Beyond fossil fuels - Welcome to Petrotech-2016 | … Papers/TS-2...such as exploration, development, production and oilfield services, transportation and refining, to wholesale and

Beyond fossil fuels

December 2016

About McKinsey & CompanyMcKinsey & Company is a global management-consulting firm committed to helping institutions in the

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such as exploration, development, production and oilfield services, transportation and refining, to wholesale

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Overview: The state of the alternative energy industry

1. Alternative technologies are fast emerging

2. The outlook for solar

3. The outlook for EVs

2

3

7

10

Contents

2 Beyond fossil fuels

Overview: The state of the alternative energy industry• The dependence on fossil fuels for primary energy demand is reducing, alternative energy

sources such as Solar and Wind will contribute 7% of energy by 2050 from 0.7% in 2013.

• There are two key disruptors; Solar PV on energy production front and Electric Vehicle (EVs)

on energy consumption front.

• Global Solar PV power generation capacity has grown exponentially from 4GW in 2004 to

182 GW in 2014 as costs have declined drastically from 32 cents to 7 cents in same period.

• Exponential growth will likely continue as solar PV has become competitive in many markets.

Even Saudi Arabia which has abundant oil and relies on oil based generation, there is a clear

business to switch to solar PV.

• Large capacity energy storage will become an important enabler of solar PV growth

• EVs have a strong future ahead, with multiple predictions showing possibility of 55% of all

new vehicle registrations in 2030 to be electric vehicles

• Four key enablers are expected to determine the future EV landscape, which include 1)

regulation, 2) technology, 3) customer preferences and 4) infrastructure.

• CO2 regulation continues to tighten in key markets towards 75 CO2/km in EU and 55mpg in

US in 2025;

• Economies of scale, value chain integration, and design/BMS improvement are the major

drivers that support battery cost declines

• Cell manufacturers expect further declines in cell costs, reaching level of below $100/kWh

within 10 years

• Improved perceptions around styling and driving can further drive adoption of EV among

millennials

• Number of charging outlets across US and Europe are increasing; with Tesla leading the way

for establishing supercharger infrastructure in Europe.

1 Alternative technologies are fast emerging

Primary energy demand

The fuel mix remains reliant on fossil fuels but growth is stagnant

Types of alternative technologies

However, several alternative technologies are beginning to replace fossil fuel usage with Solar and EVs being key disruptors

3Beyond fossil fuels

Million terajoules

SOURCE: McKinsey analysis

1 Other includes Biomass, Geothermal and Marine

163 164

179 198

120167

143

208

185

18

22

7567

5435

2013

27 14

23

Coal

Hydro

Solar

Other

GasWind

Nuclear

2050

724

32 2038

680

1021561

2035

Oil 74%

7%

Share of total mix in 2050

NOT EXHAUSTIVE

SOURCE: McKinsey analysis

Water & Waste

Transport Buildings Industry

Generation techno-logies

Supporting infrastruc-ture & IT

Vehicle techno-logies & fuels


Building techno-logies


Industrial techno-logies


Water & waste techno-logies

PowerCO2 manage-ment

Carbon techno-logies

Solar

Onshore wind

Offshore wind

Geo-thermal

Hydro-power

Nuclear

Biomass

Storage

Smart grid (e.g., grid control techno-logy)

Smart metering

Advanced analytics (e.g., wind forecast-ing)

Demand response

EVs

Fuel cells/ hydrogen

Biofuels

CNG/LNG

Car sharing

Charging infrastruc-ture

Multi-fuel infrastruc-ture

Autonomous vehicles

Intermodal urban transport systems

Modular construc-tion

Low-carbon cement

Compres-sorless HVAC

Dynamic windows

LED lighting

Insulation

Efficient appliances

Building energy manage-mentsystems

Efficient industrial equipment (e.g., boilers, pumps)

Bio-based chemicals

Energy manage-ment systems

Water-saving techno-logies(e.g., drip irrigation)

Desalina-tion

Waste-to-biogas

Waste recycling

Carbon capture

Carbon usage

• While fossil fuels will continue to supply majority of energy demand, alternative energy sources will grow the fastest.

