NS4054 Fall Term 2015

Week #2 Discussion

Shell in the Arctic I

Nick Butler, “Big Oil Faces Shrinking Prospects,” Financial Times, September 28, 2015•Abandoned project cost around $7 billion•Was this a problem for Shell?•Why was Shell really in the Arctic?•Should Shell have stayed in the Artic?

•Facts: •In 2014 Shell replaced only 26% of its oil and gas production•Over the past three years just 67%•Problem not a shortage of oil and gas – but access•Over past decade global oil reserves rose 24% despite ten years of growing production

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Shell in the Arctic II

• Access the problem

• Saudi Arabia, Venezuela, Mexico closed to foreign ownership

• Iraq a war zone

• Kurdistan difficult politically

• Libya civil war

• Iran – some sanctions may remain

• Shale in U.S. – not great at $50 per barrel

• Why did Shell give up in the Arctic

• Oil is there -- political uncertainty

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Shell in the Arctic III

• Oil industry may have to change its model

• Go into other types of energy

• Take lead in transition away from hydrocarbons

• New relationships with state oil companies

• If firms don’t change they are likely to decline and go out of business.

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Stranded Assets I

Nick Butler, Climate Change and the Myth of Stranded Assets, Financial Times, September 28, 2015

•Asks will some hydrocarbons be stranded and undeveloped as world reduces hydrocarbon use for climate change reasons?

•Facts -- many assets stranded

• Gas underneath Prudhoe Bay field in Alaska

• Shale oil in Paris Basin

•Costs of development – including regulatory costs in pursuit of public policy goals may be very high

• Some cases companies trying to find ways of developing

• In others – give up and leave them behind.

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Stranded Assets II

• How many hydrocarbons will be stranded if world adjusts to limiting hydrocarbon use to levels that assures temperatures rise by no more than 2C?

• If concept correct

• Amount of coal, oil and natural gas that can be used is already discovered

• Exploration would be profitless

• As are some of the resources already identified

• Rest should stay buried and cannot be valued as corporate assets

• Why might this not happen?

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Stranded Reserves

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Stranded Assets III

• Need to look at assumptions

• 1. the use of hydrocarbons will be limited by public policy action to keep emissions within prescribed limit

• 2. Alternative energy supplies will be available in time and at low enough cost to enable consumers to switch away from hydrocarbons

• 3. attempts to reduce amount of emissions generated by use of hydrocarbons – carbon capture and storage (CSS) – will not be viable on scale to allow continued consumption.

• Which appear correct?

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Stranded Assets IV

• Third Assumption

• Most experts agree that CCS will not be sufficient

• No clear financial model to encourage companies to invest in CCS

• Things may change, but for now CSS not a solution

• Second assumption

• Not clear at this time

• Low carbon energy costs are falling – other than nuclear where they are rising

• Solar costs down dramatically

• Storage technology is also progressing but not big breakthroughs

• At moment low carbon sources – nuclear and hydro provide less than 10% global energy supply

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Stranded Assets V

• First assumption – limited hydrocarbon use because of climate change

• Believes assumption completely unrealistic

• Political consensus does not exist in U.S.

• Europe has more of a consensus of support, but not sufficient to put in place the critical policy measure – a carbon price

• China will limit coal, but hard to see coal being displaced as the main source of energy at any point next 3 decades

• India seems committed to coal – cheap and available

• Realistically campaigns about disinvestment do nothing

• Must find a technology that is low cost and low carbon

• When that comes will leave some assets stranded or put to other uses

• Search for that technology should be the focus.10

Egyptian Gas Development I

• Nick Butler, “Will Politics Block Development of the Eastern Med?” Financial Times, September 20, 2015

• Facts

• ENI’s world class gas discovery off Egyptian coast – one of world’s top 20 in size

• Confirms that Nile and Levant basins the most prospective, underexplored areas in the world

• 83 million Egyptians short of energy

• Getting gas to shore no problem – infrastructure exists

• Beyond that – much would need to be built from scratch

• Arab Spring (2011) and aftermath have left Egypt impoverished

• Questions

• Who invests?

• Who pays? 11

Egyptian Gas Development II

• Price

• Price agreed between ENI and Egyptian state gas company very high – about double current price

• With regime still struggling for public support price looks vulnerable on both political and economic grounds

• Second market – exports

• European market stagnant and declining as Germany replaces gas with renewables

• Asia Pacific – long and expensive LNG trade

• Competition from Russia and Australia – East Africa

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Egyptian Gas Development III

• Foreign Investors could fund everything – power stations desalination plants etc

• North Africa not safest place to invest

• Libya, Tunisia, and Algeria all vulnerable to spread of Islamic terrorism

• Primary objective of terrorists is to

• Disrupt existing economic structures, and

• Deter foreign investment and foreign investors

• Egypt relatively free terrorist activity for several months

• Achieved by harsh crackdown

• Development of new field will be a terrorist target

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Egyptian Gas Development IV

• Security considerations will delaly development and add to costs

• On stream by 2017 very optimistic

• Four or five years more realistic

• While the Levant Basin may hold a vast amount of gas

• Not really explored due to political problems

• Syria barely functioning government

• Plans to drill off Lebanon’s shore repeatedly postponed

• Lebanon and Israel have no formal diplomatic relations

• Sinai is a dangerous lawless territory

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Egyptian Gas Development V

• In almost any other part of world there would be

• a single development strategy for region

• Common infrastructure on and offshore

• Interesting to see which, if any of the companies with necessary capability to develop deep water resources will have the nerve to get involved.

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