Energy power shift 09_2016

Energy: power shift under way

A general outlook on the energy industry and the changes shaping the future. The session describes the shifting trends in Oil, Gas, Power (incl. Renewables), Climate Change and Business Models

Vasilis Rallis

MBA 2001

Current RoleSenior Advisor, Energy Markets (8 years in the Regulator)

ExperienceIntl Business Development, Finance, Government.

IndustriesEnergy, Automotive, Manufacturing, Finance, Management Consulting

Agenda

1. Global Outlook

2. Oil & Gas

3. Power (+RES)

4. Climate Change

5. Energy in Europe

6. Energy: power shift underway

7. Careers in Energy

Agenda

1. Global Outlook

2. Oil

3. Gas

4. Power (+RES)

5. Climate Change

6. The New Business Mode


Energy at the centre of everything we do…“Energy refers to the power derived from the utilization of physical or chemical resources”

Simply put…Without energy…nothing can be done

Energy is a source of competitive advantage

Russia – Georgia conflict

www.geni.org

5 Global Megatrends to watch for…

Demographic and social changeWithin the next minute the global population will rise by 145 people. By 2030 global population will reach 8.7bn

Shift in economic powerOn current trends, the aggregate purchasing power of the ‘E7’ emerging economies – China, India, Russia, Brazil, Mexico, Turkey and Indonesia – will overtake that of the G7 by 2030.

Rapid urbanisationIn 1800, 2% of the world’s population lived in cities. Now it’s 50%. Every week, some 1.5 million people join the urban population, through a combination of migration and childbirth.

Climate change and resource scarcityAt current rates of consumption we may have just half a century’s worth of oil & gas left. Yet to meet our development needs we’re highly dependent on fossil fuels, which drive carbon emissions.

Technological breakthroughsThe impacts of digital disruption are now so pervasive that no business in any sector – from the smallest family business to largest multinational – is immune from them..

6 Energy Megatrends to watch for…

Oil priceOPEC’s decision to keep supply constant has caused the oil price to collapse – and has created a new industry outlook. A modest rebound is observed in 2016.

Energy Demand is falling in Europe…Based on 2013 data (Eurostat) energy demand in EU-28 has fallen 9.1% vs 2006 (approaching 1990-1995 pattern).

..but is increasing in emerging countriesWith China, India, Brazil exhibiting year-on-year energy demand growth.

Gas (r)evolutionShale gas technology (fracking) has enabled the US to become energy efficient and contemplate about exporting it – forcing OPEC to retaliate.

The bigger game: efficiencyThe biggest disruptive technology in energy is to go without it.

RES are here to staySolar is bound to get cheaper due to technology innovation and available financing. Biomass and Wind will benefit as well. They have already begun changing the industry value chain.

Agenda

1. Global Outlook

2. Oil & Gas

3. Power (+RES)

4. Climate Change

5. Energy in Europe



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Oil

Gas

Upstream Midstream Downstream

Global Oil & Gas Value Chain

Big OilBig oil is a name used to describe the world's five (or six) largest publicly owned oil and gas companies, also known as supermajors.

The supermajors are considered to be:

BP plc, Chevron Corporation, ExxonMobil Corporation, Royal Dutch Shell plc and Total SA.

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Big Oil…

..is mostly State Controlled in terms of reserves but…

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..private sector companies are making the most profits

Company name 2015 Sales(US$ million)

Exxon Mobil 496,255

Royal Dutch Shell 484,489

BP 386,463

Saudi Aramco 311,000

Chevron Corporation 245,621

Conoco Phillips 237,272

Total SA 231,580

Gazprom 157,830

Eni 153,676

Petrobras 145,915

GDF Suez 126,076

Pemex 125,344

Valero Energy 125,095

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..oil price keeps falling…5 yrs trend

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..oil price keeps falling…YTD trend – Modest rebound

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Oil & Gas 2014…The decline in oil prices over the past years and the continued weakness in gas prices have created a new structural challenge for the upstream oil and gas industry.

A world of lower oil-price planning has become the common basis for the coming 12 to 18 months.

1.Production costs, which grew by half for major oil companies over the past five years;

2.Complexity, which rose as operators’ and service companies’ production and development businesses became more elaborate

3.Government policies, which have ranged from new, regulatory burden to laissez-faire oversight (as seen in the LNG sector in Australia and in onshore production in the US).

