Oil Industry Facing Decline? PDF

The Oil industry facing decline? Jean-Michel Gauthier Professor Energy & Finance HEC Paris, CEMS, Energy in the Face of Climate Change, 2024 Fall Agenda 1. The life cycle of an oil field 2. Reserves 3. Supply & Demand 4. Oil price formation mechanisms...

The Oil industry facing decline? Jean-Michel Gauthier Professor Energy & Finance HEC Paris, CEMS, Energy in the Face of Climate Change, 2024 Fall Agenda 1. The life cycle of an oil field 2. Reserves 3. Supply & Demand 4. Oil price formation mechanisms 5. Oil Players game facing the Energy Transition Agenda 1. The life cycle of an oil field 2. Reserves 3. Supply & Demand 4. Oil price formation mechanisms 5. Oil Players game facing the Energy Transition The life cycle of a conventional oil field 4  The life cycle of an oil field Sharing of the oil rent and risks, tax regime Exploration Delineation Development Abandon Decommissioning Cost (**) Source: IFP School, Investment(*) HEC, Corporate presentations (*) Illustrative amount only Something happens here… (**) Decommissioning Cost, Provision set up and financed from commissioning date © 2014 Deloitte SA ….As opposed to the life cycle of an oil shale formation (Start of the Shale Oil history) Recovery profile of a typical shale oil field – Bakken, Dakota, US 6 © 2014 Deloitte SA ….A typical, Conventional Oil operation… An active pump jack stands behind a Trump 2020 flag flying at a ranch in Midland, Texas, April 2021. © Matthew Busch/Bloomberg Source Trican Well Service, read 5 The long-standing metrics of an O&G company 1. Reserves levels (bn bbls) 2. Production levels (Mbbl/d) 3. Refining margin (US$/t) 4. US$/€/£/Yen Forex Agenda 1. The life cycle of an oil field 2. Reserves 3. Production 4. Oil price formation mechanisms 5. Oil Players game facing the Energy Transition Reserves: definitions Proven reserves (90% confidence or P90) are recoverable from known reservoirs under existing economic and operating conditions Probable reserves: 50% probability (or P50) Possible reserves. Possible reserves are those reserves that are recoverable with a 10% confidence (P10) 1P= Proved 2P= Proved + Probable 3P= Proved + Probable + Possible Distribution of proved oil reserves in 2000, 2010 and 2020 (in %) = 53 years of consumption = 51 years of consumption = 46 years of consumption US$ 18/bbl US$ 61/bbl US$ 64/bbl The reserve base has expanded as a result of the oil price increase as well as new discoveries Source: BP Statistical Review 2021  More and more reserves, but the vast discoveries are behind us Global Oil Discoveries > 50 MBO Recoverable Oil (GBO)1 120 NOC Industry (excl. NOC) 100 80 Number of discovered fields2 > 50 MBO by Region 60 40 20 Source: ExxonMobil - 1950 1960 1970 1980 1990 2000 2010 1 Discovered recoverable oil. Data Source: IHS fields > 50 MBO (1excludes US onshore/state waters & onshore Canada; 2 excludes onshore Canada)  Oil: the geopolitics of proved oil reserves in 2020 1P Reserves by organisation (bbl) Other European Union OPEC Non-OPEC Former Soviet Union 5 $ to 35 $/bbl Non-OECD 1 214 519 141 1. OPEC holds the bulk of Conventional Oil Reserves 2. Resource-rich basins are concentrated in one region: the Middle East 3. Most resource-rich perimeters are government properties which are not open to public investment. 4. Reserves not financially documented 1. Oil Reserves are financially documented 2. IOCs open to public investment 25 $ to 80 $/bbl OECD 260 6 3. …But depleted conventional reserves Source: BP statistical review 2020 0 200 400 600 800 1 000 1 200 1 400 1 600 1 800 OPEC reserves, with low extraction costs, are dominant. Investment in development however may prove to be constrained by national policies Agenda 1. The life cycle of an oil field 2. Reserves 3. Supply & Demand 4. Oil price formation mechanisms 5. Oil Players game facing the Energy Transition Mb/d Oil demand by sector and scenario Oil demand drops by ~80% in the NZE 2050 scenario to 2050 Oil is almost no longer used as a fuel Source: IEA, WEO, 2021 19 Global oil demand by sector and annual average change by region (2000 – 2050) in the STEPS (BAU) scenario Source: IEA, Oil Report 2024 20  Peak demand in sight? Annual oil demand growth in volumes, 2022 – 2030 Booming aggregate demand in 2022 - 2023 but the engine of oil demand loses momentum… 1. Governments’ post-Covid recovery spending plans, with more than USD 2 trillion for clean energy investments by 2030 2. Global central banks prompting an extraordinary tightening of monetary policy from 2022 that is set to weigh on GDP deep into 2024 3. Transports – the engine of oil demand growth – loses momentum 4. Oil demand growth driven by petrochemicals Source; IEA, October 2024, IEA Report 2023 Major uncertainties on the supply side  Many uncertainties on the supply side Iran’s crude oil production, 1986 - 2026 Russia’s crude oil