1 Alternative technologies are fast emerging

Global Solar PV power generation capacity has grown exponentially as costs declined

EV1 sales per country

In the countries leading in e-mobility, EV sales have shown strong continuous growth


• Installation of solar PV capacity has increased by more than 40 times in just a decade, from 4 GW in 2014 to 182 GW in 2004, clocking an impressive growth of 47% p.a

• The expansion of solar PV has been aided by ever decreasing solar energy installation costs, which has decreased by more than 4 times from 32 cents to just 7 cents.

• EV sales have grown tremendously across major countries leading in e-mobility with China emerging as leader in highest number of EV owners and the highest y-o-y rise of 120% from 2012 to 2015.

US

1171239853

Thousands

+30%

+120%

139

1859

China 13

15Netherlands 2735 23

Norway 3 302209

+74%

1615France 2311

+106%

+26%

UK 4 28143

5 203Germany 137+58%

+112%

1 Including BEV and PHEV; 2 January-September 2015; 3 January-November 2015

2012 2013 2014 2015 2012 2013 2014 2015

SOURCE: RVO; Gronnbil; MINISTÈRE DE L'ÉCOLOGIE; KBA; SMMT; Inside EVs; Greencarreports; SCB; cleantechnica

+X% CAGR, 2012-2015

182

139

101

70

4023

169754

2014

+47% p.a.

2004 2010

SOURCE: EPIA; McKinsey

78

1315

1922

2526

2830

32

2010

-14% p.a.

2004 2014

Globally installed solar PV capacity GW

LCOE, large-scale solar PV in sunbelt Fixed tilt, 1800 kWh/kWDC,USD cents/kWh

Generate ~1% of global power (ca. 250 TWh)

2 The outlook for solar

Cost of solar PV will continue to decline –example cost roadmap First Solar

Attractiveness of Solar PV as source of power will continue to increase in future.

Storage will become an important enabler of solar PV growth

• Manufacturing scale is likely to reduce Li-ion costs to as low as ~USD150/kWh storage capacity by 2020 (today ~ USD 400/kWh)

• Distributed generation becomes more competitive as storage allowsdelayed consumption

• Max. share of centralized solar PV increases as grid-scale storage increases allowing peak solar storage to be captured


4

5

7

-10% p.a.

202020172014

SOURCE: First Solar; Citigroup; McKinsey

USD cents/kWh, fixed tilt, 1800 kWh/kWDC

Break even with variable cost of gas- fired generation at 5 USD/MMBTU

The outlook for solar

Case in point

Although Saudi Arabia heavily relies on oil based generation, there is a clear business case to replace oil with solar PV


• Even for Saudi Arabia, which is the largest producer of Oil in the world, power generation by solar comes out to be cheaper than Oil

• Attractiveness of solar PV production further increases with increasing oil prices, with benefits ranging from 2X to 4X depending on oil prices.

SOURCE: McKinsey

140

80

20

40

60

120

160

180

220

200

100

0202014

35 USD2014/barrel (current opportunity cost)1

2030

Solar PV LCOE

70 USD2014/barrel1

Demand growth: 5-7% p.a.

Generation 2014, Percent

Gas

Oil60

40

USD/MWh

100% = 270 TWh

Variable cost of oil based generation

1 2% inflation assumed

Solar PVpotentialin SaudiArabia

Solar PV has potential to contribute, 50% of the country‘s electricity by 2040!

• In addition to downstream Saudi Arabia can capture value by building an upstream solar PV industry

SOURCE: McKinsey

Key assumptions: Assuming winter peak = solar PV capacity, i.e., no curtailment; gross generation in 2030: 725 TWh, in 2040: 900 TWh, cost of battery storage in 2040: 5 USD cents/kWh; battery round cycle efficiency: 85%

~2040

~2030

Share of solar PV power, Percent

25 50

Installed solar PV capacity, GW

100 275

Technology Central solar PV Central solar PV, thereof 50% with 6h battery storage

Value at stake, USD bn p.a. (baseline: oil – 70 USD2014 per barrel)

30 80

3 The outlook for EVs

Share of new car sales, 2030

55% of all new registrations in 2030 will be vehicles with electrification

EV growth drivers

4 key enablers determine the future EV landscape – with disruptive recent developments observed


Key Findings

• Up to 2030, large range of xEV ramp-ups: uncertainty regarding CO2 regulation and battery price

• In the most pro-gressive scenario, 55% of all new registrations in 2030 will be for vehicles with electrification (incl. hybrids)

