Business in the Energy Transition · lubricants) from vehicles New competition and cooperation with new players entering the market Shifting markets and revenue pools …will also

Business in the Energy Transition

Presentation to 2017 Alberta Climate Summit |

28 September 2017

2

Key take-aways for today

Significant opportunities for innovation driven productivity gains ahead—defining the new basis for competition

2

Structural deceleration in energy demand growth as population ages; Non-OECD countries drive all the growth1

Peak oil demand may be in sight. What will happen to gas demand?

4Despite high renewables growth, the world (and Canada) are not on pace to achieve emission reduction targets

5

Electrification continues to expand as renewables start to outcompete fossil fuels

3

3

0.3 IEA 450

Greenpeace

Revolution-0.1

Climate

protection

scenarios

145

130

125

120

100

105

140

115

135

110

95

155

150

2020 204020302010

Index, 2014 = 100

ExxonMobil 20151.0

IEA NPS 20161.0

IEA NPS 20141.1

1.2 BP 2017

BP 20161.4

CAGR2014-2040

ExxonMobil 20170.9

McKinsey GEP

BaU 2016/170.8

SOURCE: McKinsey Energy Insights’ Global Energy Perspective, July 2017

Primary energy demand

5

4

37

Middle East

China

Non-OECD

-4

Other OECD

North America

23Africa

Europe

2035

-3

566

35

683

0

2014

6

Other

23

125

India

All energy demand growth comes from non-OECD markets,OECD demand declines

2035 683

2

749

Europe -2

North America

Africa

21

4

0Other OECD

Other

2050

67Non-OECD

3

China

18

21

Middle East

India

x% Share of total energy

demand growth

Primary energy demand

Million terajoules

107% 100%


5SOURCE: Generated by McKinsey Energy Insights’ Global Energy Perspectives Model for CPPIB, September 2017

761

20504520

607

25

638

2014

557

707

4035

733

682662

30

0.6%

0.7%

0.2%

1.2%

1.8%

0.9%

6.1%

7.8%

0.9%

1 Includes primary energy consumed in transformation processes (e.g. power generation) and end-uses 2 Compound annual growth rate (average)

3 Includes heat, geothermal and marine

Global primary energy demand1 by fuel

Million TJ

CAGR2

2014-50

Wind

Solar

Hydro

Coal

Oil

Bioenergy

Nuclear

Gas

Total

Share

2013 2050

29%

20%

22%

6%

3%

9%

4%

4%

32%

21%

28%

5%

2%

9%

1%

0%

4.9%Other3 2%0%

Despite strong growth in renewables through the period to 2050, the global energy system remains reliant on oil, coal, and natural gas

6

Power, industrials, and chemicals are main drivers of growth

51

88129

37

2014

566

49

56

48

82

212

2035

74

142

683

279Electric Power

Buildings93

60

42

Chemicals

157

81 Other transport

2050

Industry

749

Light vehicles

316

1.4

1.1

0.3

0.6

0.8

-0.4

1.0

Primary energy demand, Million terajoules

CAGR 2014-50, %


7

34

3%

72 Africa

141

Transport

India

ROW

2050

24% China

18

Industry

14%

8%

17

Buildings2014

24%

5%

Electricity demand

Million terajoules

Global demand for electric power will almost double by 2050 as electrification continues to spread

0.6%

1.9%

18% 26%

Electricity in

final energy

demand

Final energy demand

Million terajoules

CAGR

2014-50


2050

543

2035

377

2014

72

111

397

325Other

Electricity

487

141

402

8

A cleaner, more diverse power mix evolves in the longer-term as a result of increasing renewables penetration

SOURCE: Generated by McKinsey Energy Insights’ Global Energy Perspectives Model for CPPIB, September 2017

48

20504520

25

25

28

2013

23

39

4035

44

35

32

30

1.6%

0.3%

1.4%

1.8%

6.1%

9.7%

2.1%

Global electric power generation1 by source

Thousand TWh

Wind

Solar

Hydro

Coal4

Nuclear

Gas

Total

Share

2013 2050

20%

21%

9%

14%

16%

16%

24%

40%

12%

16%

4%

1%

3.8%Other3 4%2%

1 Power generation is projected on the basis of policy plans, expert views and third-party sources. It is not driven by explicit assumptions about the economics of different sources 2