…and 2016 problems

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Oil & Gas trends – Take away thought…

• Competition, slumping oil prices, and glutted energy demand

• The O&G landscape is being significantly reshaped by a potent emerging trend: the fear of climate change and a powerful, concerted effort to reduce CO2 emissions and minimize fossil fuels (Rio 1992 to Paris 2015)

Oil & Gas executives must address a vital existential issue:

How to successfully do business in an increasingly carbon-constrained world

Agenda

1. Global Outlook

2. Oil & Gas

3. Power (+RES)

4. Climate Change

5. Energy in Europe



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Electricity Value Chain


Utilities

OilCoalGasNuclearRES

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Utilities business model evolution (EU)

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“The traditional utility business model has evolved to deliver stable and predictable returns to investors. This, in turn, has ensured investment grade credit ratings could be maintained enabling the companies to efficiently raise large amounts capital to finance investment in new infrastructure projects”.

1980’s

State owned andcontrolled

1990’s 2000’s

1st Deregulation and Liberazation of the market

2010’s

2nd + 3rd Energy PackageUnbundling of Distribution, Transportation, MarketingRES penetration (20-20-20 Target)

Target Model (InternalEuropean Energy Market)RES penetration

Continuous RES penetration: + Incentives (FIT) + technology disruption = viable RES production -> erosion of utilities business model

RES – Renewable Energy Sources

Renewable energy is generally defined as energy that comes from resources which are naturally replenished on a human timescale such as sunlight, wind, rain, tides, waves and geothermal heat. Renewable energy replaces conventional fuels in four distinct areas: electricity generation, hot water/space heating, motor fuels, and rural (off-grid) energy services.

The "20-20-20" targets, set three key objectives for 2020:

1.A 20% reduction in EU greenhouse gas emissions from 1990 levels;2.Raising the share of EU energy consumption produced from renewable resources to 20%;3.A 20% improvement in the EU's energy efficiency

RES – Renewable Energy Sources

"Total World Energy Consumption by Source 2010" by Delphi234 - Own work. Licensed under CC0 via Wikimedia Commons -

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Title for text slide 24 pointwith 1 line spacing after

Sub-title 18pt with 1 line spacing after

Main copy size 14 pointLine spacing 1.2 for all text•Bullet 1 use standard bullet- Bullet 2 use for secondary bullet

"Total World Energy Consumption by Source 2010" by Delphi234 - Own work. Licensed under CC0 via Wikimedia Commons -

Agenda

1. Global Outlook

2. Oil & Gas

3. Power (+RES)

4. Climate Change

5. Energy in Europe



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Seven of these indicators would be expected to increase in a warming world and observations show that they are, in fact, increasing.

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Climate Change: already occurring

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Temperature increase…?

The critical question is:

How much of temperature increase will not create a non reversible outcome?

WEF+UN = +2%Evidence (IEA) = +4%

In a +4% scenario, the consequences could be extremely difficult to handle

The answer given in Paris 2015 = 1.5%

zero emissions sometime between 2030 and 2050

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Climate Change affect on energy industry

As the climate of the world warms, the consumption of energy in climate-sensitive sectors is likely to change. Possible effects include

1.decreases in the amount of energy consumed in residential, commercial, and industrial buildings for space heating and increases for space cooling;

2.decreases in energy used directly in certain processes such as residential, commercial, and industrial water heating, and increases in energy used for residential and commercial refrigeration and industrial process cooling (e.g., in thermal power plants or steel mills);

3.increases in energy used to supply other resources for climate-sensitive processes, such as pumping water for irrigated agriculture and municipal uses;

4.changes in the balance of energy use among delivery forms and fuel types, as between electricity used for air conditioning and natural gas used for heating; and

5.changes in energy consumption in key climate-sensitive sectors of the economy, such as transportation, construction, agriculture, and others.

