2014.12.01 - NAEC-Strategic Foresight Workshop_Session 4_Wim Thomas

Copyright of Shell International B.V.

MODELLING AND QUALITATIVE SCENARIOS

Wim Thomas Chief Energy Advisor, Shell International BV

OECD - NAEC Seminar

Learning with Futures using Narratives and Numbers

1 December 2014

Copyright of Shell International B.V. Copyright of Shell International B.V.

DEFINITIONS AND CAUTIONARY NOTE

2

Reserves: Our use of the term “reserves” in this presentation means SEC proved oil and gas reserves.

Resources: Our use of the term “resources” in this presentation includes quantities of oil and gas not yet classified as SEC proved oil and gas reserves. Resources are consistent with the Society of Petroleum Engineers 2P and 2C definitions.

Organic: Our use of the term Organic includes SEC proved oil and gas reserves excluding changes resulting from acquisitions, divestments and year-average pricing impact.

Resources plays: our use of the term ‘resources plays’ refers to tight, shale and coal bed methane oil and gas acreage.

The companies in which Royal Dutch Shell plc directly and indirectly owns investments are separate entities. In this presentation “Shell”, “Shell group” and “Royal Dutch Shell” are sometimes used for convenience where references are made to Royal Dutch Shell plc and its subsidiaries in general. Likewise, the words “we”, “us” and “our” are also used to refer to subsidiaries in general or to those who work for them. These expressions are also used where no useful purpose is served by identifying the particular company or companies. ‘‘Subsidiaries’’, “Shell subsidiaries” and “Shell companies” as used in this presentation refer to companies in which Royal Dutch Shell either directly or indirectly has control, by having either a majority of the voting rights or the right to exercise a controlling influence. The companies in which Shell has significant influence but not control are referred to as “associated companies” or “associates” and companies in which Shell has joint control are referred to as “jointly controlled entities”. In this presentation, associates and jointly controlled entities are also referred to as “equity-accounted investments”. The term “Shell interest” is used for convenience to indicate the direct and/or indirect ownership interest held by Shell in a venture, partnership or company, after exclusion of all third-party interest.

This presentation contains forward-looking statements concerning the financial condition, results of operations and businesses of Royal Dutch Shell. All statements other than statements of historical fact are, or may be deemed to be, forward-looking statements. Forward-looking statements are statements of future expectations that are based on management’s current expectations and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in these statements. Forward-looking statements include, among other things, statements concerning the potential exposure of Royal Dutch Shell to market risks and statements expressing management’s expectations, beliefs, estimates, forecasts, projections and assumptions. These forward-looking statements are identified by their use of terms and phrases such as ‘‘anticipate’’, ‘‘believe’’, ‘‘could’’, ‘‘estimate’’, ‘‘expect’’, ‘‘intend’’, ‘‘may’’, ‘‘plan’’, ‘‘objectives’’, ‘‘outlook’’, ‘‘probably’’, ‘‘project’’, ‘‘will’’, ‘‘seek’’, ‘‘target’’, ‘‘risks’’, ‘‘goals’’, ‘‘should’’ and similar terms and phrases. There are a number of factors that could affect the future operations of Royal Dutch Shell and could cause those results to differ materially from those expressed in the forward-looking statements included in this presentation, including (without limitation): (a) price fluctuations in crude oil and natural gas; (b) changes in demand for Shell’s products; (c) currency fluctuations; (d) drilling and production results; (e) reserves estimates; (f) loss of market share and industry competition; (g) environmental and physical risks; (h) risks associated with the identification of suitable potential acquisition properties and targets, and successful negotiation and completion of such transactions; (i) the risk of doing business in developing countries and countries subject to international sanctions; (j) legislative, fiscal and regulatory developments including potential litigation and regulatory measures as a result of climate changes; (k) economic and financial market conditions in various countries and regions; (l) political risks, including the risks of expropriation and renegotiation of the terms of contracts with governmental entities, delays or advancements in the approval of projects and delays in the reimbursement for shared costs; and (m) changes in trading conditions. All forward-looking statements contained in this presentation are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. Readers should not place undue reliance on forward-looking statements. Additional factors that may affect future results are contained in Royal Dutch Shell’s 20-F for the year ended 31 December, 2013 (available at www.shell.com/investor and www.sec.gov ). These factors also should be considered by the reader. Each forward-looking statement speaks only as of the date of this presentation, 27 November, 2014. Neither Royal Dutch Shell nor any of its subsidiaries undertake any obligation to publicly update or revise any forward-looking statement as a result of new information, future events or other information. In light of these risks, results could differ materially from those stated, implied or inferred from the forward-looking statements contained in this presentation. There can be no assurance that dividend payments will match or exceed those set out in this presentation in the future, or that they will be made at all.