production estimate Source; IEA, October 2023, OIES October 2024 Moscow’s (in)ability to self-finance its oil industry operations and its access to Chinese equipment ? (IEA vision) 10 Mbbl/d Or Russia’s being successful in stepping up production for cash, albeit at a discount ? (Source: Russian Ministry of Energy, Oxford Institute of Energy Studies)  Tight oil development drives U.S. crude oil production to 2050 Petroleum and other liquids production million barrels per day 2022 35 history projections 30 High Oil and Gas Supply 25 Reference 20 15 Low Oil and Gas 10 Supply Alaska 5 0 2010 2020 2030 2040 2050 Source: U.S. Energy Information Administration, Annual Energy Outlook 2023 (AEO2023)  Saudi Arabia to revert to its long-standing role as swing supplier? Saudi Arabia estimated crude oil capacity and production OPEC+ spare crude oil production capacity (2022 – 2028) (2022 – 2028) Source; IEA, October 2023  Global Oil supply: Investments in the oil industry are required under all scenarios, from all agencies Mbbl/d OPEC WOO 2023 Sources: ExxonMobil Global Outlook 2024 Based on IPCC AR6 Scenarios Database ("Likely Below 2°C" scenarios), IEA scenarios from 2023 World Energy Outlook, and 3rd Party high 2023 OPEC World Oil Outlook 2045, Laissez-Faire casex. Decline rates based on 10-yr CAGR. Oil excludes biofuels.  Global Gas supply: Investments in the gas industry are required under all scenarios, from all agencies BCFD OPEC WOO 2023 Sources: ExxonMobil Global Outlook 2024 Based on IPCC AR6 Scenarios Database ("Likely Below 2°C" scenarios), IEA scenarios from 2023 World Energy Outlook, and 3rd Party high 2023 OPEC World Oil Outlook 2045, Laissez-Faire casex. Decline rates based on 10-yr CAGR. Oil excludes biofuels. The Oil supply structure by field (i) Geographical distribution of the world’s super-giant and giant oilfields 300 fields = OECD North America 40 60% world supply OECD Europe 46 OECD Pacific 41 23 2 E. Europe / Eurasia 62 Asia 83 20 Middle East Africa Latin America About 60% of the world’s oil supplies remain very dependent on the output from some 300 big, old super-giant and giant oil fields…out of a total of 70 000 oil fields world wide  The Oil supply structure (ii) Top 20 Oil fields’ Contribution to global oil production Ghawar Cantarell Safaniyah 1% Rumaila N & S 1% 22% 2% 2% 1% 1% Greater Burngan 6% 1% 1% 1% 1% Samotlor 1% 1% Ahwaz Zakum 1% 1% Azeri-Chirag-Guneshli 1% Priobskoye 1% Bu Hasa 1% Marun 1% 1% Raudhatain Gachsaran Qatif Shaybah Saertu (Daqing) Samotlor (Main) 78% Fedorovo-Surguts Zuluf ROW © 2014 Deloitte SA 29 The Oil supply structure (iii) Top 10 Oil fields’ Contribution to global oil production 1% 6% 2% 2% 1% 17 % 1% 1% 1% Ghawar 1% Cantarell 1% Safaniyah Rumaila N & S Greater Burngan Samotlor Ahwaz Zakum 83% Azeri-Chirag-Guneshli Priobskoye ROW © 2014 Deloitte SA 30  The Oil supply structure (ii) Top 5 Oil fields in 2012 have declined sharply since then 12 000 11 000 ~12 % 10 000 1 170 Global oil demand 9 000 1 250 8 000 1 408 7 000 6 000 1 675 Today 40% E&P CAPEX Chevron Lybia NOC TNK-BP (Russia) Statoil Royal Dutch Shell Gazprom Sinopec Kazmunaigas (Kazakhstan) Eni Total ConocoPhillips The players of the oil game Global upstream Oil & Gas investments are 47% below 2014 in real terms: The Energy Transition then Covid resulted in huge cuts…. Source: IEA, Oil Report 2023 …as well as significant write-offs and impairments. 2020: 105 $ bn of stranded assets were impaired Source: IEA, Oil Report 2021 …or Big Sell-Off: Oil&Gas majors’ massive upstream asset disposal (2015-2021) Source: WoodMacKenzie, FT 4 Trillion US$, an unprecedented cash windfall in 2022… Source; IEA, October 2023 48  Distribution of cash spending by the Oil & Gas industry ….but most of it went to dividends, share The investment in low-emission buybacks and paying back debt rather technology by the Oil&Gas industry is than into energy investments less than 5% of what it spends in E&P 49 Source; IEA, October 2023 Thank you for your attention! Jean-Michel Gauthier [email protected] Where are we heading? Energy value chain, models & scenarios Jean-Michel Gauthier Professor Energy & Finance HEC Paris, CEMS, Energy in the Face of Climate Change, 2024 TODAY’S STORYLINE 1. The challenge of decarbonizing the energy industry 2. The energy value chain 3. Three energy scenarios 4. A radical redesign of global and regional economies 2 Quiz on Climate Change 3 Climate change mechanisms and impacts The three drivers of climate change are: 1. Increasing radiations –> Increasing evaporation –> Excess heat 2. Increasing radiations –> Radiative forcing –> Excess heat 3. Fossil fuel use –> CO2 emissions –> Excess heat 4. Fossil fuel use –> Increasing pollution –> Excess heat 5. Increasing emissions –> Increasing concentrations –> Radiative forcing Climate change mechanisms and impacts The three drivers of climate