U.S. Climate Change Science ProgramSynthesis and Assessment Product 4.5February 2008

Agenda

1. Global Outlook

2. Oil & Gas

3. Power (+RES)

4. Climate Change

5. Energy in Europe



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Policy FrameworkAt any given time, youcan accomplish2 out of 3 options

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EU Energy Policy Timeline

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2004

Internal Market20-20-20 TargetLisbon TreatyRussia – Ukrainecrisis

2013-2014 2015

Energiewende

…->2030

3rd Energy Package: full EU harmonization of “market design & operation rules” -> Split vertically integrated utilities by spinning off transmission, common set of access rules Target Model (Power and Gas)

2012 - Fukushima

2rd Energy Package + full retail eligibility; transparent & market friendly cross-border operation; regulators supporting market building; but cannot get open wholesale pricing & sequence of markets (Day-Ahead to real time)

Energy UnionEvaluation ofpolicy

1996 2007

1st PackageFree Entry in Generation, B2B Consumer eligibility,Free movement of goods at borders)

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Market share of the three largest suppliers (CR3), number of main suppliers and number of nationwide active suppliers in retail electricity and gas markets for households

Electricity Market: Reality Check 2015

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EU Energy Policy Timeline

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2004-2009 2013-2014 2015

Energy UnionEvaluation ofPolicy

Assumptions 3rd Energy package Reality check 2014

Fossil fuels are scarce and pricey Tough oil and new fields

EU security of supply Russian, Libya, OPEC

Nuclear power Fukushima

CO2 Collapse of ETS

RES complement Utilities RES promoted by subsidies rendered utilities business model obsolete and not complimentaryEU Internal Market cost advantage

on fuel

Green revolution ..not anytime soon

The 3rd Energy Package was designed around a very different energy system

Energy Union

The 5 Key Dimensions

1. Stronger emphasis on security of supply

2. Completed energy market to connect the whole Europe

3. Moderation of Demand

4. Decarbonising the energy mix making Europe the global leader in RES and other low carbon technologies

5. Research & Innovation in Green Growth

Strategy

Energy Union Strategy is aimed at overcoming the energy policy vulnerability and achieving the EU energy and climate goals

Europe relies too heavily on fuel and gas imports ->Europe needs to reduce this dependency while keeping the energy market open to countries outside EU

Europe needs more regional co-operation to be competitive and efficient in developing the infrastructure and energy markets.

The EU Leadership in developing RES Sector must be linked with the aim of regaining the industrial competitiveness through innovation and benefits from the learning curve

Share and value of investments in energy projects per sub-sector Share and value of the expected triggered investments per sub-sector

Agenda

1. Global Outlook

2. Oil & Gas

3. Power (+RES)

4. Climate Change

5. Energy in Europe



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Oil & Gas…2005

The production-maximizing business model…aka “drill-baby-drill”

To prosper the oil industry would have to adopt a new strategy. It would have to look beyond the easy-to-reach sources that had powered it in the past and make massive investments in the extraction in “unconventional oil” (tough oil) resources located far offshore, in the threatening environments of the far north, in politically dangerous places like Iraq, or in unyielding rock formations like shale.

David O’ ReillyCEO, Chevron2005

Oil & Gas…2015 The production-maximizing business model…the baby has drilled….and drilled...

2005 Assumptions 2015 Reality check

Demand would keep rising

EIA projected 103.2 ml b/d

Demand will continue to rise – but at the past pace vs … 93.1 ml b/d

Rising demand would ensure high prices to justify investments in unconventionalresources

Consumption will be reduced due to global economyIEA est $50 b – > $75b 2020

Finance available for investment Economic Crisis not over yet. Available capital for RESIncreased value of $ vs other currencies

Climate Change would not affect the business model

Cannot be discounted no more

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Electricity Value Chain


Utilities

OilCoalGasNuclearRES

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Electricity Value Chain – Disruption in all the chain

Business model becomes obsolete

Utilities’

Increased RES penetration Unbundling + Technology Energy EfficiencyBundled offeringEnergy as a Service

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When we think about a value chain, we tend to visualize a linear flow of physical activities.

But the value chain also includes all the information that flows within a company and between a company and its suppliers, its distributors, and its existing or potential customers.

The informational components of value are so deeply embedded in the physical value chain that, in some cases, we are just beginning to acknowledge their separate existence.

When information is carried by things — by a salesperson or by a piece of direct mail, for example — it goes where the things go and no further. It is constrained to follow the linear flow of the physical value chain. But once everyone is connected electronically, information can travel by itself.

Electricity Value Chain – Information Disruption

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The changing economics of information threaten to undermine established value chains in many sectors of the economy, requiring virtually every company to rethink its strategy—not incrementally, but fundamentally.

Bargaining power will shift as a result of a radical reduction in the ability to monopolize the control of information.

Market power often comes from controlling a choke point in an information channel and extracting tolls from those dependent on the flow of information through it.

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3.2%In the utilities value chain, information was supply driven i.e. generation driven.

