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The future energy landscapeGlobal trends and a closer look at the
Netherlands
CONFIDENTIAL AND PROPRIETARY
Any use of this material without specific permission of McKinsey & Company
is strictly prohibited
Occo Roelofsen
June 2017
Presentation to Dutch Financial sector, Rotterdam
2McKinsey & Company
PV auctions ~50% price drop
29.129.9
35.4
48.0
58.4 -50%
Aug 2016:
Solarpack
May 2016:
Masdar/FRV
Jan 2015:
ACWA
Mar 2016: EnelFeb 2015: Enel
200
MW
144
MW
427
MW
800
MW
120
MW
LCOE, USD/MWh
Lowest
winning
solar
PV bids
3McKinsey & Company
Onshore wind -45%
30
37
44
48
51
55
2016: EGP/GR
Paino/
GR Taruca
2016: Various
bidders, incl.
WPD
2015: Various
bidders
-45%
2016: Various
bidders
2016: Various
bidders,
incl. Enel
2015: Neoen
100
MW
90
MW
986
MW
620
MW
162
MW
850
MW
LCOE, USD/MWh
Winning
onshore
wind bids
4McKinsey & Company
… and offshore wind tenders have dropped by over 60%
5054
64
73
103
Borssele
3+4
(Dec’16)
Borssele
1+2 (Jul’16)
>60%
DNS
Vesterhav
Nord/Syd
(Sep’16)
Horns Rev 3
(Feb’15)
East Anglia
One/Neart na
Gaoithe (Feb’15)
Danish Kriegers
Flak (Nov ’16)
~ 135
Offshore
wind
tenders
have
dropped
~60%
LCOE, EUR/MWh
5McKinsey & Company
269
600
300
800
400
100
700
500
200
02010 15 2520 2030
Battery priceUSD/kWh
SOURCE: Expert interview, SNE research, Navigant, Avicenne Energy, Berstein
Source of insight , Unit: $/kWh (Pack cost)
McKinsey BreakthroughMcKinsey Base case
120
100-120
150
170
190
2020 estimates 2025 estimates
125-140
70-85
100
N/A
135
2010 outlook 2015/2016 outlook
93
53
190
269
135
112
And Battery costs continue to fall, faster than expected
6McKinsey & Company
Investments in the energy system are shifting
16-35
Oil & Gas
06-15
Other
7McKinsey & Company
Are we going back to the ‘normal’ levels for resource cost?
Resource expenditures as share of global GDP, Percent
0
7
3
1
5
6
4
2
1910 20001900 1980 ‘101960195019301920 19901940 ‘151970
Iron ore
Crude oil CopperThermal coal
Natural gas
8McKinsey & Company
Economic profit evolution of upstream
O&G, 1995-2015, % per annum
Quintiles
40
100
-20
80
60
0
20
Upstream
Oil and
Gas
15
0
20
10
25
5
05 201520001995 10
11
Economic profit per year, 1995-2015
$Bn, per annum
High Tech
PharmaceuticalsAirlines
Power
Economic profits in Upstream oil and gas
9McKinsey & Company
After 4 years of bleeding cash, consensus is that the Majors will have cash
available for discretionary spending in 2017
SOURCE: CapitalIQ, team analysis
“Committed” cash flow for Majors1,2, USD billion
1 Including Exxon, Shell, Chevron, Total and BP; 2 Cash flow from operations split in uses - capex and dividend payments which are defined as committed usages; cash flow source/ usage
excludes Acquisition/ sale, change in debt balance, equity issuance, share repurchases, other investing/ financing and forex activities; 3 Cash flow from operations, capex based on analyst
consensus, dividends are grown at 5% each year from 2016 levels
29229
-49-48-13-36
6
18F14 1615 2019F17E132012
Operating
cash flow
Capex
Dividends
Discretionary
spending
16815613880
117179170190
95928991126149167147
4341393839423836
10McKinsey & Company
Post-tax ROIC1
Percent
However, fundamental upstream performance remains weakBreakdown of upstream returns on invested capital 2010-2016
UPSTREAM
1 ROIC based on year end IC; based on SEC O&G reporting; Invested capital based on reported capitalised costs 2 Based on net production
3 Based on reported proved reserves 4 Based on year end reserve by production ratio
Source: Company filings; Team analysis
NOPLAT margin2
$/boe
Invested capital/Reserves3
$/boe
Invested capital/Production2
$/boe
Reserves/Production (R/P)4
Ratio
2 SOURCES OF VALUATION GAP
12
911
13
1817
12 13 20161514112010
12
141416
18
14
151412112010 13 2016
145145146133
122101
84
201615112010 1412 13
12.211.710.8
10.19.47.9
6.9
152010 1211 20161413
12.312.913.913.613.113.012.4
13 201615142010 11 12
11McKinsey & Company
The 3 trends shaping the energycompany of the future
1
2
3
‘The shifting energy landscape’
Lower for longer for oil, gas, power prices as a base case?