change are: 1. Increasing radiations – Increasing evaporation – Excess heat 2. Increasing radiations – Radiative forcing – Excess heat 3. Fossil fuel use – CO2 emissions – Excess heat 4. Fossil fuel use – Increasing pollution – Excess heat 5. Increasing emissions – Increasing concentrations – Radiative forcing QUIZ : Industry-related CO2 emissions today are about: A. 3.5 million tonnes CO2/y B. 350 million tonnes CO2/y C. 3.5 billion tonnes CO2/y D. 35 billion tonnes CO2/y E. 350 billion tonnes CO2/y F. 3.5 trillion tonnes CO2/y QUIZ : Industry-related CO2 emissions today are about: A. 3.5 million tonnes CO2/y B. 350 million tonnes CO2/y C. 3.5 billion tonnes CO2/y D. 35 billion tonnes CO2/y E. 350 billion tonnes CO2/y F. 3.5 trillion tonnes CO2/y QUIZ : The Paris Agreement « 2°C or less » is aimed at limiting CO2 concentration levels in the atmosphere to: 1. 280 ppm 2. 450 ppm 3. 650 ppm 4. 950 ppm 10 11 QUIZ : The Paris Agreement « 2°C or less » is aimed at limiting CO2 concentration levels in the atmosphere to: 1. 280 ppm 2. 450 ppm 3. 650 ppm 4. 950 ppm 12 QUIZ : The Paris Agreement 1.5°C calls for a carbon neutrality objective to be globally achieved by 1. 2030 2. 2040 3. 2050 4. 2060 5. 2070 13 14 QUIZ : The Paris Agreement 1.5°C calls for a carbon neutrality objective to be globally achieved by 1. 2030 2. 2040 3. 2050 4. 2060 5. 2070 15 16  1 The challenge of decarbonizing the energy industry 17  Remaining carbon budgets to limit warming to 1.5°C could soon be exhausted The limit could be exceeded in less than 10 years at today’s emission rate Source: IPCC Sixth Assessment Report (AR6), Longer Report, March 2023 The cumulative CO2 emissions from industrial societies since 1850 are about 2500 GtCO2 Limiting global temperature increase to a specific level requires limiting cumulative net CO2 emissions to within a finite carbon budget, which is estimated to be 3000 GtCO2 in the case of the 1.5°C limit, leaving us with a carbon budget around 500 GtCO2 in 2020 18 Existing policies make it very likely that global warming will exceed 1.5°C or 2°C shortly Global warming scenarios depend on climate policies… But it is very likely that warming will exceed 1.5°C any time soon Carbon emissions scenarios versus warming scenarios: With the Paris Agreement, there are rising levels of national ambition in support of the development and implementation of climate policies 19  Limiting global warming to 1.5°C (>50%) will require reaching Net Zero CO2 emissions by 2050… …and reducing all GHG emissions by about 50% as early as 2030 …With different pace across sectors Source: IPCC Sixth Assessment Report (AR6), Longer Report, March 2023 20  Carbon Sources and Sinks Sources Sinks 18.9 GtCO2/yr 35.3 GtCO2/yr 47% 88% 31% 12.3 GtCO2/yr 12% 4.7 GtCO2/yr 26% Excess 10.4 GtCO2/yr Budget Imbalance: 4% (the difference between estimated sources & sinks) -1.6 GtCO2/yr Source: Friedlingstein et al 2023; Global Carbon Project 2023  Two ways to decarbonise Reduce Sources Support & Develop Sinks DAC Direct Air 35.3 GtCO2/yr Capture 88% BECCS Bioenergy equipped with CCUS + 12% NATURAL 4.7 GtCO2/yr SINKS Reforest, Reduce Reduce Deforestation excess Source: Friedlingstein et al 2023; Global Carbon Project 2023 2 - The energy value chain 23 The energy content varies considerably across energy sources: energy density U235 Liquid H2 = = 2 000 000 * 3.3 * Oil energy density Oil energy kWh/kg 10 density Liquid Hydrocarbons at 8 ordinary P and T 6 Coal 4 Biomass Natural gas 2 Hydrates Hydrogen Batteries kWh/l 0 0 1 2 3 4 5 6 7 8 9 10 Source: IFPEN 24 The energy chain: from primary to final energy and used energy Primary Secondary Final Used Energy Energy Energy Energy Conversion losses Transportation losses Usage losses Petroleum Electricity, Oil, gas, coal, Petroleum products, heat, uranium, products, electricity, lighting, renewables…. electricity, heat, steam,… transport, Petrol station, Russia,Saudi Arabia… Rotterdam refinery… Power Plant in YY… Your home 25  The energy chain in 2022: from primary to final energy Electricity has the highest carbon footprint Final Energy: 439 EJ Primary Energy: 624 EJ Emissions (in %) ~40 21 25 8 Source: IEA 2022 - Energy Technology Perspectives 3 – Three energy scenarios 27  The International Energy Agency: what does it do? Why are its scenarios crucial for the world’s economy ? The IEA is the international organization in charge of providing “authoritative analysis, data, policy recommendations and solutions to ensure energy security and help the world transition to clean energy” A part of the OECD with non-OECD association countries (China, India, Singapour, South Africa, Indonesia etc…) The IEA covers all energy sources (fossil, fissile, renewables…), all infrastructure and all energy users. The IEA works with governments and industry to shape a secure and sustainable energy future The flagship report of the IEA, the World Energy Outlook, is produced yearly and provides in- depth analysis and strategic insights into every aspect of the global energy system, as well as where we stand on the Energy Transition globally and regionally. First and foremost, the World Energy Outlook includes the latest update of the Three Energy Scenarios of the IEA, which form the paramount source of authority globally, and are used as a refence by every decision maker worldwide (Governments, corporates, banks, insurance groups, traders, consulting firms, start-ups etc…). 