Business in the Energy Transition Presentation to 2017 Alberta Climate Summit 28 September 2017
Key take-aways for today 1 2 3 4 5 Structural deceleration in energy demand growth as population ages; Non-OECD countries drive all the growth Electrification continues to expand as renewables start to outcompete fossil fuels Peak oil demand may be in sight. What will happen to gas demand? Despite high renewables growth, the world (and Canada) are not on pace to achieve emission reduction targets Significant opportunities for innovation driven productivity gains ahead defining the new basis for competition 2
Primary energy demand Index, 2014 = 100 155 CAGR 2014-2040 1.4 BP 2016 150 1.2 BP 2017 145 140 135 130 125 120 115 1.1 1.0 1.0 0.9 0.8 IEA NPS 2014 IEA NPS 2016 ExxonMobil 2015 ExxonMobil 2017 McKinsey GEP BaU 2016/17 110 105 100 0.3 IEA 450-0.1 Greenpeace Revolution Climate protection scenarios 95 2010 2020 2030 2040 SOURCE: McKinsey Energy Insights Global Energy Perspective, July 2017 35
All energy demand growth comes from non-oecd markets, OECD demand declines Primary energy demand Million terajoules x% Share of total energy demand growth 2014 566 2035 683 North America -3 North America 2 Europe -4 Europe -2 Other OECD 0 Other OECD 0 Non-OECD 125 Non-OECD 67 India 37 India 21 China 23 China 4 Africa 23 107% Africa 18 100% Middle East 6 Middle East 3 Other 35 Other 21 2035 683 2050 749 SOURCE: McKinsey Energy Insights Global Energy Perspective, July 2017 4
Despite strong growth in renewables through the period to 2050, the global energy system remains reliant on oil, coal, and natural gas Global primary energy demand 1 by fuel Million TJ CAGR 2 2014-50 Share 2013 2050 557 607 638 662 682 707 733 761 Total 0.9% Other 3 4.9% 0% 2% Solar Wind Bioenergy 7.8% 6.1% 0.9% 0% 1% 9% 4% 4% 9% Hydro 1.8% 2% 3% Nuclear 1.2% 5% 6% Coal 0.2% 28% 22% Gas 0.7% 21% 20% Oil 0.6% 32% 29% 2014 20 25 30 35 40 45 2050 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 SOURCE: Generated by McKinsey Energy Insights Global Energy Perspectives Model for CPPIB, September 2017 5
Power, industrials, and chemicals are main drivers of growth Primary energy demand, Million terajoules CAGR 2014-50, % 749 0.8 683 81 Other transport 1.0 566 56 49 37 74 48 51 142 42 60 157 Light vehicles Chemicals Industry -0.4 1.4 0.6 129 88 93 Buildings 0.3 82 212 279 316 Electric Power 1.1 2014 SOURCE: McKinsey Energy Insights Global Energy Perspective, July 2017 2035 2050 6
Global demand for electric power will almost double by 2050 as electrification continues to spread Final energy demand Million terajoules 543 CAGR 2014-50 Electricity demand Million terajoules 18 141 487 17 14% India 402 0.6% 34 24% China Other Electricity 397 325 72 377 111 141 1.9% 72 8% Africa 5% 24% 3% ROW Electricity in final energy demand 2014 2035 2050 18% 26% 2014 Buildings Industry Transport 2050 SOURCE: McKinsey Energy Insights Global Energy Perspective, July 2017 7
A cleaner, more diverse power mix evolves in the longer-term as a result of increasing renewables penetration Global electric power generation 1 by source Thousand TWh CAGR 2 2014-50 Share 2013 2050 48 Total 2.1% 44 Other 3 3.8% 2% 4% 39 Solar 9.7% 1% 16% 32 35 Wind 6.1% 4% 16% 28 23 25 Hydro 1.8% 16% 14% Nuclear 1.4% 12% 9% Coal 4 0.3% 40% 21% 2013 20 25 30 35 40 45 2050 Gas 1.6% 24% 20% 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 SOURCE: Generated by McKinsey Energy Insights Global Energy Perspectives Model for CPPIB, September 2017 8
However, electricity demand in the developed world will be nearly flat, driven by accelerated DG and EE adoption Example retail sales load forecast, Canada % of 2015 actual retail sales 133.9 3.1 1 24.3 1 Electrification of vehicles drives slight increase in demand, but the increase is offset by the combined effects of EE and DG 100.0 33.9 2 5.6 3 107.0 6.0 4.3 96.7 2 Energy efficient technologies such as LED lights, highefficiency air conditioners, and smart thermostats drive a significant decline in electricity demand 2015 Economic growth 2030 (frozen tech) EV demand EE uptake DG uptake Expected case 2030 EE uptake DG uptake 2030 Aggressive uptake case 3 Distributed generation of electricity (e.g., solar panels for residential use) further decrease daily demand on the grid Effective CAGR %, 2015 2030 2.0% 0.2% -0.5% SOURCE: McKinsey PowerIQ electricity demand model 9
