strategy in uncertainty - global interdependence …...this information is confidential and was...
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This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent
Strategy in UncertaintyA guide to anticipate and act in a time of uncertaintyJuly 2016
CONFIDENTIAL
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent 2
Strategy in Uncertainty
“Prediction is very difficult – especially about the future”- Niels Bohr, quantum physicist and Nobel Prize Winner (1922)
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent 3
Objectives of these materials
• Introduce a framework and methodology to anticipate and act in times of unprecedented uncertainty
• Share some perspectives on what the signposts are indicating regarding the future energy landscape
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent 4
• U.S. economy• Canadian economy• Global GDP growth• Capital markets (yield
curve, cost of capital, etc.)• Consumer preferences,
trends, and social media• Energy intensity (per
capita, per $ GDP)• Energy spend as percent of
income or revenue• Generation – utility and IPP• Transmission – electrical
wires and gas pipeline• Global and North American
petrochemical demand• Global development of
potential shale plays• Competitive activity: new
competitors, and asset builds/ expansions
• Licensing of new and existing nuclear plants
• State and federal rules on fracking and disclosures
• EPA regulations on coal-fired generation
• Federal GHG regulation• Global compact on GHG• State and federal rules and
incentives for renewables, energy efficiency, etc. (e.g. RPS, ITC, PTC)
• State and federal subsidies for alternatives to gasoline/diesel
• FERC, NERC, other regulatory body standards and rulings
• Public safety (pipeline and other), reserve margins, etc.
• Cyber-security, geopolitics, and policy
• Fracking techniques / technologies
• PE cracking technological improvements, e.g. coal to olefins
• Utility-scale renewable cost experience curve
• Electricity storage and transmission technology
• Next-gen nukes (incl. modular)
• Coal and gas turbine• Distributed generation• Energy efficiency, demand
mgmt. / response • AMI / "smart meter" /
Smart Grid evolution • New segments of demand,
e.g. long-haul trucking and North American GTL
Crude oil• Foreign imports• Energy independenceCoal• Pricing and supply • Mining and emission
regulations• Import / export dynamicGas and NGLs• Pricing and production• NGL prevalence and frac
spread (oil, NGLs vs. gas)• Fracking constraints• Gas infrastructure• Import / export dynamicsNuclear• Permitting process• Loan guarantees• Next-gen technology• Public opinion
There are many variables that can affect any business: Utility Example
Market environment TechnologyRegulation and
PolicyEnergy costs and
supply
Even if each bullet point represented one bi-modal variable would be 2^45 possible outcomes
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent 5
CRUDE OIL GREEN POWERNATURAL GAS
Energy costs and supply: on just the production variable, projections vary widely
COAL
Notes: North American production onlySource: Analyst set includes EIA, IEA, Exxon, IHS, among others
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent 6
And future price forecasts are ‘unusable’…
WTI CRUDE OIL HH NATURAL GAS
0
50
100
150
$200/bbl
2009 2010 2011 2012 2013 2014
Implied price (95% confidence)
Historical priceFutures priceLower confidenceUpper confidence
Source: EIA June 2016; Bain analysis (Probability values created using NYMEX market data)
0
2
4
6
8
$10/MBtu
2009 2010 2011 2012 2013 2014
Implied price (95% confidence)
Historical priceFutures priceLower confidenceUpper confidence
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent 7
…As history teaches us these forecasts are often wrong
WTI CRUDE OIL HH NATURAL GAS
0/bbped pce (95% codece)toca pcee codecepe codeceues pce
Source: EIA June 2016; Bain analysis (Probability values created using NYMEX market data)
2009 2011 2012 2014 2016 2009 2011 2012 2014 2016
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent 8
Strategy, as traditionally designed, is about clarity and alignment from ambition to execution at the front line
Bold, inspiring full potential ambition
Plan and routines to align the front line
Initiatives and capabilities to repeat success
Clear choices on where to play and how to win
Roadmap to Deliver Results
Ambition
Whereto Play
Howto Win
Actions that Drive to Full Potential
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent 9
Roadmap to Deliver Results
Ambition
Whereto Play
Howto Win
Actions that Drive to Full Potential
In periods of heightened uncertainty, however, strategy creation can fall into common traps
Treating uncertainty as “unknowable’”Focusing only on things that can be controlled“Wait and see” stance on market changesDoubling down to protect incumbencyFew reinvention or innovation betsA bet on every square to manage riskLack of direction in front line execution