Compound annual growth rate (average) 3 Includes oil, bioenergy, geothermal and marine 4 Assumes no breakthrough in carbon capture and storage

CAGR2

2014-50

9

However, electricity demand in the developed world will be nearly flat, driven by accelerated DG and EE adoption

SOURCE: McKinsey PowerIQ electricity demand model

33.9

24.3

5.6

6.0

4.3

2030

107.0

DG

uptake

EE

uptake

EV

demand

EE

uptake

2030DG

uptake

96.7

2030

(frozen

tech)

3.1

Economic

growth

2015

100.0

133.9

Example retail sales load forecast, Canada% of 2015 actual retail sales

0.2% -0.5%2.0%Effective CAGR

%, 2015 – 2030

Expected case Aggressive uptake case

1 Electrification of vehicles drives

slight increase in demand,

but the increase is offset by the

combined effects of EE and DG

2

Energy efficient technologies

such as LED lights, high-

efficiency air conditioners,

and smart thermostats drive

a significant decline in

electricity demand3

Distributed generation of

electricity (e.g., solar panels

for residential use) further

decrease daily demand on the

grid

1

2

3

10

Decreasing costs of solar plus battery storage will soon make load defection economically sound in many markets

SOURCE: McKinsey DER valuation tool and analysis

28 203024202018

5

22

15

10

026

35

30

20

2525

20

028

10

5

203024 2622202018

35

15

30

Cost of avoided electricity

Levelized cost of customer-

sited energy

Full grid defection1 scenario

Cents/kWh

Partial (90%) grid defection scenario

Cents/kWh

1 Grid-defection-economics estimates are based on Arizona residential customer. Full grid defection includes diesel generator backup.

▪ Partial grid defection

(generating ~90% of own

electricity using solar

+storage) is already

beginning to play out in

sunny areas with high

electricity costs (e.g.

Australia, Hawaii)

▪ Full grid defection

(completely disconnecting

from the centralized electric-

power system) not

economical today, but at

current rates of cost

declines, it will make sense

sooner than many utilities

expect

11

Liquids demand grows through 2037, driven by chemicals and aviationPrimary liquids demand; Million barrels/day

Δ< -0.1 mb/d

Δ > 1 mb/d Δ-0.05 - -0.1 mb/d

Δ 0.5 - 1 mb/d2035

2016 Δ 0.05-0.5 mb/d

-0.05<Δ<0.05 mb/d

Aviation

Other transport

Other industry

Chemicals

2016-35 Δ

Total

Residential/

Commercial

Light vehicles

Power

Heavy vehicles

China India

3.9 2.9

2016-35 ΔTotal

Russia

& CIS Europe

North

America

Latin

America

Middle

East

2.7

0.5

0.7

6.7

11.20.60.9 -1.7 -0.11.71.2 1.7

0.7

1.7

-1.7

Africa

0

8.6

6.1

15.3

19.4

8.9

32.4

4.3

12.9

6.0

5.6

14.6

12.7

8.2

30.7

6.0

12.9

108.1

96.6

15.5

11.6

7.1

4.2

22.3

22.4

13.3

15.0

5.3

4.7

11.1

9.4

17.6

16.7

5.6

3.9

9.8

8.6

Other

Asia &

Oceania


12

At this point global liquid demand is expected to peak, driven by electrification of the transport sector

108

4540

Road transport

0.1% p.a.

107108107

25

Other transport

Power

Chemicals

3530

105

-0.3% p.a.

Buildings

0.7% p.a.

Industry (excl. chemicals)

2050

105101

202016

97


Global oil demand, Million barrels per day

2.4% p.a. 1.7% p.a.1.4% p.a.

0.5% p.a.-0.9% p.a.

-2.1% p.a.