29 The three IEA scenarios mirror the IPCC climate scenarios (including climate & emission reduction pathways) and represent three decarbonisation scenarios of the global economy CO2 Emissions from Energy Use The future without the Paris Agreement. No further 0 Pre-Paris baseline, climate action over the period. Global energy-related IEA, >+3.5° C by 2100 CO2 emissions keep going up. Financial market mechanisms are the rule. This scenario has been officially abandoned by the IEA. The Stated Policies Scenario (STEPS) reflects the 1 Stated Energy Policies Scenario, policy actions that have been legislated today. IEA, >+3 to +2.5° C by 2100 Emissions remain largely flat until the late 2020s and then decline slowly to 30 Gt CO2 in 2050 The Announced Pledges Scenario (APS) reflects 2 Announced Pledges Scenario, policy actions that has been transposed into laws IEA, >+2 to +1.7° by 2100 PLUS policy undertakings from Governements since the Paris Agreement. Emissions fall by just over 2% per year to 31 Gt CO2 in 2030 and then fall further to 12 Gt CO2 in 2050 (in line with Paris 2°C) The Net Zero Emissions by 2050 (NZE) Scenario is 3 Net Zero Emissions by 2050 Scenario, aiming at global carbon neutrality by 2050. 2022 IEA, >+1.5° to +1.4° C by 2100 Emissions drop by more than 5% per year to 24 Gt CO2 in 2030 and then fall to net zero in 2050 Source: IEA - WEO 2023 The three energy scenarios from the IEA are based on the same macro-economic assumptions (population, global GDP growth …) but do not reflect the same ambitions in energy efficiency Future energy demand & supply equilibria in absolute terms, expressed as energy unit (heat unit) Total Energy Supply (EJ) by Scenario Stated Policies Scenario (STEPS): includes all policy ambitions and targets that have been legislated STEPS NZE APS for or announced by governments around the world 800 725 (+3/+2.5°C by 2100) 692 678 700 668 624 623 Announced Pledges Scenario (APS): assumes that Energy Supply (EJ) 600 541 632 541 all climate commitments made by governments around the world, including Nationally Determined 500 Contributions (NDCs) and longer-term net zero 420 targets, will be met in full and on time (+2/+1.7°C by 400 370 2100) 300 2022 The Net Zero Emission by 2050 (NZE): sets out a 200 narrow but achievable pathway for the global energy 1990 2000 2010 2020 2030 2040 2050 sector to achieve physical net zero CO2 emissions by Year 2050 (+1.5/+1.4°C by 2100) Source: IEA - WEO 2023 Scenario 1: The Stated Energy Policies Scenario (STEPS) does NOT meet climate objectives Oil ➔ $83/barrel IEA Stated Policies Scenario (STEPS) Total Energy Supply (EJ) Coal global excl. US ➔ $69-80/tonne Source: IEA - WEO 2023 Coal US ➔ $41/tonne 700 Natural Gas excl. US ➔ $7.1-7.8/MBtu Natural Gas US ➔ $4.3/MBtu CO2 Advanced Econ ➔ $250/tonne 600 CO2 BRZ, CH, IND ➔ $200/tonne Prices in 2050 in USD 2022 500 Energy Supply (EJ) Energy Source Change 2022-2050 Natural gas use remains constant as 400 countries work on reducing gas reliance Renewables 246% Hydro 44% 300 Oil remains 79 % fossil fuels Traditional Use of Biomass -33% the leading single source of energy 200 60 % fossil fuels Nuclear 66% Natural Gas 0% 100 Coal drops to pre-1850 share by 2050 Oil -1% Coal -41% 0 2010 2020 2022 2030 2035 2040 2050 Year Source: IEA - WEO 2023 Coal Oil Natural Gas Nuclear Traditional Use of Biomass Hydro Renewables Fossil fuels dominate the energy mix for a few more decades Most of the net demand growth is, however, met by low carbon emissions sources In the STEPS Scenario, average annual growth to 2030 in total energy demand slows down to 0.7% per annum, about half the rate of energy demand growth of the previous decade. Demand continues to increase through 2050  Scenario 2: APS: Announced Pledged Scenarios reduces the share of fossil fuels in the mix (vs STEPS) thanks to renewables and efficiency essentially Oil ➔ $60/barrel IEA Announced Pledges Scenario (APS) Total Energy Supply (EJ) Coal global excl. US ➔ $53-62/tonne Source: IEA - WEO 2023 Coal US ➔ $26/tonne Natural Gas excl. US ➔ $5.4-6.3/MBtu 600 Natural Gas US ➔ $2.2/MBtu CO2 Advanced Econ ➔ $250/tonne CO2 BRZ, CH, IND ➔ $200/tonne 500 Prices 2050 in USD 2022 Energy Supply (EJ) 400 Energy Source Change 2022-2050 Renewables 409% 300 Hydro 69% 79 % fossil fuels Traditional