Carbon supply cost curves:

gas capital expenditures

Initiative

arbon TrackerDRAFT/EMBARGOED UNTIL JULY 7 0001 BST

ContentsExecutive summary 2

Foreword 41. Introduction 52. Allocating the carbon budget 63. Demand scenarios 74. Supply cost curves 115. LNG carbon supply cost curve 126. European carbon supply cost curve 147. North America carbon supply cost curve 168. Capex implications 189. Conclusions and recommendations 24

Asia Pacific

Russia

Australia

North Africa

Canada

East Africa

US

West Africa

Middle East

Other

Existing

Executive summary

Perfect storm Demand and price

over the last year has also put pressure on contract

Gas connoisseurs

Fugitives on the run

LNG left on the shelf?

Asia Pacific

Russia

Australia

North Africa

Canada

East Africa

US

West Africa

Middle East

Other

Existing

European diversity

a result may not need them all in the next couple

commitments to increase renewables and reduce

High carbon high costA consistent theme to our cost curve analysis has

Foreword | 3

Foreword

what the international community considers to be

many investors now see coal as not only the most

Anthony Hobley

1. Introduction

Competition between fossil fuels

Complex regional markets

New trading dynamics

Golden age or gold rush?

Operating within a carbon budget

Paris and beyond

Further investment

Introduction | 5

2. Allocating the carbon budget

2 2 2

2

2

Figure 1: Breakdown of gas carbon budget

GtCO2 emissions to 2035Gas Type 450 scenario LDSConventional

Gas consumption before delivery

Fugitive methane emissions

2

on a CO2 2

Geographic split

the world is produced and consumed domestically

3. Demand scenarios

Industry outlooks

Direction of travel

•

•

•

•

•

important to note that these areas are not dependent

Coal to gas switching

balance between carbon prices and commodity prices

Demand scenarios | 7

Figure 2: Comparison of demand scenarios Pe

rcen

tage

gro

wth

in ga

s dem

and

from

201

5

Year

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

50.0%

Low Demand Scenario (LDS) IEA – NPS IEA – CPS IEA – 450 BP Exxon Shell – Outlook

2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035

450 vs low demand scenario

•

•

• Overall capex is down 6% between the scenarios

Price trends

Price risk

and Europe is supplied under contracts which are are

Figure 3: Comparison of gas production and capex in the regions and scenarios (2015-2035)

Production (bcm) Capex ($bn)

450 LDS 450 LDS

Needed Unneeded Needed Unneeded Needed Unneeded Needed Unneeded

414 588

284

Europe

874

Demand scenarios | 9

Figure 4: Trends in contract and spot gas prices across regional markets over the last decade

0

5

10

15

20

31/0

5/20

06

31/0

5/20

07

31/0

5/20

08

31/0

5/20

09

31/0

5/20

10

31/0

5/20

11

31/0

5/20

12

31/0

5/20

13

31/0

5/20

14

31/0

5/20

15

25

BAFA German border price

Japan LNG import

Day ahead UK NBP

Japan LNG spot

Henry Hub

OECD Crude CIF

Gas p

rice

(US$

/mm

Btu)

4. Supply cost curves

not needed in a demand scenario which appear

Supply and demand

which is not needed in this demand scenario is to the

Project stage

Capex and production

which does not currently interact with the traded

Breakeven prices

Delivered cost basis

Supply cost curves | 11

5. LNG carbon supply cost curve

•

•

•

•

Strategy rethink

Lowering expectations

• $82bn in Canada

•

• $68bn in Australia

Price assumptions

Carbon intensive

This translates to a long term breakeven test of around $10/mmBtu

Figure 5: Global LNG cost supply cost curve, 2015–2035

$0

$2

$4

$6

$8

$10

$12

$14

$16

$18

DES

Japa

n co

st ($

/mm

Btu)

Asia Pacific

Russia

Australia

North Africa

Canada

East Africa

US

West Africa

Middle East

Other

Existing

Indicative 450 gas demand: 10,274 bcm LDS gas demand: 10,430 bcm

Breakeven threshold: $10/mm Btu

1,000 2,000 3,000

5 100 15 20

4,000 5,000 6,000 7,000 8,000 9,000 10,000 11,000 12,000 13,000

Cumulative supply (bcm)

Lifecycle GtCO2

LNG carbon supply cost curve | 13

6. European carbon supply cost curve

This suggests that UK unconventionals will supply less than 1% of UK gas demand over the next decade

450 Scenario

Unconventional impact on UK supply

Indigenous gas uncompetitive

EU unconventionals

Coal to gas switch

Figure 6: Europe carbon supply cost curve, 2015–2035

5 100 15Lifecycle GtCO2

0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000$0

$2

$4

$6

$8

$10

$12

$14

$16

$18

Deliv

ered

cost

($/m

mBt

u)

