Transcript Discussion Articles for Week 2

NS4054
Fall Term 2015
Week #2 Discussion
Shell in the Arctic I
Nick Butler, “Big Oil Faces Shrinking Prospects,” Financial
Times, September 28, 2015
• Abandoned project cost around $7 billion
• Was this a problem for Shell?
• Why was Shell really in the Arctic?
• Should Shell have stayed in the Artic?
• Facts:
• In 2014 Shell replaced only 26% of its oil and gas
production
• Over the past three years just 67%
• Problem not a shortage of oil and gas – but access
• Over past decade global oil reserves rose 24% despite
ten years of growing production
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Shell in the Arctic II
• Access the problem
• Saudi Arabia, Venezuela, Mexico closed to foreign ownership
• Iraq a war zone
• Kurdistan difficult politically
• Libya civil war
• Iran – some sanctions may remain
• Shale in U.S. – not great at $50 per barrel
• Why did Shell give up in the Arctic
• Oil is there -- political uncertainty
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Shell in the Arctic III
• Oil industry may have to change its model
• Go into other types of energy
• Take lead in transition away from hydrocarbons
• New relationships with state oil companies
• If firms don’t change they are likely to decline and go out
of business.
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Stranded Assets I
Nick Butler, Climate Change and the Myth of Stranded
Assets, Financial Times, September 28, 2015
• Asks will some hydrocarbons be stranded and
undeveloped as world reduces hydrocarbon use for
climate change reasons?
• Facts -- many assets stranded
• Gas underneath Prudhoe Bay field in Alaska
• Shale oil in Paris Basin
• Costs of development – including regulatory costs in
pursuit of public policy goals may be very high
• Some cases companies trying to find ways of developing
• In others – give up and leave them behind.
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Stranded Assets II
• How many hydrocarbons will be stranded if world adjusts
to limiting hydrocarbon use to levels that assures
temperatures rise by no more than 2C?
• If concept correct
• Amount of coal, oil and natural gas that can be used is already
discovered
• Exploration would be profitless
• As are some of the resources already identified
• Rest should stay buried and cannot be valued as corporate
assets
• Why might this not happen?
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Stranded Reserves
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Stranded Assets III
• Need to look at assumptions
• 1. the use of hydrocarbons will be limited by public policy
action to keep emissions within prescribed limit
• 2. Alternative energy supplies will be available in time
and at low enough cost to enable consumers to switch
away from hydrocarbons
• 3. attempts to reduce amount of emissions generated by
use of hydrocarbons – carbon capture and storage (CSS)
– will not be viable on scale to allow continued
consumption.
• Which appear correct?
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Stranded Assets IV
• Third Assumption
• Most experts agree that CCS will not be sufficient
• No clear financial model to encourage companies to invest in
CCS
• Things may change, but for now CSS not a solution
• Second assumption
• Not clear at this time
• Low carbon energy costs are falling – other than nuclear where
they are rising
• Solar costs down dramatically
• Storage technology is also progressing but not big
breakthroughs
• At moment low carbon sources – nuclear and hydro provide less9
than 10% global energy supply
Stranded Assets V
• First assumption – limited hydrocarbon use because of
climate change
• Believes assumption completely unrealistic
• Political consensus does not exist in U.S.
• Europe has more of a consensus of support, but not sufficient to
put in place the critical policy measure – a carbon price
• China will limit coal, but hard to see coal being displaced as the
main source of energy at any point next 3 decades
• India seems committed to coal – cheap and available
• Realistically campaigns about disinvestment do nothing
• Must find a technology that is low cost and low carbon
• When that comes will leave some assets stranded or put to other
uses
• Search for that technology should be the focus.
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Egyptian Gas Development I
• Nick Butler, “Will Politics Block Development of the
Eastern Med?” Financial Times, September 20, 2015
• Facts
• ENI’s world class gas discovery off Egyptian coast – one of
world’s top 20 in size
• Confirms that Nile and Levant basins the most prospective,
underexplored areas in the world
• 83 million Egyptians short of energy
• Getting gas to shore no problem – infrastructure exists
• Beyond that – much would need to be built from scratch
• Arab Spring (2011) and aftermath have left Egypt impoverished
• Questions
• Who invests?
• Who pays?
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Egyptian Gas Development II
• Price
• Price agreed between ENI and Egyptian state gas company very
high – about double current price
• With regime still struggling for public support price looks
vulnerable on both political and economic grounds
• Second market – exports
• European market stagnant and declining as Germany replaces
gas with renewables
• Asia Pacific – long and expensive LNG trade
• Competition from Russia and Australia – East Africa
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Egyptian Gas Development III
• Foreign Investors could fund everything – power stations
desalination plants etc
• North Africa not safest place to invest
• Libya, Tunisia, and Algeria all vulnerable to spread of
Islamic terrorism
• Primary objective of terrorists is to
• Disrupt existing economic structures, and
• Deter foreign investment and foreign investors
• Egypt relatively free terrorist activity for several months
• Achieved by harsh crackdown
• Development of new field will be a terrorist target
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Egyptian Gas Development IV
• Security considerations will delaly development and add
to costs
• On stream by 2017 very optimistic
• Four or five years more realistic
• While the Levant Basin may hold a vast amount of gas
• Not really explored due to political problems
• Syria barely functioning government
• Plans to drill off Lebanon’s shore repeatedly postponed
• Lebanon and Israel have no formal diplomatic relations
• Sinai is a dangerous lawless territory
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Egyptian Gas Development V
• In almost any other part of world there would be
• a single development strategy for region
• Common infrastructure on and offshore
• Interesting to see which, if any of the companies with
necessary capability to develop deep water resources will
have the nerve to get involved.
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