“Rifle shot” views of the futureBold, but unrealistic or vague ambitionFailure to anticipate competitionRigid pursuit of new business modelsBig and monolithic bets that create “lock-in”Little or no focus on risk managementHeads down and rigid execution
UNDERCONFIDENCE OVERCONFIDENCE
Modified approach is needed
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Dealing with Future uncertainties
• The primary means of forecasting by most companies, analysts, and economists today consists of:- Development of a base case (usually based on significant analysis of 3-5 variables
and building a “story” for why that is the most likely- Adjustment of variables to create a “high case” and a “low case”
• Shell created a different concept of “scenario analysis,” which takes 3-5 reasonably likely scenarios, and then builds potential strategies around each scenario, putting probabilities against them and using those to include into hurdle rates for investment decisions
• We have developed a new approach that identifies the “extreme, but plausible corners” of an infinite cube of scenarios. This approach allows us to identify clearly the variables that matter most, set them as “signposts” and monitor for disruptive “tipping points”. There is tremendous economic value to be created if you can see a disruption coming 3-5 years ahead of competitors
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent 11
Source: IC Insights; ICE Status; Electronic Design; Singularity University
Among economic signposts, experience curves are important to monitor as they highlight “tipping points”
VHS tape becomes
mainstream
DVD is introduced and laserdisc stops production 2 years
laterLaserdisc
offers alternative to
VHS
Streaming technology disrupts music and video
industry
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent 12
Consumers adopt new technology once its capability and price become more attractive than its predecessor
Note: Videos and DVDs - DVDs and VHS. Includes digital downloads. Music CDs, digital downloads, and streaming services; Forrester ecommerce estimates based on any purchase paid for online (regardless of whether delivered or picked up in store); Source: Forrester; Bain analysis
Legend
ActualPrediction using Forrester forecast
Historical Forecast
MUSIC: ECOMMERCE PENETRATION
VIDEOS & DVDS: ECOMMERCE PENETRATION
Historical Forecast
Legend
ActualPrediction using Forrester forecast
The growth of iTunes, founded
in 2001, contributed to
the acceleration of ecommerce penetration in
music.
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent 13
Unless there are substitution barriers which may slow penetration
Source: NASA, Financial Times
NORTH DAKOTA FLARING
• Low Gas Prices caused rigs to rapidly shift to “wet” plays
• However, midstream infrastructure was not in place…thereby creating a substitution barrier
• As a result, gas was flared and WTI crude prices decoupled from Brent.
FLARES VISIBLE FROM SPACE
Bakkenformation
Eagle Ford
North
• Bakken flaring burns more than $100 million per month (~30% of production)
• Bakken flares are being replicated in other shale regions, including Texas
• As rail and other infrastructure has been put in place, the WTI/Brent spread has narrowed
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent 14
We assess the strategic implications in order to understand potential actions to take, now and in the future
ENERGY EXAMPLE
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent 15
As an example, we developed 8 “corner scenarios” for energy markets
U.S. Energy consumption (Qbtu)
2030 EIA Reference
Hydro-carbon Starved
Gas Land Oil Rebirth
Hydro-carbonWorld
Green Nirvana
Green Power
Feuding Fuels
Green Mandate
1 2 3 4 5 6 7 8
No imports
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent 16
Collectively, these scenarios covered a wide range of volumes and prices
$60/bbl
$120/bbl
$4/MMbtu
$10/MMbtu
CRUDE OIL NATURAL GAS
Green Nirvana
Green Nirvana
Gas Land
Oil Rebirth
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent 17
Signposts (the variables most important for identifying disruption) were set to “extend the headlights”
Global Oil Signposts
• Iraq production• Brazil deepwater
production• Other conventional
production• North America Production
• OPEC production levels and spare capacity
• Oil consumption in developed nations
• Economic growth in emerging markets
OPEC’s Influence Demand GrowthProduction Growth
Basin Productivity• Initial production
rates• Drilling days / frack
stages• Well depletion rates• Number of wells
Supply Chain Capacity
• Monthly rig count• Dry vs. wet rig
deployment• Rig costs (day rates
& breakeven)
Access & Regulations• Current and proposed
fracking restrictions• Federal acreage
open/leased• Drilling applications &
permits
Available Resources• Current and
forecasted EUR• Planned E&P capital
investment • Price differentials
(basin vs market)
North America Production Metrics
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent 18
Watching the signposts on cost of tight gas allowed us to see the explosion three years before everyone else
Signposts indicated viability
The world began to
notice shale gas’ disruption
ANALYSTS DID NOT PAY ATTENTION TO FRACKING UNTIL IT