• The 2030 portfolio must be designed robustly vs. possible market scenarios

14 1822 22

30 27 43 43

9076 75

56 5545

12129

45

Base case pull scenario

22

Global Strategy Analytics

BEV

Shell Study

HEV +PHEV

Break-Through push scenario

ICE

Base case push scenario

Break-through pull scenario

1

IHS Auto-motive

Study

Highest scenario = 55%electri-fication

SOURCE: Sustainable Mobility Team Analysis, IHS, Global Strategy Analytics, Shell

Current focus

US+EU+ChinaPercent

IHS Strategy Analytics

ShellMcKinsey & Company

SOURCE: McKinsey Sustainable Mobility Initiative

Regulation

Infrastructure readiness

CO2 regulation continues to tighten in key markets towards 75 CO2/km in EU and 55mpg in US in 2025; national, regional, and city gov. subsidies and non-financial incentives/penalties are evolving quickly

Fast infrastructure roll-out currently taking place across key markets, which is critical for some uptake (today buying a BEV requires a driving lifestyle change)

1

4

Technology

Battery improvements may drive prices below 200 USD/ kWh with some OEMs <150 USD/kWh by 2020, which would put A/B segments at TCO parity in some markets (e.g., US) if subsidies hold

2

Customerpreferences

EVs must change consumer perceptions to believe they are fun to drive in addition to high-tech and efficient (Tesla Model 3 may help) and car sharing fleets can also stimulate demand as they buy on TCO

3

Different scenarios will have different implications


Race towards emission milestones

When would OEMs reach 2021 EU CO2 targets if their fleet emissions continue to improve as they have done, between 2008-2014

• 40% of top auto OEM manufacturers will be able to meet their 2021 CO2 targets.

9

SOURCE: Transport and Environment Studie May 2015

2027 2026 2025 2024 2023 2022 2021 2020 2019 2018

Too late EarlierOn time

OEMs experience slight delay(on average) when meetingemission targets

95 g/km

GM

Hyundai

Honda

Fiat

Suzuki

BMW

Mazda

Volkswagen

Ford

Daimler

Renault

Toyota

PeugeotCitroen

Nissan

Volvo


Declining battery cost

Economies of scale, value chain integration, and design/BMS improvement are the major drivers that support battery cost declines

Battery cell price outlook

According to Tesla and LG Chem, xEV battery price will decrease to ~$100/kWh between 2020~2022


Major driver“Economy of scale: Gigafactory1”• Tesla expects the

Gigafactory will reduce production cost for their Electric vehicle battery packs by 30%– Its projected

capacity for 2020 is 35 GWh per year of cells as well as 50 GWh per year of battery packs

“Economy of scale and internalization of core material”• GM announced that in

2016, their contracted battery price will be $145/kWh (~50% of current price)

• LG Chem is lowering cost through raw material internalization and economies of scale

SOURCE: Company IR, Analyst report, Press search

100100150150150250250250

-7% p.a.

2219 20182010 16 1715

GMLG Chem

Tesla Panasonic

100120145145145145300

550 -13% p.a.

20 2219181716152010

1 The Tesla Gigafactory is a lithium-ion battery factory which is under construction primarily for Tesla Motors in Nevada, US

First (partial) operation of gigafactory (2017)

$/kWh

For new “Bolt (2017)” model only – GM announced the contracted cell price of $145/kWh for 2016~19; GM also said it has planned improvements to get to ~$100/kWh by 2022

Full utilization of gigafactory (2020)


Cell cost outlook

Cell manufacturers expect further declines in cell costs, reaching level of below $100/kWh within 10 years

Overall result –EVI1

summary

Thus far, no market with an existing xEV market has been able to foster a strong consumer demand ‘pull’ for its products

• Countries observed with different EV roll out patterns– Germany, China,

Japan with focus on supply side

– Norway, Netherland with focus on demand side (infra-structure roll-out first)

• Country KPIsmoving recently along the arrows indicated


SOURCE: Expert interview, SNE research, Navigant, Avicenne Energy, Berstein

123

2015 202520

125~140

-9~10%~380

~170

25070~85100~120

-10~11%

100120300

-10%

260380

N/A

-7%

150300

-13%

Bernstein

TeslaPanasonic

LG Chem

Avicenne Energy

BYD

Navigant

2015Outlook

2010Outlook

NREL (National Renewable Energy Laboratory) 230

-10%

N/A

350~400

Comments/key driving force for price decrease

“… LG's depth and breadth in materials will help improve the energy density, calendar life and cycle life. Making cells more robust will also help pack level cost reduction for thermal management and BMS electronics in the future”

