Amy Myers JaffeDavid M. Rubenstein Senior Fellow for

Energy and the EnvironmentCouncil On Foreign Relations

Project LINK Meeting 2019“Coping with Stranded Asset Risk”June 18, 2019

The Science of Unburnable Carbon

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3

Markets Recognize That Science of Stranded Assets is Real: 2009 Stock Market Aggregate Loss = 2.48% of market capitalization

$1,061,565

$27,050

Aggregate capitalization

Unburnable disclosure losses

Griffin, Lont, Jaffe, Dominguez-Faus, Energy Economics, Fall 2015

Management can still pivot to adapt to new market circumstances.

Some of the largest oil and gas companies such as Total and Statoil are already making strategic changes.

101 – 250 Quads

51 – 100 Quads

6 - 30 Quads

31 - 50 Quads

0 – 5 Quads

250 – 1500 QuadsNatural Gas

Oil

Unburnable Fuel Reserves Before 2050 Under 2°C Scenario

Source: University College London

0

50

100

150

200

250

300

350

China

Kazakh

stan

United St

ates

Nigeria

Libya

Russia

UAE

KuwaitIra

qIra

n

Canada

Saudi A

rabia

Venezuela

Billi

ons o

f Bar

rels

Proven Oil Reserves

Larger and Expensive Resources Most at Risk for Stranding

• Canada – Oil Sands Reserves are 166.3billion barrels

• Venezuela – Orinoco Belt reserves are 235 billion. Some other regions are damaged beyond repair such as the El Furrial Field.

• Russian Arctic oil reserves are 90 billion barrels and 47 trillion cubic meters of gas

• Will countries developtheir unconventional oil from shale? (Mexico, Colombia, Paraguay,Algeria, Jordan, South Africa, Argentina, Russia…)

Peabody Energy stock collapse from 2015-2016 highlights risk of disorderly decapitalization as competitive market conditions change and carbon gets repriced more accurately

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CORNERSTONE MACRO: FIVE YEAR MODEL: $50-$55/B WTI IS TOO LITTLE; $65/B SEEMS TOO MUCH

Source: CORNERSTONE MACRO

2

4

6

8

10

12

14

Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20

Mb/dSensitivity of US Shale Crude Oil Production to WTI Prices

$50$55$60$65$70

-1,500

-1,200

-900

-600

-300

0

300

600

900

1,200

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

million barrelsmillion barrels per day

s/d implied stock change

end year inventorysurplus (rhs)

Central Scenario

sensitivity of 5 year global oil balance to shale production growthglobal stock change (Mb/d) running shale model at various WTI prices

2019 2020 2021 2022 2023$50 -0.9 -1.5 -2.4 -3.6 -5.6$55 -0.6 -0.5 -0.8 -1.6 -3.6$60 -0.1 0.7 1.1 0.7 -0.6$65 0.2 2.1 3.8 4.1 3.5$70 0.5 3.6 4.7 5.2 4.3$75 0.7 4.1 5.5 5.7 4.7

Is the WTI Boom-Bust Price Cycle Shortening?

• Shorter cycle times for oil price rises potentially weakens the investment response in regions with large scale conventional reserves that take longer to develop.

9Source: CORNERSTONE MACRO

DATA SCIENCE IS DELIVERING FOR US TIGHT OIL: TECHNOLOGY IS BRINGING ABUNDANCE

Shorter cycle times will leave NOCs with less capital flexibility.NOCs likely to have more difficulty staving off declines in mature fields.

Majors are favoring short cycle projects such as shale in the Americas, brownfield extensions and development of satellite reserves. Interest in long cycle projects like Venezuelan heavy oil

and Arctic development is sinking. Longer term, any higher oil prices could breed structural decline in oil use, creating intractable problem for OPEC.

Rising Oil Production Potential VS NOC Supply RiskCorruption Scandals, Failing States, and States Raiding NOC Finances

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Technology Revolution is ushering in exponential gains in productivity, via transportational logistics, automation, big data, material science and biotech, artificial intelligence, 3-D printing.

This revolution dramatically change the way we produce, sell and use energy.

Old v. New Forces Impacting Long Term Oil Demand

~ 100 MIL BBL/DAY(current)

TECHNOLOGY

LEGISLATIVE + TAX POLICY

ENERGY EFFICIENCY (energy per GDP declining)

MILLENNIALS REJECT VEHICLE OWNERSHIP

GROWTH OF ALTERNATIVE ENERGY

POPULATION GROWTH

EMERGING ECONOMY EXPANSION

EXPANDING GLOBAL MIDDLE CLASS

74 MIL BBL/DAY(2 degrees)

Potential impact of increased shared mobility/autonomous vehicles: Oil consumption highly sensitive to changes in VMT

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30% Higher VMT

50% Lower VMT

Baseline

0

10

20

30

40

50

60

70

80

90

100

2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

million bbl/day

Oil Consumption Sensitivity to VMT

ICE Ban Oil Consumption

0

10

20

30

40

50

60

70

2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

mm

boe/

day

BAU -- 4 Degree Shift

Energy demand is expected to peak in OECD. Could China be next?

Change in energy demand, 2016-40 (Mtoe)

GDP across developing world might slow due to climate change, migration, and slowdown in global trade.

India1 005

420

SoutheastAsia

China 790

United States-30

Japan-50

Europe-200

270Central and South America

485

Africa

135 Eurasia

480Middle

East

How Will Producers Respond?

§ Since reserves under the ground will depreciate over time, it makes commercial sense to accelerate production now while demand is still robust

§ Green paradox: Higher the likelihood of carbon tax or restrictions, the more it will encourage producers to accelerate production

§ Geopolitical implications: petro-states responding to loss of strategic stature by shifting to harder power measures to raise importance on world stage

§ Anticipation of failing national budgets is destabilizing legitimacy of petro-governments and prompting intensification of repression

HOW DOES THE UNITED NATIONS PROMOTE A SOFTER LANDING?

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