A closer look at the Netherlands
11McKinsey & Company
12McKinsey & Company
Our latest outlook is lower than “base case”-like views
SOURCE: IEA World Energy Outlook 2015; Shell New Lens Scenarios 2013; Greenpeace Energy Outlook 2015, ExxonMobil Energy Outlook 2015
Primary energy demand
Index, 2014 = 100
CAGR
2014-2040
1.5 Shell Oceans
1.4 Shell Mountains
1.4 IEA Current Policies
0.8 McK BaU (Q4 ’16)
1.0 ExxonMobil
1.0 IEA New Policies
1.5 Greenpeace Reference
0.3 IEA 450
-0.1 Greenpeace Revolution
Scenario
13McKinsey & Company
We see structural shifts in fundamental energy demand drivers
Overall GDP growth is depressed
G19 and Nigeria GDP CAGR; %
Structure of GDP shifts towards
services
Services as % of GDP
The growth is becoming
increasingly energy-efficient
Liters/kilometer for passenger cars
14McKinsey & Company
The energy mix remains reliant on fossil fuels despite the rapid growth of
non-fossil sources
BAU SCENARIO
SOURCE: McKinsey Energy Insights’ Energy Demand Intelligence, Business As Usual Scenario, 1Q2017
82%
17%
1%
73%
22%
5%
Primary energy demand by energy source
Million terajoules
Share
2014 2050
15McKinsey & Company
Among fossil fuels, gas is a relative winner and oil demand remains resilient,
however coal use peaks around 2025
BAU SCENARIO
Peak in global
coal use
Primary energy demand by energy source
Million terajoules
1.1%
0.4%
-0.2%
0.8%
1.9%
CAGR
2014-50
SOURCE: McKinsey Energy Insights’ Energy Demand Intelligence, Business As Usual Scenario, 1Q2017
16McKinsey & Company
Chemicals drive almost 60% of liquids demand growth through 2035, while
light vehicles and power demand declines
BAU SCENARIO
Other
Asia &
OceaniaChina India
Aviation
Other
transport
Other
industry
Chemicals
2014-2035
Δ5.6 4.6
Total
Residential/
Commercial
Light
vehicles
Power
2014-2035
ΔTotal
Russia
& CIS Europe
North
America
Latin
America
Middle
East
2.9
0.6
0.6
7.2
12.90.51.6 -1.8 -1.81.70.9 1.6
0.8
-0.6
-1.8
Africa
3.1Heavy
vehicles
5.1 17.6 12.8 19.9 10.9 16.6 8.5 9.5 5.3
8.6
6.1
15.3
19.4
105.8
8.9
24.9
4.3
18.6
5.7
5.5
14.7
12.2
93.2
8.1
25.6
6.1
15.5
11.0 3.8 21.714.64.69.215.93.78.6
Δ< -0.1 mb/d
Δ > 1 mb/d Δ-0.05 - -0.1 mb/d
Δ 0.5 - 1 mb/d2035
2014 Δ 0.05-0.5 mb/d
-0.05<Δ<0.05 mb/d
Primary liquids demand
Million barrels per day
SOURCE: McKinsey Energy Insights’ Energy Demand Intelligence, Business As Usual Scenario, 1Q2017
17McKinsey & Company
Could peak crude demand be in sight?
BAU SCENARIO
Liquids demand by product
Million barrels per day
SOURCE: McKinsey Energy Insights’ Energy Demand Intelligence, Business As Usual Scenario, 1Q2017
18McKinsey & Company
The Thought experiment: technology disruption
TECH DISRUPTION
Energy use is optimized by
IOT and smart devices
Mobility electrifies and
becomes more efficient
The power sector is
transformed by renewables
19McKinsey & Company
The assumptions in the Tech Scenario
TECH DISRUPTION
SOURCE: McKinsey Energy Insights’ Energy Demand Intelligence
Thought experiment assumptions
2035
Global average efficiency improvement by
sector in 2035 % savings relative to 2014
Industry
Residential
buildings
Global power generation by source
% of total
EV adoption in 2035,
% new car sales
Car-sharing in 2035,
% total car fleet
L4 AVs in 2035,
% new car sales
Trucks fuel
economy gain,
2014-35, % p.a.