WAS DISRUPTIVEE-CURVES SHOWED THE COMING
DISRUPTION OF SHALE
1
2
5
10
20
50
100
10 20 50 100
200
500
1,00
0
2,00
0
5,00
0
10,0
00
2007 price
2006
2004
Slope = 72%
Cumulative # of wells drilled
SWN Fayetteville shale gas well costs
($/Mcf)
2007 price
20152014
2013 20122011
20102009
2008
2007
2005
Note: 2013-15 $/Mcf costs based on % improvement in break-even oil costs over the same periodSource: Argonne National Lab, EIA, Google Trends, The Atlantic, SWN company financials; EIA; Rystad; Company websites and press releases; Bain analysis
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent 19
We saw the same pattern in tight oil…
Note: Well cost is weighted average well cost, pads and single wellsSource: Rystad; Continental Resources; EIA; Company websites and press releases
Eagle Ford breakeven oil prices ($/bbl)
~15% cost decline (’14-’15)
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent 20
Estimated 2030 crude
demand
And suggested in 2012 that low cost supply was likely to exceed demand, affecting global clearing prices
4020 60 90
Source: Rystad, IEA, Advanced Resources Int’l, BP Energy Outlook 2030, Bain Analysis
0 8070503010
Cost of production/import(2012 $/bbl)
Crude production (MBD)
2030
2012 average oil price
2016 crude
demand
0550500$5dde ast ad caussaS cosa co couopeO tgt oustaaca Caada y S sa GC
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent 21
And noted throughout 2014 that over-supply situations led to price declines between 30% and 70%
1986 1991 1998 2001 2008
Source: EIA, IEA
Change in production
Change in consumption
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent 22
Strategies using this approach have a number of advantages
• Strategies are developed that are robust under multiple scenarios-Clear “no regrets” moves
• Strategies have built-out element of optionality
• Improved capability to monitor the environment provides visibility 3-5 years out into the future further than today’s strategies
-Experience curves-Substitution barriers-Key Technological developments
• Clear decisions are triggered when signposts flash “red” prior to imminent change in the environment
• Signposts accord greater time to execute and adjust
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent 23
Objectives of these materials
• Introduce a framework and methodology to anticipate and act in times of unprecedented uncertainty
• Share some perspectives on what the signposts are indicating regarding the future energy landscape
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent 24
Some key questions to consider for the future mix and pricing of energy:
• We have seen why prices have dropped dramatically for both gas and oil, but why have they nearly doubled from their lows over the past few months? What does that imply for the future?
• The disruptive nature of tight oil and gas experience curves is now well known. Are there other disrupters or major tipping points that are likely to come over the next few years?
• Will the history of past boom and bust cycles in the oil industry hold for the future, or are other forces going to change the dynamics?
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent 25
Dropping NA supply, and disruptions to supply, have been a primary driver of price increases the past few months
0
500
1,000
1,500
2,000
2,500
3,000
Kuwait Canada North Sea Nigeria US Argentina GhanaItaly Columbia Libya Brazil Abu Dhabi Iraq/Kurdistan
Mai
nten
ance
in M
urba
n
Kirku
k-Cey
han
sabo
tage
Fire
at
Bra
zil’s
Bar
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arat
inga
Kuw
ait
strike
San
Pab
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ayPi
pelin
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ak
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rt b
lock
age
In L
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ks
Col
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Pip
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due
to
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Ital
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Val
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hutd
own
Buz
zard
mai
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ance
Baghdad’s decision to halt pumping oil from Kirkuk into Turkey
Canadawildfire
Thou
sand
bar
rels
per
day
US rig counts have now started to move up
7,7007,9008,1008,3008,5008,7008,9009,1009,3009,5009,7009,900
WeeklyMonthlyWeekly production plus balancing term
SUPPLY DISRUPTIONS US PRODUCTION
Source: Goldman Sachs
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent 26
Another potential disruptor is change in energy sources for demand applications (power and transport)
DEMANDSUPPLY INTERMEDIARY
Source: US Energy Information Administration, Bain analysis
Percent of sources
Percent of sectors
• Transport• Conversion• Storage
100
9
9241453
<19
28333
4
2372
1
35
91
11
5
13
15
39
92
1
26
3
44
761
7
22
37
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent 27
25
50
100
200
500
1,000
$2,000
10 20 50
'15'14
'13
Cumulated produced capacity (GWh) [Log Scale]
Li-ion battery/cell cost ($/kWh) [Log Scale]