Use of -79% 200 Biomass 37% fossil fuels Nuclear 103% of which more than a third Natural Gas -42% 100 is abated or non energy use Oil -45% Coal -73% 0 2010 2020 2022 2030 2035 2040 2050 Year Source: IEA - WEO 2023 Coal Oil Natural Gas Nuclear Traditional Use of Biomass Hydro Renewables Coal, Oil & Gas demand cumulatively decreasing by more than a half in 2050, with coal dropping over 70% Share of clean energy sources (renewables and nuclear) triple to 63% by 2050, from 20.2% today In the Announced Pledges Scenario, total energy demand flattens, thanks to improved efficiency and the inherent efficiency advantages of technologies powered by electricity – such as electric vehicles and heat pumps – over fossil fuel-based alternatives  Scenario 3: The Net Zero Emissions Scenario takes the world from molecules (carbon) to electrons: electricity becomes the global star of the show…but how bright will it shine?? IEA Net Zero Scenario (NZE) Total Energy Supply (EJ) Oil ➔ $25/barrel Source: IEA - WEO 2023 Coal global excl. US ➔ $43-49/tonne 600 Coal US ➔ $23/tonne Natural Gas excl. US ➔ $4.1-5.3/MBtu Natural Gas US ➔ $2.0/MBtu CO2 Advanced Econ ➔ $250/tonne 500 CO2 BRZ, CH, IND ➔ $200/tonne Prices 2050 in USD 2022 Energy Supply (EJ) 400 Energy Source Change 2022-2050 Solar 1867% 300 Wind 950% 79 % fossil fuels Hydro 88% Bioenergy 139% 200 Other renewables 1066% Traditional use of biomass -100% 100 18% fossil fuels in 2050 Nuclear 131% Of which 73% is abated Natural Gas -77% or non energy use Oil -82% 0 Coal -91% 2010 2020 2022 2030 2035 2040 2050 Source: IEA - WEO 2023 Year Solar Wind Hydro Bioenergy Other Renewables Traditional Use of Biomass Nuclear Natural Gas Oil Coal Renewables and nuclear displace most fossil fuel use. The share of fossil fuels falls from 79 % in 2021 to 18% in 2050 Solar PV capacity growing 20-fold and wind almost 11-fold by 2050 The Net Zero Emission scenario of the IEA reflects the European Green Deal of the European Union (adopted by many other countries today) and is aimed at reaching Carbon Neutrality by 2050 In the NZE 2050 Scenario, electrification and efficiency gains proceed faster, leading to a decline in primary energy of 1.2% per year to 2030  The energy chain in 2022 (reminder) Final Energy: 439 EJ Primary Energy: 624 EJ Emissions (in %) ~40 21 25 8 Source: IEA 2022 - Energy Technology Perspectives Data: based on energy values 2021  The energy chain in 2050 in the NZE: the world is all about electricity Electricity becomes the largest energy vector in the NZE Scenario, with global demand almost tripling between 2021 and 2050 Source: IEA, Energy Technology Perspectives, 2023  4 A radical redesign of global and regional economies 37  Coal exit The USA and the Inflation Reduction Act Oil slows down Source: IEA - WEO 2023 Steps Scenario (EJ) - USA APS Scenario (EJ) - USA 100 100 90 90 80 80 Energy Supply (EJ) Energy Supply (EJ) 70 70 60 60 50 50 40 40 30 30 20 20 10 10 0 0 2010 2020 2022 2030 2050 2010 2020 2022 2030 2050 Year Year Coal Oil Natural Gas Nuclear Renewables Coal Oil Natural Gas Nuclear Renewables The Inflation Reduction Act (IRA) and the Bipartisan Infrastructure Act led to a major shift on the outlook of the US energy transition Under the IRA, carbon emissions in the US are expected to fall under 50% from today’s levels Announcements to raise Renewable Portfolio Standards: 100% carbon-free electricity target by 2035 nationwide Nuclear provided zero emission credits now on a national level California set target to phase out ICE vehicles by 2035 With the Inflation Reduction Act, 50% of new US car registrations are projected to be electric in 2030 in the STEPS. Two years ago, the corresponding figure in the World Energy Outlook-2021 was 12%  The EU : from BAU to the Paris Agreement and By 2030, CO2 emissions decline by 45% clean transition packages in APS and 26% in STEPS vs 2022 levels Source: IEA - WEO 2023 STEPS Scenario (EJ) - EU APS Scenario (EJ) - EU 60 60 50 50 Energy Supply (EJ) Energy Supply (EJ) 40 40 30 30 20 20 10 10 0 0 2010 2020 2022 2030 2050 2010 2020 2022 2030 2050 Year Year Coal Oil Natural Gas Nuclear Renewables Coal Oil Natural Gas Nuclear Renewables Achieve Net Zero GHG by 2050: Long-term strategy for climate neutrality by 2050 “European Green Deal”, backed the €750 billion ($850 billion) recovery package July 2020 “Fit for 55 Objective” to reduce GHG emissions to 55% below 1990 levels in 2030 RePowerEU: most recent significant policy package, aiming at reducing the EU’s dependence on Russian gas, eventually going well beyond the Fit for 55 package’s targets EU Energy Performance of Buildings Directive: objective to achieve a decarbonized building stock by 2050 In the European Union, the share of heat pump installations in the STEPS double up versus the 2021 projections. China in 2022: moving on to an unchartered territory under the Paris