Aviation fuel
economy gain,
2014-35, % p.a.
Global mobility
20McKinsey & Company
The technology disruptions significantly reduce energy demand
SOURCE: McKinsey Energy Insights’ Energy Demand Intelligence; IEA World Energy Outlook 2015
TECH DISRUPTION
Global primary energy demand by energy
source, Million TJ
Global final energy consumption by end-use
sector, Million TJ
Global energy-related emissions
Gt CO2-equivalent
2013 2035
BAU TECH
2025
BAU TECH
2 ⁰C
3.6 ⁰C-9%
-8%
-12%
21McKinsey & Company
Such a scenario would accelerate peak oil (not just crude) demand
Million barrels/day
-3,3
2025
97,5
Disruption
due to
Chemicals
and Electric
Vehicles
BaU
2,2
97,3
-2,4
Disruption
due to
Chemicals
and Electric
Vehicles
2035
94,1
6,7
2015 BaU
22McKinsey & Company
Technology acceleration leads to tipping point around 2025 for oil and gas
Last M
odifie
dP
rinte
d
6McKinsey & CompanySOURCE: Global energy perspective, McKinsey Energy Insights; McKinsey Global Institute analysis
Primary energy demand could peak in 2025 as a result of efficiency
improvements, changes in the transport sector, and the shift to renewables
577
10118
606
473
18
85
427
30
2030
14 28
493
2035
29
69
2013
58
462
17
615
76
600
488
16
561
27
2025
30
2020
Total primary energy demand
Million terajoules
640
516
30
2030
95
33 3519
524
2035
529
85
680
21
1458
462
27
661
61277
16
68
2013 2020
17
500
28
2025
561
NuclearHydroRenewables1 Fossil fuels
Moderate case scenario2 Tech acceleration scenario2
1 Includes biomass and geothermal as well as solar and wind.
2 Both scenarios assume annual average global GDP growth of 2.7%.
NOTE: Numbers may not sum due to rounding.
+1.1% p.a.
+0.6% p.a.
+0.8% p.a. -0.6% p.a.
Last M
odifie
dP
rinte
d
7McKinsey & CompanySOURCE: Global energy perspective, McKinsey Energy Insights; McKinsey Global Institute analysis
Oil demand
Million terajoules
Oil demand could peak by 2025 under a tech acceleration scenario,
although demand would continue to grow with moderate adoption
2013
179
91
79
99
89
2020
183
105
84
2035
106
73
2025
184176
107
179
68
-2%
2030
Tech acceleration scenario
2020
91
195
89
179190
103
84
2013
111
87
2030
122
80 77
+11%196 198
2025
116
2035
Moderate tech scenario
OECDNon-OECD
NOTE: Numbers may not sum due to rounding.
Last M
odifie
dP
rinte
d
8McKinsey & CompanySOURCE: Global energy perspective, McKinsey Energy Insights; McKinsey Global Institute analysis
Natural gas demand would remain flat vs. 2013 demand under a tech
acceleration scenario, but grow rapidly under the moderate adoption caseGlobal primary natural gas demand
Million terajoules
134
121
2035
50
+1%
71
2030
63
57
120
79
2020
131
5559
7972
60
2013 2025
139
Tech acceleration scenarioModerate tech scenario
Non-OECD OECD
63
57
+39%
66
2030
68
98
158167
203520252020
145
9283
134
74
60
120
2013
63
NOTE: Numbers may not sum due to rounding.
Last M
odifie
dP
rinte
d
9McKinsey & CompanySOURCE: McKinsey Energy Insights; World energy outlook 2016, IEA; McKinsey Global Institute analysis
In both our technology adoption scenarios, greenhouse gas emissions will
not meet international reduction targetsGreenhouse gas emissions by scenario
Gigatonnes CO2 equivalent
373734
203520252015
29
3533
20352015 2025
22
2832
2015 20352025
Moderate case
Emissions continue to grow until
2035
Tech acceleration case
Emissions peak in 2025
450 ppm scenario1
Emissions drop resulting in 450 ppm
atmospheric CO2 by 2035
1 This chart has been adapted from IEA data about the levels of CO2 from greenhouse gases required to limit global temperature in 2100 to two degrees
Celsius above pre-industrial levels. We took IEA data for 2020, 2030, and 2040 and interpolated midpoints assuming a linear trajectory.