'12
Slope: = 75%
Li-ion batteries will likely be one of these disruptors as costs continue to trend down the experience curve
RECENT TRENDS SUGGEST ~25% REDUCTION IN COST FOR EVERY DOUBLING OF PRODUCTION
Note: This only includes cell cost; Cost in $2015 Source: Bloomberg New Energy Finance, Deutsche Bank, Bain DER analysis; CEMAC; FS-UNEP Global Trends in Renewable Energy Investment 2016
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent 28
These trends suggest price parity for electric vehicles in the near-term
0
10,000
20,000
30,000
40,000
50,000
2013 2016 2019 2022
MSPR ($US)
200 mile EVToyota Camry
0
10,000
20,000
30,000
40,000
50,000
15' 16' 17' 18' 19' 20' 21' 22'
MSRP + 5 year TCO ($US)
200 mile EVToyota Camry
TCO PRICE PARITY FOR EV EXPECTED BY 2020
PURCHASE PRICE PARITY FOR EV EXPECTED BY 2022
Source: Ark Investment Management
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent 29
As electric vehicle prices reach parity, consumers will increasingly adopt electric vehicles
Purchase price parity
TCO parity
Source: Bloomberg New Energy Finance; Ecowatch; ICCT
Brazil’s adoption of flex-fuel vehicles was much more
rapid, reaching 94% of new car sales in 2013
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent 30
Battery enhancements will also enable increased energy storage for alternative energy
…INCREASING ALTERNATIVE ENERGY APPEAL AS THESE TECHNOLOGIES RAPIDLY
COME DOWN THE LEARNING CURVE
AS BATTERY PRICES FALL, ALTERNATIVE ENERGY WILL INCREASINGLY BE PAIRED
WITH BATTERIES…
0
200
400
600
800
1,000
1,200
1,400
2015 2020 2025 2030 2035 2040
Total GW capacity
Cumulative small-scale solarSolar without batteriesSolar paired with batteries
Source: Cleantechnica; Lazard Levelized Cost of Energy Analysis 9.0; GWEC
0
100
200
300
LCOE ($/MWH)
09' 10' 11' 12' 13' 14' 15'
WindSolar
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent 31
All this will decrease demand for fossil fuels and impact oil/gas prices moving forward
-15
-10
-5
0
2015
0
2020
-1
2025
-3
2030
-7
2035
-11
2040
-13
Expected Mb/d oil offset by EVs
Source: Bloomberg New Energy Finance; Ecowatch; IEA
0
25
50
75
100
125
150
2015 2020 2025 2030 2035 2040
Global oil and liquids demand
EVS EXPECTED TO REDUCE OIL DEMAND CONSIDERABLY…
…BUT CURRENT DEMAND FORECASTS MAY NOT TAKE S-CURVE INTO ACCOUNT
IEA expects relatively flat line growth in oil
demand
Decreasing demand for oil should
maintain lower oil prices
Potential for Peak Oil Demand in mid 2020’s
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent 32
Additionally, fuel cells could further disrupt the oil and gas marketplace
ADVANTAGES OF FUEL CELLS FUEL CELL ADVANCEMENTS
• Higher efficiency than diesel or gas engines
• Zero pollution
• Faster refueling than EVs
• Greater range than EVs
• Potential weight advantages
• Toyota has spent an estimated $8.8B and 20 years developing fuel cell technology
• In 2015 Toyota released the Mirai, one of the first commercial fuel cell vehicles
• Toyota also announced royalty-free use of approximately 5,680 fuel-cell-related patents to encourage innovation
As fuel cell costs come down, fuel cell vehicles could further disrupt oil prices and overall mix of energy sources
Source: Toyota; SeekingAlpha
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent 33
Given the emergence of these signposts, what does this mean for the energy market?
• Short term uncertainty will remain within the energy market- Typical approaches to forecasting will provide false accuracy
• Comparative changes in costs of alternative technologies will provide guidance around future trends. Tracking experience curves for key technologies can highlight when “tipping points” will be reached.
• More specifically, Li-ion batteries will continue to become more cost efficient, allowing EV’s to displace traditional gas powered vehicles
• Solar/Wind energy will increasingly use these batteries to improve alternative energy storage while they become more cost efficient
• These newer technologies will offset demand for traditional fossil fuels, putting continual pressure on prices and margins (assuming no major supply disruptions)
• Trends in other emerging technologies (such as fuel cells) will need to be monitored to spot disruption before it happens
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent 34
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent 35
Appendix
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent 36
Real breakthrough in storage will come with next generation batteries (not expected until ~2030)
Source: DOE Electricity Advisory Committee, BCC Research, Electrical Power and Research Institute (2010)Notes: “Other” includes flow batteries, lead acid, and thermal peak shaving (i.e., ice storage)
Experience curve effect
BY 2020, BATTERIES STILL NOT COST COMPETITIVE WITH PEAKERS FOR
LARGE-SCALE PLACEMENT
NEW LI-ION TECHNOLOGIES PROMISE HIGHER POWER DENSITIES, BUT THE
TRUE BREAKTHROUGH WILL BE LI-AIR
1860 1910 1960 2010 2020 2030
Lead-Acid
25-45
Nickel-Iron
30-40
Nickel-Cadmium
35-60
Nickel-Metal
Hybride50-75
Lithium Ion
110-140
Li-ion w/ SiNanowire 400
Li-Air~4000