We use certain terms in this presentation, such as discovery potential, that the United States Securities and Exchange Commission (SEC) guidelines strictly prohibit us from including in filings with the SEC. U.S. Investors are urged to consider closely the disclosure in our Form 20-F, File No 1-32575, available on the SEC website www.sec.gov. You can also obtain this form from the SEC by calling 1-800-SEC-0330.


OVERVIEW

Success in the future depends not on the success of future decisions but on the future success of decisions taken today

Introduction

Shell’s scenario methodology

From storyline to quantification

3


WHY DO WE USE SCENARIOS?

Relevant to our business

Develop or test strategies and plans

Search for resilience

Identify threats & opportunities and develop options

Make risky decisions more transparent

Focus on the ‘near future’, i.e. strategy & policy agenda next 1-3 years NOT on scenario horizon

Ask “what if” questions, not necessarily give answers

Challenge assumptions and mental models

Enrich debate and identify ‘certainties’

?

4


LONG RISK HORIZONS

0 5 10 15 20

Years from discovery to first sales

Sakhalin II, Russia 2010

Gas Project Lead-time

5

SAKHALIN II LNG PLANT LUNSKOYA PLATFORM


OUR LEARNING TO DATE

Scenarios can help generate vision and strategy

Proper use requires ‘good’ scenarios and receptive organisation & culture

All scenarios need to be ‘focused’, plausible, recognisable, challenging and consequential

Must be underpinned by rigorous analysis and quantification

Integrate into the strategy process for flexibility in the strategic plan

Scenarios can be used for better project evaluation

BUT

Actual events often fall outside scenario range

A good “forecast” now and then helps credibility

Scenarios can be misused to justify bad judgement, strategy or timing

DO NOT FORGET

Communication, communication, communication

… after 40 years we are still learning

6



SHELL’S SCENARIO METHODOLOGY


UNDERSTANDING THE INTERACTIONS

Politics

Environment Technology

Society Economics

8


WHAT REALLY MATTERS?

Outside the Box: Things that matter and that people in the business don’t know about

Important/Impact

Inside the Box: Things that matter and that people in the business know that matter

Critical Issues

9


Surface implicit assumptions

Drivers

ELEMENTS OF SCENARIO BUILDING

Dynamics Framework

1 2 3 4

Quantification

Pre-determined ?

Uncertainties

Frames of reference

Scenarios

relevant to decisions

10

Time Horizon

Problematique Surface conflicts and dilemmas

? Dominant mental

models


VARIETY OF METHODS

Inductive

Scenario 1

Scenario 2 Scenario 3

Official future

Forecast

Alternative scenario

Incremental Normative

Vision



Deductive

Uncertainty 1

Unc

erta

inty

2

11


HOW FAR AHEAD DO WE SEE?

Event/Problem focused

Short term (2 years)

Medium term (5-15 years)

Long term (20 years)

Very long term (50 years)

Country/ business focused

Business focused

Issue focused

(September 11th) Subprime crisis

Deepwater Horizon (Your Company)

(Mobility, Cities)

(Energy systems)

Global Scenarios Long Term

Energy Scenarios

Focussed Scenarios

12


FEATURES OF A GOOD SCENARIO

Plausible

Recognisable from signals in the present

Internally consistent

Challenging

Consequential

… stories describing paths to different futures

Predictions

Projections

Preferences

X

13


SHELL’S WORLD ENERGY DEMAND MODEL

TOTAL FINAL CONSUMPTION

100 100 YEARS COUNTRIES & REGIONS

(INC. 82 COUNTRIES INDIVIDUALLY)