The information was one sided, controlled by the utilities , commodity driven and with no interaction.

Technology + RES effect have disrupted the value chain by becoming demand driven.

The information will be (mostly) owned by enabling end users with an increasing amount of information available (internet of things).

Power Shift of Information

From Supply DrivenTo

Demand Driven

Electricity Value Chain – Information identified

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Electricity Value Chain – legacy version

Utilities

Supply side driven – “pre arranged” generation

InformationInformation

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Electricity Value Chain – emerging version

Utilities

Demand side driven – information flows from end consumer to generation

InformationInformation

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The RES Effect: the duck curve

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Power shift to the Demand Side

End Consumersnow manage the Information

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Europe’s electricity providers face an existential threat

The traditional utility business model has evolved to deliver stable and predictable returns to investors. This, in turn, has ensured investment grade credit ratings could be maintained enabling the companies to efficiently raise large amounts capital to finance investment in new infrastructure projects.

However, this business model has significant drawbacks. It demands that the organisation is managed to deliver steadily increasing profits and this creates a difficult environment in which to grow new businesses and develop new markets – particularly if those new businesses cannibalise the core markets that generate the cash.

It is not possible to optimally run an organisation which comprises two businesses pointing in fundamentally opposite directions.

How to lose half a trillion euro

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Alternate Energy Sources (RES)Interconnected SystemDemand side GenerationManagement

Energy Management &Efficiency (Smart Buildings)Load Optimization

Transmission and Distribution are upgraded to support a distributed generation world based on intelligent use of Big Data

Smart Grid

The power industry’s main concern has always been supply. Now it is learning to manage demand

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The Internet of things…in electricity

1.Who will own all the Big Data?2.Who will be the new (energy) Google?3.What’s the business model?

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The reactions…

2 Case studies

1.e.on2.Statoil

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Energiewende: Germany’s Energy Transition

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The background

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The Solution: split in 2

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e.on stock price 5yrs

e.on split

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e.on stock price vs Deutche Borse 1yr

e.on split

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Statoil’s big dilemma: should it continue to go for oil and gas – or transform itself into an energy service provider?

vs

99.5% of activities connected to Oil & Gas

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Statoil’s big dilemma: should it continue to go for oil and gas – or transform itself into an energy service provider?

The business idea for a restructured Statoil will no longer be to pump oil and gas, but to supply society with energy services it needs and is asking for.

This would be a long-term sustainable business model which also allows for oil and gas production…. The goal will be to deliver energy services people need, which bring the world forward, and which are compatible with a two-degree target.

Financially, the upside will be that the road is much shorter from investment to cash flow than in upstream oil and gas. Large solar power stations can be planned and built in the space of a few months. Supplementary gas power plants also have fairly short construction times. These are markets in growth. It will happen whether the oil industry likes it or not.

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Stat oil stock price Oslo Stock Exchange 1yr

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Energy Efficiency: The Bigger Game

Global market for energy efficiency worth $310 bn and accelerating

October 2014

The biggest innovation in energy is to go without it

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Energy Efficiency: The Bigger Game

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The basic problem is that energy is treated as a commodity, which means that suppliers sell it by volume – and of course they then want to increase their sales.

But energy should be regarded as a service – a “process-in-infrastructure”. By treating energy as a process, by selling it in the form of infrastructure, it becomes in the interest of the supplier to save energy rather than to maximize sales. This is where we should be taking our energy system. In fact, this is already happening in many places.

The role of government in all this is not merely to develop appropriate legislation or regulation. Governments can do even more as consumers of energy. They are the biggest users of energy in the world after all.

Walt Patterson, physicist and Associate Fellow at Chatham House

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On 12 December 2015, the participating 195 countries agreed, by consensus, to the final global pact, the Paris Agreement, to reduce emissions as part of the method for reducing greenhouse gas.

The Agreement will not become binding on its member states until 55 parties who produce over 55% of the world's greenhouse gas have ratified the Agreement

Agenda

1. Global Outlook

2. Oil & Gas

3. Power (+RES)

4. Climate Change

5. Energy in Europe



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Career Mapping

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Career Mapping -> Functions

FinanceManufacturingMarketingBizDevSalesLogisticsHRRegulation

Finance

FinanceManufacturingMarketingBizDevSalesLogisticsHRPolicyRegulation

FinancePolicyRegulationComplianceLegal

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Thank you for your attention