Primary energy demand to peak by 2025 …peak oil by 2025…
…and even gas demand decline by 2025… …even whilst CO2 targets are not being
met.
23McKinsey & Company
The 3 trends shaping the energycompany of the future
1
3
‘The shifting energy landscape’
Lower for longer for oil, gas, power prices as a base case?
A closer look at the Netherlands
23McKinsey & Company
2
24McKinsey & Company
Recent years have been focused on survive
1.5
-53%
0.2
0.6
0.8
2013
Government take
3.2
2016
Cost (CAPEX + OPEX)
Cash profit 0.6
1.6
1.0
Decline in oil industry revenue
USD Trillion
-25%
-64%
-73%
25McKinsey & Company
Several oil price scenarios –
Price recovery case example
97.8
2014
98.3
20182016
98.8
97.2
20192015
96.797.0
20202017
93.8
Demand
Production
Inventories1
SOURCE: Energy Insights by McKinsey
99
Brent oil price,
USD/bbl
X
52 43 50-55 65-7055-60
Market switches to
undersupply by Q3 2017
SHORT-TERM
65-70
Lack of upstream investment
accelerates legacy declines
affecting supply stack to 2020
Existing inventories keep the
market well-supplied and put
downward pressure on prices
OPEC plays a role as the
balancing actor
LTO production returns to strong
growth by 2020
Cost compression of 30-40% is
partially maintained in short term
Flattened global economic growth
leads to slow down in oil demand
Global oil market balance – price recovery scenario
MMb/d What you need to believe
26McKinsey & Company
High drilling activity growth in LTO plays was complemented by increased
drilling and completion efficiency
SOURCE: Baker Hughes, Energy Insights
1,1961,001951
658 82%
1412 132011
# of rigs
Kb/d1 per rig, annual average
264%
12
2.00
2011
2.95
1.08
13 14
3.94
New production from rig count increase
Production from existing wells
New production from efficiency gainsMb/d
North America Horizontal Rigs North America LTO Production
New Production per Rig
xx p.a. growth, Mb/d
0.9 0.95 1.0
1 Rig productivity includes two factors: rig efficiency as number of wells per year per rig, and well productivity as production per well
2.22.1
1.61.2
2014
82%
12 132011
27McKinsey & Company
Following near term growth, we expect US LTO production to remain
economically competitive, but plateau due to resource constraints
SOURCE: Energy Insights, NavPort
LTO is projected to remain competitive in the global supply curve through 2030…
…However, production is likely to plateau post 2021 as Eagle Ford and Bakken resource
becomes constrained
1
2
MMb/d
Forecast
PRICE RECOVERY
Near-term recovery
and growth
Longer-term plateau in LTO production
US light tight oil production outlook
28McKinsey & Company
The 3 trends shaping the energycompany of the future
1
2
3
‘The shifting energy landscape’
Lower for longer for oil, gas, power prices as a base case?
A closer look at the Netherlands
28McKinsey & Company
29
0
60
50
70
90
100
80
110
10
30
40
20
2040 2050203020202010 ‘1420001990
To achieve EU 2050 ambition of GHG emission reduction of 80 percent, the
Netherlands would need to accelerate with factor 3
SOURCE: CBS
-40% -80%-20% -60%-16%
‘15
CO2 equivalent emission, % change as of 1990
11
179
2240.7%./yr
45
87
134
2%/yr = 3x
196
187
30
Until now, most of the GHG emission reduction was realized through
reductions in non-CO2 emissions
SOURCE: CBS – Emissieregistratie (1990 – 2014)
14
10
8
14149 163CO2
HFK/PFK/
SF610
N2O 18
CH4 33
Reduction 1990-2014
Emissions from (industrial) processes 2014
Focus today
43%
56%
75%
9%
CO2 equivalent emission, MTon
31
Our current energy system
Trans-
port
Industrial
energy use
Power sectorAgri,
Fishing,
& other
Residential &
commercial
Renewables
Gas
Oil
Coal
Nuclear
37 22 30 9 51 149 Mton
SOURCE: Centraal Bureau voor de Statistiek (2014), “Energiebalans” and “Energieverbruik” databases
Power &
Heat
CO2 emissions, 2014, CO2e, MTon
An investment of ~ EUR 135 billion is required to decrease and decarbonize
the energy demand of the Dutch economy towards 2040
Magnitude of investment,
EUR billions
Transport
Residential
&
Commercial
Industry
ShipsTrucks
30
Light duty vehicles
Busses
Insulation
Fuel switch
85
20
Energy demand by energy
carrier, PJ
LPG
Electricity-40%
260
Liquids
Biofuel
Hydrogen
2040Current
438
-35%Other
688
455