14 SECTORS

10 ENERGY CARRIERS

18 ENERGY SOURCES

USA

CONVERSION TECHNOLOGIES

TOTAL PRIMARY ENERGY DEMAND

ENERGY SUPPLY

REST OF EUROPE WEST OTHER HEAVY INDUSTRY SOLID HYDROCARBON FUELS OIL

CHINA REST OF EUROPE EAST OTHER AGRICULTURE & OTHER INDUSTRY

LIQUID HYDROCARBON FUELS NATURAL GAS

RUSSIA REST OF EU NEW 13 GASEOUS HYDROCARBON FUELS COAL SERVICES

PASSENGER TRANSPORT – SHIP

PASSENGER TRANSPORT – RAIL

PASSENGER TRANSPORT – ROAD

PASSENGER TRANSPORT – AIR

FREIGHT TRANSPORT – SHIP

FREIGHT TRANSPORT – RAIL

FREIGHT TRANSPORT – ROAD

FREIGHT TRANSPORT – AIR

RESIDENTIAL – HEATING & COOKING

RESIDENTIAL – LIGHTING & APPLIANCES

NON ENERGY USE

INDIA BALTIC STATES ELECTRICITY – COMMERCIAL NUCLEAR

JAPAN REST OF CENTRAL ASIA ELECTRICITY – DISTRIBUTED SOLAR PV

HYDRO-ELECTRICITY

GERMANY REST OF EAST ASIA BIO-FUELS – 1ST GEN

FRANCE REST OF SE ASIA BIO-FUELS – 2ND GEN

UNITED KINGDOM REST OF MIDDLE EAST BIOMASS – TRADITIONAL

CANADA REST OF SOUTH ASIA BIO-FUELS – MARINE

REST OF NORTH AFRICA

REST OF ARABIAN PENINSULA

REST OF AFRICA OMAN

REST OF SOUTHERN AFRICA

REST OF NORTH AMERICA

REST OF WEST AFRICA

REST OF SOUTH AMERICA

REST OF CENTRAL AMERICA & CARIBBEAN

REST OF OCEANIA

AZERBAIJAN

PERU

MOROCCO

MOZAMBIQUE

ANGOLA

ECUADOR

LUXEMBOURG

YEMEN

HYDROGEN

HEAT – COMMERCIAL

HEAT – DISTRIBUTED SOLAR THERMAL

BIOMASS – COMMERCIAL

BIOMASS – TRADITIONAL

BIOMASS – COMMERCIAL

WASTE

GEOTHERMAL – HYDROTHERMAL

GEOTHERMAL – ENGINEERED

SOLAR – PHOTOVOLTAIC

WIND

TIDAL

WAVE

14


SHELL’S OIL & GAS SUPPLY MODEL

YET TO FINDS

PRODUCTION

DEVELOPED RESERVES

UNDEVELOPED

DISCOVERED VOLUMES

15


OIL 32%

GAS 22%

COAL 28%

BIOMASS 10%

NUCLEAR 5%

RENEWABLES 3%

FUELS 82%

ELECTRICITY 18%

RESIDENTIAL 24%

INDUSTRY & SERVICES 50%

TRANSPORT 26%

Shell’s World Energy Model sees the global energy system as one integrated ‘balloon’, expanding and contracting with population and economic development. Developments in one part of the world or value chain will interact elsewhere, allowing competitive and policy forces to play out coherently throughout the system.

TODAY’S ENERGY SYSTEM SETS THE CONTEXT FOR THE FUTURE

16



FROM STORYLINE TO QUANTIFICATION


SIX KEY DRIVERS OF THE ENERGY SYSTEM

18

WE ARE ENTERING AN ERA OF VOLATILITY & TRANSITIONS

Political & social instability

Demographic transitions-urbanisation

Emerging resources Shale gas & oil

Challenged environmental boundaries

Building a ‘mini-lateral’ world

Intensified economic cycles

19

MOUNTAINS A VIEW FROM THE TOP

Concentration of power – elites drive policy

Global economic growth moderates

Nationalist world The Gas Backbone – the

global shale revolution Nuclear renaissance Renewables sluggish ‘Clean’ energy: CCS takes off

by 2030

1200

1000

800

600

400

200

0

EJ/yr

2000 2010 2020 2030 2040 2050 2060

World Total Primary Energy

Oil Biofuels Natural Gas Biomass Gasified

Coal Biomass/Waste Biomass Traditional Nuclear

Hydro Geothermal Solar Wind

20

Social stability, the long view

OCEANS A VIEW OF THE HORIZON

World Total Primary Energy

Rising aspirations drive people power

Reform unleashes market forces and economic growth

A fast adaptors, open borders world

Energy supply struggles to keep pace with demand

Unconventional gas proves disappointing outside of NA

Rise of renewables A late ‘Green’ world

Oil Biofuels Natural Gas Biomass Gasified

Coal Biomass/Waste Biomass Traditional Nuclear

Hydro Geothermal Solar Wind

EJ/yr 1200

1000

800

600

400

200

0 2000 2010 2020 2030 2040 2050 2060

21

Churn, innovation, reform

22

GLOBAL ENERGY-RELATED CO2 EMISSIONS

? Normative scenario

theoretically feasible but seemingly implausible

plausible but unfeasible?