Agreement Source: IEA - WEO 2023 STEPS Scenario (EJ) - China 160 ~18% 140 Energy Supply (EJ) ~19% Global 120 Global GDP 100 Population 80 60 40 20 0 2010 2020 2022 2030 2050 Year ~30% ~28% Coal Oil Natural Gas Nuclear Renewables Global Global CO2 Energy Emissions APS Scenario (EJ) - China 160 Energy Supply (EJ) 140 120 100 80 60 40 ~20% ~57% 20 Global Global Coal 0 Renewables Use 2010 2020 2022 2030 2050 Year Oil Coal Natural Gas Nuclear Renewables China’s GDP growth averages just under 4% per year by 2030. This results in its total energy demand peaking around 2030, with robust expansion of clean energy putting overall fossil fuel demand and emissions into decline. If China’s near-term growth were to slow by another percentage point, this would reduce 2030 coal demand by an amount almost equal to the volume currently consumed by the whole of Europe India’s Energy Outlook STEPS Scenario (EJ) - India Source: IEA - WEO 2023 APS Scenario (EJ) - India 70 70 60 60 Energy Supply (EJ) Energy Supply (EJ) 50 50 40 40 30 30 20 20 10 10 0 0 2010 2020 2022 2030 2050 2010 2020 2022 2030 2050 Year Year Coal Oil Natural Gas Nuclear Renewables Coal Oil Natural Gas Nuclear Renewables Policy: “nearly achieves” target of 450 GW of renewables and 50% installed capacity being non-fossil based by 2030 “Made in India” campaign to increase the share of manufacturing in the national economy; stimulus funding for renewable energy and batteries 2022 Amendments to Energy Conservation Act aims at enhancing enforcement of energy efficiency policy Faster Adoption and Manufacturing of Hybrid and EV (FAME) Nuclear capacity new built: ambitious review and program India is the world’s largest source of energy demand growth in the STEPS, ahead of Southeast Asia and Africa  Russia’s Energy Outlook STEPS Scenario (EJ) - Russia APS Scenario (EJ) - Russia 35 35 30 30 Energy Supply (EJ) Energy Supply (EJ) 25 25 20 20 15 15 10 10 5 5 0 0 2010 2020 2022 2030 2050 2010 2020 2022 2030 2050 Year Year Coal Oil Natural Gas Nuclear Renewables Coal Oil Natural Gas Nuclear Renewables National target to reach net zero by 2060 Reduce GHG by 80% by 2050 compared to 1990 level, with a strong reliance on negative emissions from land use, land- use change and forestry. State support to hydro and nuclear power An unprecedented surge in new LNG projects in 2025 is set to tip the balance of markets and concerns about natural gas supply. The glut of LNG means there are very limited opportunities for Russia to secure additional markets. Russia’s share of internationally traded gas, which stood at 30% in 2021, is halved by 2030 in the STEPS Source: IEA - WEO 2023 The Middle East* Under the Announced Pledges Scenario, fossil fuels still dominate the energy mix, but renewables and energy efficiency measures unlock significant volumes of gas for exports The Middle East remains one of the most carbon intensive area in the world, due to the need to produce fresh water from desalination. APS Scenario (EJ) - Middle East 70 Energy Source Change 2022-2050 60 Energy Supply (EJ) 50 Renewables 4133% 40 Nuclear 500% 30 20 Natural Gas 21% 10 Oil -5.8% 0 2010 2020 2022 2030 2050 Year Coal 4% Coal Oil Natural Gas Nuclear Renewables * Includes : Bahrain, Islamic Republic of Iran (Iran), Iraq, Jordan, Kuwait, Lebanon, Oman, Qatar, Saudi Arabia, Syrian Arab Republic (Syria), United Arab Emirates and Yemen Source: IEA - WEO 2023 The World in 2050 Primary Energy Demand (EJ) Mix in Selected Regions - STEPS 2050 Driven by China’s “Energy Middle East Revolution” and “Clean & Affordable” Technologies USA EU will consume less energy than Central & South America Africa or the Middle East EU Chinese coal use is almost equal to Region Russia the total energy demand in the EU Africa Three interlinked issues stand out: Southeast Asia risks to affordability, electricity India security and the resilience of clean energy supply chains China 0 20 40 60 80 100 120 140 Energy Demand (EJ) Renewables Oil Nuclear Natural Gas Coal Source: IEA - WEO 2023 Thank you for your attention! Jean-Michel Gauthier [email protected] The Electricity Revolution Part I & II Jean-Michel Gauthier Professor Energy & Finance HEC Paris, CEMS, Energy in the Face of Climate Change, 2024 Fall 1 I – Systems and Costs II – Markets & Prices 2 I – Systems and Costs 3 Agenda 1. The physical constraints 2. The future is about electricity 3. Generation technologies 4. The cost of generating electricity 4 Agenda 1. The physical constraints 2. The future is about electricity 3. Generation technologies 4. The cost of generating electricity 5  Electricity is not a Fuel Primary Energy Final Energy Usage Sector Oil S T Conventional Coal S T Residential CH Natural Gas S T Electricity ST 4 Uranium S T Transport ST Transport Transformation Heat ST Crops S T Renewable Sun Industrial Water Wind Legend: S Storage T Transport Electricity