2040Current
Electricity
GasGeo-
thermal/DH
Heat
pumps
Biogas
Oil
RES
675Electricity
Other-20%
Gas
Coal
840
Current 2040
Scale of measure - assumptions
▪ All houses and services buildings are insulated to at least Label B
▪ Half of the current building stock and all of new built switches to a low carbon energy source
▪ Electricity becomes the principle heating source (54%), followed by (geothermal) district heating (28%), and biogas (18%)
▪ Cooking becomes electric for 82% of the houses that switch heating source
▪ Efficiency improvements of ~1% p.a.1
▪ By 2040, 50% of the vehicle fleet reaches zero CO2
emissions▪ Conventional ICE vehicles are replaced at end of life▪ All vehicles will be BEV except trucks, which will
switch to hydrogen▪ Efficiency improvements of ~1% p.a.1
▪ 50% of gas furnaces and boilers replaced by electric furnaces and boilers
▪ 50% of steel production capacity (one Blast Furnace) decarbonized
▪ Efficiency improvements of ~1% p.a.1
1 Efficiency improvements only affect share of energy use (and thus CO2 emissions) that are not impacted by other measures
33
Power sector: “80% renewable power supply” by 2040 would be needed
illustrative scenario, other choices also possible
1 45% capacity factor, turbines of 3 GW 2 1.65 m2 per solar panel, 235 kW 3 17 MJ/kg biomass, 2 ktons/km2
Wind
62% of
production
Solar
12% of
production
Biomass
8%
~63 million solar panels2
▪ Third of current roof area
8,500 kton dry biomass3
▪ Conversion of existing coal
plants to biomass
~11 thousand turbines1
▪ 6% of Dutch North Sea
Flexibility
measures
▪ As illustration, 5 GW of
(seasonal) storage
Other choices would also be
possible, e.g. with larger role
for (coal/gas) CCS, imports
34
Energy sources Sectors
1,114
709
377
136
77
53
160
840
315
373
438
In 2014 the energy system is largely dependent on fossil fuels
Netherlands energy demand in 2014; flow between energy sources and sectors, PJ
1 Includes: hydro, geothermal, solar, wind, and biomass2 Only includes net use for central power production (320 PJ) and transmission and distribution losses (23 PJ); energy sector own use (e.g., oil consumption in refining is included in industry)
Source: Centraal Bureau voor de Statistiek (2014), “Energiebalans” and “Energieverbruik” databases
Natural gas
Oil
Coal
Renew-ables1
Other
Electricity(net import)
Agriculture, fishing & other
Industry
Commercial
Residential
Transport
Power sector2
343 (net)
35
Energy sources Sectors
Source: Centraal Bureau voor de Statistiek (2014), “Energiebalans” and “Energieverbruik” databases
Natural gas
Oil
Coal
Renew-ables1
Other
Electricity(net import)
Agriculture, fishing & other
Industry
Commercial
Residential
Transport
Power sector2
In 2040,the energy system would look and function very differently
Netherlands energy demand in 2040; flow between energy sources and sectors, PJ
1 Includes: hydro, geothermal, solar, wind, biomass, and hydrogen2 Includes net biomass use (94 PJ), gas use (111 PJ) and own use and transmission and distribution losses
36McKinsey & Company
An annual investment of ~EUR 10 billion would be needed to move towards a 60% CO2 reduction by 2040
85
30
Transport
45
Estimate investment need to adjust demand
Networkand connection costs
20
135
Industry Total additional investment
Residential and Commercial
20
200
RES build out (excluding grid)
~10 EUR billion/ year or ~3%
of annualbudget
Indicative net investment need, EUR billions, 2020 to 2040
Demand System and Generation
37
What could be new economic ‘sectors’ for the Netherlands?
Sustainable building heating – Climate control systems and residential energy management
Heavy industry transformation and CCS/U – Alternative feedstock configurations with innovative processes and technologies
Offshore wind – programmatic wind build out capturing benefits of scale
Integrating renewables with the energy system- Integrating renewables (conversion – storage – transport)
‘New’ transport – Novel solutions to improve urban transport
38McKinsey & Company
Potential job creation: the long-term impact comes from new sectors
2020 >2050
Operations and maintenance>20,000 jobs2
Installation >45,000 jobs1
“Realization of new sectors”