Cumulative supply (bcm)

Breakeven threshold: $10/mmBtu

LDS gas demand: 8,829 bcm

Indicative 450 gas demand:

8,279 bcm

Indigenous existing

Indigenous

UK exising

UK

Norway existing

Norway

Netherlands existing

Netherlands

Russsia existing

Russia

North Africa existing

North Africa

Middle East existing

Middle East

European carbon supply cost curve | 15

7. North America carbon supply cost curve

unconstrained supply as this approach is not possible

Shale gas

450 scenario

Financially sustainable?

Price stability

Regional distribution

Figure 7: North America carbon supply cost curve, 2015–2035

5 10 15 20 25 30 35

Lifecycle GtCO2

Deliv

ered

cost

($/m

mBt

u)

0 5,000 10,000 15,000 20,000$0

$1

$2

$3

$4

$7

$8

$9

Cumulative supply (bcm)

USA conventional USA unconventional Canada conventional Canada unconventional Canada unknown

Indicative 450 gas demand: 19,910 bcm

LDS gas demand:21,358 bcm

$5

$6

North America supply cost curve | 17

8. Capex implications

Differences between scenarios

in the low demand and 450 scenarios due to the

•

•

North America

Europe

capex that is not needed in a low demand scenario

Price risk

Focus on LNG

LNG Capex

Limits to growth

Figure 8: LNG production & capex not needed in the LDS

2015–35 Production (bcm) 2015–2025 Capex ($bn)Existing New Existing New

Supply country Needed Needed Not needed % not needed Needed Needed Not needed % not neededAustralia 418 77% 87 0 68 100%

Canada 0 22 824 0 0 82 100%

50 110 0 0 10 100%

Malaysia 788 45 0 0% 6 0 0 0%

552 100 54% 0 0 0 0%

Qatar 0 0 0% 0 0 0%

527 210 0 0% 0 11 100%

682 664 70% 17 26 71 74%

648 417 4 48 42 47%

65% 152

Capex implications | 19

Australia

Existing needed

New needed

New not needed

LNG production 2015–35 production (bcm)

Rest of the world Global LNG total(bcm)

Indonesia

Canada

US

Malaysia

Russia

Nigeria

Qatar

8,567

1,862

3,446

Figure 9: Map of LNG production needed and not needed in LDS

Projects deferred

Production already covered

that would also be included in the low demand

Existing exposure

LNG concentration

assume there will be a conducive demand and price environment that warrants its development in 2025

Capex implications | 21

Figure 10: Company exposure to LNG capex and production 2015–2025 Capex ($bn) 2015–35 Production (bcm)

Rank CompanyTotal

Existing needed (LDS)

New needed (LDS)

New not

needed

% new not

needed

Existing needed (LDS)

New needed (LDS)

Total needed (LDS)

% of total needed

1 Chevron 100% 428

2 100% 646 46

100% 218 0 218

4 Cheniere 160

5 ExxonMobil 100% 586 120 706

6 188 225

7 100% 41 677

8 100% 0

48 478

10 151 180

11 Apache 100% 27

12 52% 0

0% 0 21 21

14 100% 0

15 100% 0 50 50

16 Qatar Petroleum 100% 141

17 100% 0 15 15

18 PetroChina 100% 0 0 0

100% 155 8

20 100% 0 0 0

64.2%100% 46

LNG Projects not making the cut at $10/mmBtu

may have under consideration which may not be

Figure 11: LNG projects not needed in low demand scenario to 2035

18

16

14

12

10

8

6

4

2

00 500 1,000 1,500 2,000 2,500 3,000 3,500

Deliv

ered

cost

($/m

mBt

u)

LNG Canada

Jordan Cove

Gulf LCG EnergyKitimat Additional Nigeria

Gorgon ExpansionCorpus Christi Expansion

Pacific NorthwestGulf Coast

Abadi FLNG

Equatorial Guinea FLNG

Browse CyprusTanzania

Scarborough

Lavava BayLake Charles

Sabine Pass Phase 3Prince Rupert

MagnoliaAlaska SCLNG

Cameron ExpansionAdditional Angola

Tanzania ExpansionSunrise FLNG

Naturna Indonesia

Cumulative supply (bcm)

QLD Expansion 1 QLD Expansion 2

Additional Algeria

Capex implications | 23

9. Conclusions and recommendations

Less potential for wasted capital

Limits to growth

Price risk

How much growth?

For how long?

Room for unconventionals?

Allocating the carbon budget