Generation  Energy: A Story About Waste Losses on Power plant losses: 62 38 units = load on Transmission line: 2 units transmission lines units Coal Energy content: 100 units Energy available to power the light bulb: 36 units Compress Light Emitting Policies aimed at combatting climate change by reducing Incandescent Fluorescent Diode (LED) greenhouse gas emissions and increasing energy efficiency Lamp (CFL) Unit of energy lost in heat 33 29 9 are calling for a major energy market re-design Unit of energy in Light bulb 3.0 7 27 Efficiency ratio 3% 7% 27% Source: IFPEN, GE Light produced per unit of energy 0.2 5 10 Light output (lm/W) 13.5 62 81 7 The Energy Transition challenges the long-standing organisation of energy systems (i) Energy Utilities are moving from a traditional, highly centralised, fossil-fuel based, simple business model, with consumers at the end of the value chain … …to a decarbonised, bi-directional system with producers / prosumers / flexumers(*) at both end of the value chain and profitability outside the old central energy production system Source: Cap Gemini, SAP, 2023 The Energy Transition challenges the long-standing organisation of energy systems (ii) New challenges 1. Integration of increasing levels of renewable generation on the distribution network. 2. Emergence of new electricity uses such as electric vehicles. 3. Development of self consumption; 4. Handling bi-directional networks Embracing the Two-Way energy flow 1. Energy networks have traditionally operated with unidirectional power flows, from centralized power plants to end consumers. 2. With the rise of distributed generation, such as rooftop solar panels, energy networks must adapt to handle bidirectional energy flows. 3. This transition requires technological upgrades, advanced metering systems, and enhanced grid management strategies to effectively manage the dynamic exchange of power between the grid and distributed energy resources.  The Energy Transition calls for a radical revolution of the global economy… The 3 Ds Revolution Decarbonisation Decentralisation Digitisation From centralised utilities… To a decentralised model Risks are shifting from market to communities Towards a Zero-Marginal Cost Economy Financing Renewable International markets to Energy become irrelevant? Driven by Government packages & regulations …more than tech Connectivity to reshape development until now operations and markets Digitisation to cut need for more capacities Digitisation leads to number of projects becoming stranded assets  From a centralized … to a decentralized system 11 -- Generation Generation Generation: large central units Generation: small local units 22 –– Energy Energy source source Fossil or Fissile Renewable 33 –– Energy Energy load load Baseload + Peak Intermittent 44 -- Grid Grid Aggregates load Takes demand off the grid 55 -- Consumers Consumers Passive Become producers 66 -- Utilities Utilities Large operators, Listed, Strong BS Small entities, no liquidity 77 –– Financing Financing Infrastructure Infrastructure New financing schemes, consumers to Corporate debt, Project Finance, Bonds… contribute funds 11 Agenda 1. The physical constraints 2. The future is about electricity 3. Generation technologies 4. The cost of generating electricity 12 Scenario 1 (STEPS): demand for electricity rises from its current level by over 80% Global Electricity Generation Mix – Stated Policies Scenario (STEPS) Electricity Source Change 2021-2050 50000 Solar 1236% Electricity Generation (TWh) Source: IEA - WEO 2023 Wind 455% 40000 Hydro 45% 30000 80% low Bioenergy 154% 20000 emission Nuclear 62% 10000 Natural Gas -5% 0 Oil -61% 2010 2020 2022 2030 2035 2040 2050 Year Coal -53% Coal Oil Natural Gas Nuclear Bioenergy Hydro Wind Solar In 2020, Coal contributes just over 33% of electricity supply but 75% electricity sector CO2. Natural gas is the second‐ largest source of electricity and CO2 emissions in the sector today Electricity is expanding to new end-uses at scale, notably to provide mobility and heat, in all geographies Scenario 2 (APS): demand for electricity rises from its current level by 120% Global Electricity Generation Mix – Announced Pledges Scenario (APS) ~Paris 2°C Electricity Source Change 2021-2050 60000 Solar 1786% Electricity Generation (TWh) 50000 Wind 765% Source: IEA - WEO 2023 40000 Hydro 69% 30000 Bioenergy 337% 90% CO2 free 20000 Nuclear 97% 10000 Natural Gas -52% 0 Oil -80% 2010 2020 2022 2030 2035 2040 2050 Coal -85% Year Coal Oil Natural Gas Nuclear Bioenergy Hydro Wind Solar Demand in the residential sector rises for appliances, space cooling and heating and water heating Production of electrolysis hydrogen accounts for about 10% of total generation Renewables expand by a factor 2.7. Scenario 3 (NZE): demand for electricity rises from its current level by more than 150% Global Electricity