Exploratory scenarios

OVERSHOOT, DAMAGE … REPAIR?

23

NATIONAL CONTRAST TOTAL PRIMARY ENERGY IN OCEANS USA China

Oil Natural Gas Coal

Nuclear Hydro-electricty Biofuels

Biomass/Waste Biomass Traditional Geothermal

Solar Wind Other Renewables

2000 2010 2020 2030 2040 2050 2060 0

20 40 60 80

100 120 140 160 180 200

EJ/Y

ear

(ene

rgy

Sour

ce)

2000 2010 2020 2030 2040 2050 2060 0

20 40 60 80

100 120 140 160 180 200

24

SCENARIO CONTRAST WORLD PASSENGER TRANSPORT

Mountains Oceans

Combined with the impact of higher economic development, Oceans sprawling suburbs lead to higher travel needs than Mountains compact cities

Electricity and Hydrogen Gaseous Hydrocarbon Fuels Liquid Hydrocarbon Fuels & Biofuels

2000 2010 2020 2030 2040 2050 2060 0

10,000

20,000

30,000

40,000

50,000

60,000

Billi

on v

ehic

le k

m

2000 2010 2020 2030 2040 2050 2060 0

10,000

20,000

30,000

40,000

50,000

60,000

25

SCENARIO CONTRAST OPEC AND NON-OPEC PRODUCTION

Mountains Oil, condensate & NGL production

Oceans Oil, condensate & NGL production

The effect of abundant gas and a slower growing global economy affect the call on OPEC in Mountains OPEC Non OPEC

0

10

20

30

40

50

60

2000 2010 2020 2030 2040 2050 2060 m

boe

/ da

y 0

10

20

30

40

50

60

2000 2010 2020 2030 2040 2050 2060

mbo

e /

day


Q & A



HOW DO SCENARIOS COMPARE WITH OTHERS’ OUTLOOKS?


Overall energy system balances on people’s needs, options, actions and reactions

0

200

400

600

800

1,000

1,200

2010 2015 2020 2025 2030 2035 2040 2045 2050

EJ /

yea

r

Year

Total Primary Energy - World - All Sources

Mountains

Oceans

WEO14 CP

WEO14 NP

WEO14 450

EIA13 Ref

EIA13 HighEG

XOM 2014

BP 2014

FSB Energy External Scenario Comparison Tool v3.4


We envisage the possibility of a significant different pathway for oil use

0

50

100

150

200

250

300

2010 2015 2020 2025 2030 2035 2040 2045 2050

EJ /

yea

r

Year

Total Primary Energy - World - Oil & Biofuels

Mountains

Oceans

WEO14 CP

WEO14 NP

WEO14 450

EIA13 Ref

EIA13 HighEG

XOM 2014

BP 2014



Unconventional gas could make gas the dominant fuel in the 2030s … or perhaps not if fracking is opposed outside NA

0

50

100

150

200

250

2010 2015 2020 2025 2030 2035 2040 2045 2050

EJ /

yea

r

Year

Total Primary Energy - World - Gas

Mountains

Oceans

WEO14 CP

WEO14 NP

WEO14 450

EIA13 Ref

EIA13 HighEG

XOM 2014

BP 2014



Is coal still king in future …?

0

50

100

150

200

250

300

350

2010 2015 2020 2025 2030 2035 2040 2045 2050

EJ /

yea

r

Year

Total Primary Energy - World - Coal

Mountains

Oceans

WEO14 CP

WEO14 NP

WEO14 450

EIA13 Ref

EIA13 HighEG

XOM 2014

BP 2014



… or will nuclear see a revival …?

0

10

20

30

40

50

60

70

80

90

100

2010 2015 2020 2025 2030 2035 2040 2045 2050

EJ /

yea

r

Year

Total Primary Energy - World - Nuclear

Mountains

Oceans

WEO14 CP

WEO14 NP

WEO14 450

EIA13 Ref

EIA13 HighEG

XOM 2014

BP 2014



… or is the age of Renewables upon us?

0

50

100

150

200

250

300

2010 2015 2020 2025 2030 2035 2040 2045 2050

EJ /

yea

r

Year

Total Primary Energy - World - Renewables & Biomass

Mountains

Oceans

WEO14 CP

WEO14 NP

WEO14 450

EIA13 Ref

EIA13 HighEG

XOM 2014

BP 2014



Economy & Finance

2014.12.01 - NAEC-Strategic Foresight Workshop_Session 4_Wim Thomas