13SOURCE: McKinsey

Ride sharing and autonomous operations compound with electrification to accelerate mobility disruptions

Vehicle

Electrification

Autonomous

drivingInfrastructure

Shared

mobility1

23

▪ Changes in mobility

behavior

▪ Connectivity and

optimization will lower

fuel demand

▪ Uptake of electric

vehicles and continuous

improvement of ICE

technology will lower

demand for oil and oil-

related products (e.g.,

lubricants) from vehicles

▪ New competition and

cooperation with new

players entering the

market

▪ Shifting markets and

revenue pools

…will also radically change

the oil and gas industry

Autonomous

driving

Majority of the trends impacting the future of mobility…

2 Self-driving functionality accelerates sharing

3 Self-driving electric vehicles offer lower TCO

4 An uptake in shared mobility reduces public transit

5 Electric vehicles at scale accelerate battery cost reductions

6 Self-driving electric vehicles have advantaged infrastructure

7 Increasing renewable penetration generation make electric vehicles more attractive

1 Increasing shared mobility increases utilization, accelerating electrification,

8 Self-driving vehicles accelerate the uptake of IoT applications

14

104

100

110

108

106

102

96

98

94

353020 2037252016

In oil, several additional disruptors could lead to an even earlier peakImpact on global liquids demand mb/d


Increased plastics

recycling rate

Plastics savings through

packaging efficiency

Increased share in sales of

electric passenger cars

Increased share in sales of

electric trucks and buses

Assumption (%, global)

97

25

Disruption

Base case

351

66

320

49

0

5

0

2016 2035

+

Peak in 2037

Peak in 2027

BAU

+

+

15

In gas, the debate is whether emerging disruptions offset demand growth by 2030

353

244

53

69

166

347

86

Industry

3,6232030 disrupted

Power

2016 3,503

+3%

Industry

Buildings

Other

4,222

Power

+21%

2030 BaU

Buildings

Gas demand

Bcm

More aggressive

renewables uptake

What clients

believe

Disruptive heat

electrification

Faster increase in heat

pump penetration


16

Energy-related CO2 emissions reach a peak around 2035

Peaks

1 Does not include any CCS assumptions 2 Includes emissions from oil and gas extraction, mining and other energy sector own uses

+14%

Global energy-related CO2 emissions1, Gigatonnes CO2-equivalent

SOURCE: McKinsey Global Energy Perspective

17

However, even with the high renewables growth, emissions will miss current targets by a wide margin

SOURCE: McKinsey Energy Insights; World energy outlook 2016, IEA; McKinsey Global Institute analysis

Business-as-Usual scenario

Emissions continue to grow until 2035

Tech disruptor case

Emissions peak in 2025

Greenhouse gas emissions by scenario; Gigatonnes CO2 equivalent

3836

34

2035252015

29

3534

2035252015

Emissions in line with

2 degree scenario

(IEA 450)

18

Canada, too, is not on track to meet 2030 emissions targets

600

750

550

500

850

650

700

800

Megatonnes of carbon dioxide equivalent

202520102005 203020202015

Scenario

Low

High

Reference

790

742

697

SOURCE: Environment and Climate Change Canada

▪ Canada set target in 2015 to

reduce 2030 emissions to 30%

lower than 2005 levels

▪ Target is more aggressive than

Copenhagen target to reduce

2020 emissions to 17% lower than

2005 levels

Target: 523 Mt

19

Addressing Greenhouse Gas Emissions Requires Broad Innovation, Creating Opportunities for Canada