Decreasing costs of solar plus battery storage will soon make load defection economically sound in many markets Levelized cost of customersited energy Cost of avoided electricity 35 30 25 20 15 10 5 0 Full grid defection 1 scenario Cents/kWh 2018 20 22 24 26 28 2030 35 30 25 20 15 10 5 0 Partial (90%) grid defection scenario Cents/kWh 2018 20 22 24 26 28 2030 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 electricpower system) not economical today, but at current rates of cost declines, it will make sense sooner than many utilities expect 1 Grid-defection-economics estimates are based on Arizona residential customer. Full grid defection includes diesel generator backup. SOURCE: McKinsey DER valuation tool and analysis 10
Liquids demand grows through 2037, driven by chemicals and aviation Primary liquids demand; Million barrels/day Chemicals Other industry Light vehicles Heavy vehicles Aviation China India Middle East Africa Other Asia & Oceania Latin America 2016 Δ > 1 mb/d Δ 0.05-0.5 mb/d 2035 Δ 0.5-1 mb/d -0.05<Δ<0.05 mb/d Russia & CIS Europe North America Total 12.7 19.4 14.6 15.3 30.7 32.4 12.9 12.9 6.0 8.6 Δ-0.05 - -0.1 mb/d Δ< -0.1 mb/d 2016-35 Δ 6.7 0.7 1.7 0 2.7 Other transport 5.6 6.1 0.5 Residential/ Commercial 8.2 8.9 0.7 Power 6.0 4.3-1.7 Total 11.6 15.5 4.2 7.1 8.6 9.8 3.9 5.6 16.7 17.6 9.4 11.1 4.7 5.3 15.0 13.3 22.4 22.3 96.6 108.1 2016-35 Δ 3.9 2.9 1.2 1.7 0.9 1.7 0.6-1.7-0.1 11.2 SOURCE: McKinsey Energy Insights Global Energy Perspective, July 2017 11
At this point global liquid demand is expected to peak, driven by electrification of the transport sector Global oil demand, Million barrels per day 97 0.1% p.a. -0.3% p.a. 0.7% p.a. 107 108 105 108 107 105 101 2.4% p.a. 1.7% p.a. 1.4% p.a. Chemicals Power Buildings Industry (excl. chemicals) Other transport 0.5% p.a. -0.9% p.a. -2.1% p.a. Road transport 2016 20 25 30 35 40 45 2050 SOURCE: McKinsey Energy Insights Global Energy Perspective, July 2017 12
Ride sharing and autonomous operations compound with electrification to accelerate mobility disruptions Majority of the trends impacting the future of mobility will also radically change the oil and gas industry SOURCE: McKinsey Infrastructure 3 Vehicle Electrification Autonomous driving 1 Increasing shared mobility increases utilization, accelerating electrification, 2 Self-driving functionality accelerates sharing 3 Self-driving electric vehicles offer lower TCO 4 An uptake in shared mobility reduces public transit 1 2 Shared mobility 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 8 Self-driving vehicles accelerate the uptake of IoT applications 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 oilrelated products (e.g., lubricants) from vehicles New competition and cooperation with new players entering the market Shifting markets and revenue pools 13
In oil, several additional disruptors could lead to an even earlier peak Impact on global liquids demand mb/d 110 108 106 104 102 100 98 96 94 2016 Peak in 2037 Peak in 2027 20 25 30 35 2037 BAU 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) 2016 2035 7 0 1 0 25 9 5 0 66 35 49 32 Disruption Base case SOURCE: McKinsey Energy Insights Global Energy Perspective, July 2017 14
In gas, the debate is whether emerging disruptions offset demand growth by 2030 Gas demand Bcm What clients believe 2016 3,503 Power 353 +21% More aggressive renewables uptake Industry 244 Buildings 53 Other 2030 BaU 4,222 69 Disruptive heat electrification Power 166 Industry 347 Buildings 2030 disrupted 3,623 86 Faster increase in heat pump penetration +3% SOURCE: McKinsey Energy Insights Global Energy Perspective, July 2017 15