Generation Mix – Net Zero Emissions Scenario (NZE) Electricity Source Change 2021-2050 70000 Solar 2322% Electricity Genration (TWh) 60000 Wind 1003% Source: IEA - WEO 2023 50000 Hydro 88% 40000 Bioenergy 346% 30000 ~100% CO2 free Nuclear 125% 20000 Natural Gas -97% 10000 0 Oil -100% 2010 2020 2022 2030 2035 2040 2050 Coal -100% Year Coal Oil Natural Gas Nuclear Bioenergy Hydro Wind Solar The industrial sector overtakes the residential sector as the stronghold of electricity demand Production of electrolysis hydrogen accounts for more than 15% of total generation Renewables expand by a factor more than 5 The Sun King: Solar dominates the energy system Global installed power capacity by selected technology and scenario, 2022-2050 Source: IEA - WEO 2023 Solar PV capacity takes off in all scenarios, with wind power coming second with less than half the size of cumulated solar PV Agenda 1. The physical constraints 2. The future is about electricity 3. Generation technologies 4. The cost of generating electricity 17  Coal Ultra Ultra Supercritical with AD 700 project ultra-supercritical coal Subcritical Supercritical fired power plant - Germany Supercritical CCS (2020-2050) CAPEX (M$/MW) 1.4 2.4 2 - 4.1 4.6 - 6 2 O&M Costs ($/MWh) 5 9 29 30 Fuel Costs ($/MWh) 29 29 17 39 30 Cost Volatility Flexibility Niagara Mohawk's Dunkirk steam station in New Resource Intermittency York (soon to be set up for cofiring biomass) Photo by David Parsons, NREL 06705 Thermal Efficiency 30% 39% 45% 40% Capacity Factor 0% - 20% 30% 30 - 50% 85% 20% ? CO2 ($/MWh) 24 23 3.4 Lifetime (Years) 40 40 40 40 >40 Full cost – EUR/MWh Sources: IEA 2022, IEA 2023, Engie Dispatch in hours/year Natural Gas Combined Cycle Gast Turbine (CCGT) Source : Meaford Energy Center 19  Natural Gas OCGT CCGT (2020 – 2050) FGE Eagle Pine, Texas, US CAPEX (M$/MW) 0.6 - 1 1 0.5 - 1 O&M Costs ($/MWh) 9 - 18 6 Fuel Costs ($/MWh) 74 46 35 – 85(*) Cost Volatility Flexibility Resource Intermittency Thermal Efficiency 34% 60% >60% ? Futtsu, Kanto, Japan Capacity Factor 15% 20 - 55% 0% - 15 % CO2 ($/MWh) 11 10 9 Lifetime (Years) 30 30 30 Full cost – EUR/MWh Sources: IEA 2022, Engie (*) In 2040: 35$ in the US, 85$ in China, 70$ in the UE Sources: IEA 2022, IEA 2023, Engie Dispatch in hours/year Nuclear 21 Nuclear Sources: IEA 2022, IEA 2023, Engie Nuclear (2020 – 2050) Palo Verde Nuclear Generating Station, Arizona, US CAPEX (M$/MW) 2.8 – 6.6 2.5 – 4.5 (*) O&M Costs ($/MWh) 14 Fuel Costs ($/MWh) 9 25 - 30 Cost Volatility Bugey Nuclear Power Station, Saint-Vulbas, France Flexibility Resource Intermittency Capacity Factor 70% - 90% 70% - 90% CO2 ($/MWh) 0 0 Lifetime (Years) 60 60 Additional costs for Full cost – EUR/MWh Radioactive waste management (*) In 2050: 2.5 M$ in China, 4.5M$ in Dispatch in hours/year the UE and US Hydro Power 23 Hydro Power River Hydro CAPEX (M$/MW) 1-6 O&M Costs ($/MWh) 6 Fuel Costs ($/MWh) 0 Dam Cost Volatility Flexibility Resource Intermittency Capacity Factor 65% CO2 0 Lifetime (Years) 80 Storage capability with Pumped Hydro technology Pump station Sources: IEA 2020, IRENA, 2018 Solar Photovoltaic (PV) Concentrated Solar Power (CSP) Parabolic Trough Power Tower Dish Sources: Kenbrook solar, Solar PEIS 25  Solar Single-Axis Flat PV Dual-Axis Flat PV Solar PV CSP (2018 – 2050) CAPEX (M$/MW) 0.7 - 1 0.3 – 0.5 5.8 O&M Costs ($/MWh) 7 5 19 Fuel Costs ($/MWh) 0 0 0 Cost Volatility Flexibility Noor-Ouarzazate Solar Plant, Morocco Resource Intermittency Capacity Factor 13 - 21% 14 - 23% 34% CO2 0 0 0 Lifetime (Years) 25 >25 25-30 CSP Storage Capability with Molten Salt Reservoir Sources: IEA 2022, IEA 2023, Engie Wind 27  Wind Onshore Wind Offshore Wind (2020 – 2050) (2020 – 2050) CAPEX (M$/MW) 1.2 – 1.7 1 – 1.6 2.8 - 4 1.4 – 1.9 O&M Costs ($/MWh) 13 22 - 35 10 - 20 Fuel Costs ($/MWh) 0 0 0 0 Cost Volatility Flexibility Resource Intermittency Capacity Factor 26% - 42% 30 - 50% 45 – 60% CO2 ($/MWh) 0 0 0 0 Lifetime (Years) 25 25 >25 Sources: IEA 2022, IEA 2023 Geothermal Source : ENI Geothermal Mahanagdong geothermal plant, Leyte Island, Philippines Geothermal CAPEX (M$/MW) 2.5 - 7.1 O&M Costs ($/MWh) 10 - 30 Fuel Costs ($/MWh) 0 Cost Volatility Flexibility Hellisheidi Geothermal Power Station - South Iceland Resource Intermittency Capacity Factor 80 - 85% CO2 Lifetime (Years) 25 Sources: IRENA, 2022 Biopower Polaniec biomass power plant, south-east Poland Biopower CAPEX (M$/MW) 1.2 - 4.9 O&M Costs ($/MWh) 29 - 35 Fuel Costs ($/MWh) 14 - 43 Cost Volatility Flexibility 50 MW biomass power plant in Huelva (Spain) Resource Intermittency Capacity Factor 86% CO2 Lifetime (Years) 20 Source: IRENA 2022 Agenda 1. The physical constraints 2. Generation technologies 3. The cost of generating electricity 32 The Levelized cost of Electricity (LCOE) Example of Calculation for CCGT LCOE : the Methodology to Model Electricity Economics  The drivers in t