– LG Chem executive

▪ Experts and insiders now believe that battery scale, design, and BMS will drive the cost down much faster than previously predicted in the next 5~10years

“Tesla is planning to source raw material to Gigafactory and make everything (core cell materials/components to final packaging) to optimize the supply and value chain”

– Tesla executive

“BYD is investing largely in new capacity and automation of new plants, and considering increasing production of NCM batteries and decreasing LFP production (cost of LFP is 1.6~1.7RMB/Wh, vs. cost of NCM is 1.5~1.6RMB/Wh)”

– BYD executive

▪ In 2010, major reports and experts claim that$200~250/kWh would be the expected cell cost for 2020

USD/kWh

3 5

3

4

5

210

2

1

04

Denmark

IrelandItaly

Portugal

Norway

Spain

Korea

UK France

Nether-lands

Germany

JapanChina

Demand side

Supply side

US

1 McKinsey Electric Vehicle Index

SOURCE: McKinsey EVI analysis

EV demand side roll-out pattern

EV supply side roll-out pattern

E-Mobility


Survey responses1

of Millennials in 2014

There is potential for greater xEV adoption among millennials, if perceptions about styling and driving are improved

Public EV charging stations across the countries

Snapshot of public charging outlets across the countries


• The US leads in terms of absolute number of public charging stations

• Norway ranks first in terms of EVs per public charging outlet by country, 2015

SOURCE: Autoguide millennial survey

22

29

14

15

14

38

12

11

918

6

7

14

17

50

12

11

6

6

22

…are reasonable”

…look nice”

…are fun to drive”

…are sporty”

…are environmentally friendly” 32

21

19

24

17

39

15

12

14

10

13

16

14

11

12

19

12

10

64

Germanyn = 1,800 responses

USAn = 2,300 responses

QUESTIONS: “Electric cars…

Agree somewhat Strongly agreeDisagree somewhatStrongly disagree

1 Neutral answers not shown

SOURCE: Press, IHS Technology, IHS Automotive DRIVEN BY Polk, CAAM, Marklines, McKinsey

7618008761,200

20,153

1,235

5,883

5,500

9,465

1,300

15,641

28,440

6,0727,189

Public EV charging outlets by country, 2015

Light vehicles per public EV charging outlet by country, 2015

4,199

6,484

1,834

22,4279,1968,651

46,00730,608

8,165

4,817

3,9062,318

1,251504

STATUS: DECEMBER 2015

EVs1 per public charging outlet by country, 2015

8.98.7

8.18.1

8.17.4

5.54.84.8

1.30.9

10.810.0

12.7

1 Cumulative new registrations October 2010-September 2015

Number

Publicly accessible charging stations in the US Charging networks

Number of locations

SOURCE: Alternative Fueling Data Center, 2016

~1,400

~3,700

~1,050

~650

~4,800

SemaCharge

All others/Un-networked

eVgo

Tesla

~700

Blink

ChargePoint

Total public stations = ~12,300Total charging outlets = ~40,000(not including private chargers)


Charging stations network across US

The US now has >12K publicly accessible charging station locations; many are part of larger subscription networks; very few fast chargers

Tesla super charging infrastructure across Europe

The Tesla Supercharger infrastructure has quickly conquered Europe


527 Supercharger stations with 2.983 Supercharger slots

Smooth ride North Cape to Lisbon

SOURCE: Company website

…currently being rolled out in EuropeThe Tesla supercharger infrastructure…

136

27

270

Tesla Super-charger120 kW

Public charging station 50 kW

Home charger11 kW

Range after 30 minutes of chargingKilometers 2016 planned

The digital opportunity in oil and gas 23

Authors

Abhishek AgrawalEngagement Manager

Amit KheraPartner

Artika ThakurSenior Research Analyst

24 The digital opportunity in oil and gas

December2016Copyright © McKinsey &Company

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Beyond fossil fuels - Welcome to Petrotech-2016 | … Papers/TS-2...such as exploration, development, production and oilfield services, transportation and refining, to wholesale and