Energy-related CO 2 emissions reach a peak around 2035 Global energy-related CO 2 emissions 1, Gigatonnes CO 2 -equivalent +14% Peaks 1 Does not include any CCS assumptions 2 Includes emissions from oil and gas extraction, mining and other energy sector own uses SOURCE: McKinsey Global Energy Perspective 16
However, even with the high renewables growth, emissions will miss current targets by a wide margin Greenhouse gas emissions by scenario; Gigatonnes CO2 equivalent Business-as-Usual scenario Emissions continue to grow until 2035 Tech disruptor case Emissions peak in 2025 Emissions in line with 2 degree scenario (IEA 450) 34 36 38 34 35 29 2015 25 2035 2015 25 2035 SOURCE: McKinsey Energy Insights; World energy outlook 2016, IEA; McKinsey Global Institute analysis 17
Canada, too, is not on track to meet 2030 emissions targets Megatonnes of carbon dioxide equivalent 850 800 750 Scenario Reference High Low 790 742 700 697 650 600 550 Target: 523 Mt 500 2005 2010 2015 2020 2025 2030 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 SOURCE: Environment and Climate Change Canada 18
Addressing Greenhouse Gas Emissions Requires Broad Innovation, Creating Opportunities for Canada The 4 basic transition strategies Major Opportunities for Innovation 1 2 Decarbonization of power Decarbonization of Transportation Countryspecific 3 transition path-ways 4 Transition to low carbon energy systems providing energy access for all 1 2 Carbon Capture, Use and Sequestration Industrial Heat Exporting 3 Innovation 4 Energy efficiency Land Use Building Efficiency Methane Management 19
Many initiatives have been launched already to reduce GHG emissions Business-led innovations Recent innovations 1 SaskPower: world s first commercial-scale Carbon Capture and Storage (CCS) unit at a coal-fired power plant, reducing its emissions by 90% 2 Shell Canada s Quest facility captures and stores one million tons of CO2 underground per year 3 Paraffinic Froth Treatment (PFT) improves the quality of bitumen from mining operations and allows for a 6% reduction of GHG emissions 4 Imperial Oil has replaced steam for in-situ oil sand productions by injecting solvents under high pressure but at much lower temperatures 5 Suncor began testing melting bitumen with microwaves in 2014 New initiatives 1 Direct-contact steam generation (DCSG) project, backed by COSIA, could reduce water requirements and production of pure CO2 2 Alberta Carbon Trunk line, developed by Enhance Energy, will transport 15mm tons of CO2 per year to EOR (Enhanced Oil Recovery) sites 3 Vancouver-based Inventys Thermal Technologies will deploy a low cost CCS technology at Husky s Pikes Peak South Lloyd thermal project Federal support for Clean Growth going forward 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 SOURCE: Natural Resources Canada, Alberta oil magazine, The Economist 20
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 21
At the end of the day, energy productivity and the share of zero-carbon energy will define system change Global primary energy demand, 2012-2050 1 or more ~ 2 C Well below 2 C Increase in share of zerocarbon 1 energy % points p.a. < 1 Well above 2 C INDCs: 2013-2030 ~ 2 C Historical: 1980-2014 < 3 3 or more Improvement in energy productivity % p.a. 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 22
Key take-aways for today 1 2 3 4 5 Structural deceleration in energy demand growth as population ages; Non-OECD countries drive all the growth Electrification continues to expand as renewables start to outcompete fossil fuels Peak oil demand may be in sight. What will happen to gas demand? Despite high renewables growth, the world (and Canada) are not on pace to achieve emission reduction targets Significant opportunities for innovation driven productivity gains ahead defining the new basis for competition 23