
as accelerating changes
© Oliver Wyman 34THANK YOU; POST-WEBINAR LOGISTICS; Q&A
Contact us
Til Schuermann
Til.Schuermann@oliverwyman.com
Helen Leis
Helen.Leis@oliverwyman.com
Doug Elliott
Douglas.Elliott@oliverwyman.com
Bob Orr
Bob.Orr@oliverwyman.com
© Oliver Wyman 35READ OUR LATEST INSIGHTS ABOUT COVID-19 AND ITS GLOBAL IMPACT ONLINE Oliver Wyman and our parent company Marsh & McLennan Visit our dedicated COVID-19 website: (MMC) have been monitoring the latest events and are putting https://www.oliverwyman.com/coronavirus forth our perspectives to support our clients and the industries they serve around the world. Our dedicated COVID-19 digital destination will be updated daily as the situation evolves © Oliver Wyman 36
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