Transition to

low carbon

energy systems

providing energy

access for all

Decarbonization of

power

Decarbonization of

Transportation

Energy efficiency Land Use

The 4 basic transition strategies

Country-specific

transition path-ways

1 2

3 4

Major Opportunities for Innovation

Carbon Capture,

Use and

Sequestration

Industrial Heat

Building EfficiencyMethane

Management

Exporting Innovation

1 2

3 4

20

Many initiatives have been launched already to reduce GHG emissions

▪ A $2-billion low-carbon economy fund

was launched in June 2017, as part of

the Pan-Canadian Framework on Clean

Growth and Climate Change

▪ The federal government announced

several measures to support innovation

in the 2017 budget

− About $1.5 billion to support the clean

technologies sector over the next 5

years

− Launch of the Innovation

Superclusters Initiative to foster

collaboration between industry,

academia and federal agencies

▪ SaskPower: world’s first commercial-scale Carbon Capture and Storage

(CCS) unit at a coal-fired power plant, reducing its emissions by 90%

▪ Shell Canada’s Quest facility captures and stores one million tons of CO2

underground per year

▪ Paraffinic Froth Treatment (PFT) improves the quality of bitumen from

mining operations and allows for a 6% reduction of GHG emissions

▪ Imperial Oil has replaced steam for in-situ oil sand productions by

injecting solvents under high pressure but at much lower temperatures

▪ Suncor began testing melting bitumen with microwaves in 2014

SOURCE: Natural Resources Canada, Alberta oil magazine, The Economist

Federal support for Clean Growth going forward

Recent innovations

New initiatives

▪ Direct-contact steam generation (DCSG) project, backed by COSIA,

could reduce water requirements and production of pure CO2

▪ Alberta Carbon Trunk line, developed by Enhance Energy, will transport

15mm tons of CO2 per year to EOR (Enhanced Oil Recovery) sites

▪ Vancouver-based Inventys Thermal Technologies will deploy a low cost

CCS technology at Husky’s Pikes Peak South Lloyd thermal project

Business-led innovations

1

2

3

4

5

1

2

3

21

And the early stage innovation pipeline offers promise as well

Converts the biogenic portion of organic waste into

renewable natural gas for distribution in municipal power

grids or for fleet vehicle fuel

converts the biogenic portion of organic waste into

renewable natural gas for distribution in municipal power

grids or for fleet vehicle fuel

Uses this waste carbon dioxide to make greener concrete

products by chemically converting it into a limestone-like

mineral.

Designs, engineers and manufactures a proprietary

advanced lithium energy-storage technology that can

provide sustained power

Develops and sells membranes and energy recovery

technology that significantly improve the energy efficiency

and air quality in buildings

Manufactures lithium ion batteries and systems for

electric vehicles, portable power for industrial electronics

and energy storage for smart grids

Converts electrical energy to compressed air that is then

sent to a series of flexible accumulators located between

50 metres and 500 metres underwater

Holds more than 60 granted and pending patents

worldwide on multiple innovations

Developed the most commercialized energy-from-waste

gasification technology in the world. It has completed

seven commercial projects in North America

Protect water resources by changing the way cities

manage excess nutrients both in wastewater streams and

due to fertilizer runoff

Advanced water treatment solutions provider. It designs,

manufactures and assembles systems for desalination,

brine management and chemical recovery applications

Solantro’s chipsets and platforms turn solar panels into

integrated power generators and allow for the

management and storage of renewable energy.

Designs, manufactures and services the world’s leading

flywheel energy-storage technology

Lowest cost producer of automotive fuel globally,

producing cellulosic ethanol at less than half the cost of

producing the gasoline its biofuel hopes to replace

22

At the end of the day, energy productivity and the share of zero-carbon energy will define system change

~ 2C

Well above 2C

Well below 2C

~ 2C

Increase in

share of zero-

carbon1 energy

% points p.a.

1 or

more

< 1

< 3 3 or more

Improvement in energy productivity

% p.a.

INDCs: 2013-2030

Historical: 1980-2014

1 We include here renewables, nuclear, biomass and fossil fuels if and when their use can be decarbonized through carbon capture and use or storage (CCS/CCU). However, if a large share of the increase

is from the latter, a higher share is required since this does not reduce emissions to zero completely

SOURCE: Enerdata (2015), Historic actuals

Global primary energy demand, 2012-2050

23

Key take-aways for today

Significant opportunities for innovation driven productivity gains ahead—defining the new basis for competition

2

Structural deceleration in energy demand growth as population ages; Non-OECD countries drive all the growth1

Peak oil demand may be in sight. What will happen to gas demand?

4Despite high renewables growth, the world (and Canada) are not on pace to achieve emission reduction targets

5

Electrification continues to expand as renewables start to outcompete fossil fuels

3

Documents

Business in the Energy Transition · lubricants) from vehicles New competition and cooperation with new players entering the market Shifting markets and revenue pools …will also