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Energy Consumption - Scenario Planning

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Royal Dutch Shell lays down its vision, Sept 2017

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Energy Consumption - Scenario Planning

  1. 1. Royal Dutch Shell September 8, 2017 Royal Dutch Shell plc September 8, 2017 Shell scenarios, modelling and decision making #makethefuture
  2. 2. Royal Dutch Shell September 8, 2017 2 Cautionary note This presentation contains data from Shell’s New Lens Scenarios. The New Lens Scenarios are a part of an ongoing process used in Shell for 40 years to challenge executives’ perspectives on the future business environment. We base them on plausible assumptions and quantifications, and they are designed to stretch management to consider even events that may only be remotely possible. Scenarios, therefore, are not intended to be predictions of likely future events or outcomes and investors should not rely on them when making an investment decision with regard to Royal Dutch Shell plc securities. It is important to note that Shell’s existing portfolio has been decades in development. While we believe our portfolio is resilient under a wide range of outlooks, including the IEA’s 450 scenario, it includes assets across a spectrum of energy intensities including some with above-average intensity. While we seek to enhance our operations’ average energy intensity through both the development of new projects and divestments, we have no immediate plans to move to a net-zero emissions portfolio over our investment horizon of 10-20 years. The companies in which Royal Dutch Shell plc directly and indirectly owns investments are separate legal 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 over which Royal Dutch Shell plc either directly or indirectly has control. Entities and unincorporated arrangements over which Shell has joint control are generally referred to “joint ventures” and “joint operations” respectively. Entities over which Shell has significant influence but neither control nor joint control are referred to as “associates”. 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’’, ‘‘goals’’, ‘‘intend’’, ‘‘may’’, ‘‘objectives’’, ‘‘outlook’’, ‘‘plan’’, ‘‘probably’’, ‘‘project’’, ‘‘risks’’, “schedule”, ‘‘seek’’, ‘‘should’’, ‘‘target’’, ‘‘will’’ 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 regulatory measures addressing climate change; (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. No assurance is provided that future dividend payments will match or exceed previous dividend payments. 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 risk factors that may affect future results are contained in Royal Dutch Shell’s 20-F for the year ended December 31, 2016 (available at www.shell.com/investor and www.sec.gov ). These risk factors also expressly qualify all forward looking statements contained in this presentation and should be considered by the reader. Each forward-looking statement speaks only as of the date of this presentation, September 8, 2017. Neither Royal Dutch Shell plc 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. This presentation may contain references to Shell’s website. These references are for the readers’ convenience only. Shell is not incorporating by reference any information posted on www.shell.com. We may have used certain terms, such as resources, in this presentation that United States Securities and Exchange Commission (SEC) strictly prohibits us from including in our 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.
  3. 3. Royal Dutch Shell September 8, 2017 Georges Menane VP Investor Relations Europe Royal Dutch Shell
  4. 4. Royal Dutch Shell September 8, 2017 4 Summary Re-shaping Shell - on track  Divestments: >$25 billion completed, announced or advanced progress  Projects delivery for 2018 on track  Capital investment – discipline, efficiency and flexibility  Operational excellence and driving down costs Leader: value + influence Reducing our carbon intensity Shared value with society World-class investment case
  5. 5. Royal Dutch Shell September 8, 2017 5 Supporting Shell’s World Class Investment IR Programme  LNG Outlook  Provide information to demonstrate the robustness of our Integrated Gas cash engine  Chemicals event  Raise the appreciation and understanding of our Chemicals business  Scenarios, modelling and strategy presentation  Explain how different scenarios inform strategy Task force on climate-related financial disclosure (TCFD)  Shell supports TCFD  Ongoing engagement with taskforce  Challenges with regulatory perspective  Considering next steps  Modelling ability helps us understand qualitative risks www.shell.com/investor
  6. 6. Royal Dutch Shell September 8, 2017 Guy Outen EVP Strategy & Portfolio Royal Dutch Shell
  7. 7. Royal Dutch Shell September 8, 2017 Exploring alternative futures ▪ Energy system was complicated ▪ Energy transition and digital: major disruptors ▪ Past does not predict the future ▪ Forecasts are inappropriate ▪ Radically uncertain future ▪ Complex future: needs agility  Scenario thinking  Decision-making ▪ Scenarios are a distinctive Shell capability From complicated to complex SCENARIOS FORECAST The Present The Path The Future 7
  8. 8. Royal Dutch Shell September 8, 2017 Outcome 1 Outcome 2 Outcome 3 Outcome 4 Outcome 5 Multiple futures 8 Scenarios are neither forecasts nor plans  Scenarios are not forecasts; neither are they our business plan  Shell considers multiple, bespoke scenarios relevant to decisions  Scenarios usage ranges from evaluation of individual opportunities, to portfolio choices, to overarching strategy development Scenarios stretch our perspectives CO2 Solutions Social Networks Education LNG market Terrorism Gas Price Oil Price CO2 Cap Inter-regional tension Resource ‘wars’ Climate Change Technology 2nd Gen eBusiness Recession Russia CCS Dutch disease Surprise Surprise EU China USA Unconventional gas GCC GCC Demographics Today ASSUMPTIONS Multiple forces may push towards or pull away from the envisaged futures MACRO-RISKS & UNCERTAINTIES
  9. 9. Royal Dutch Shell September 8, 2017 9 Shell’s strategy #makethefuture Scenario thinking supports robust strategy + portfolio decision-making Winning Capabilities Aspired Future Aspired Portfolio  World-class investment case  Leader: value + influence  Reducing our carbon intensity  Shared value with society  Customer Centricity  Commercial Value Delivery  Technology Commercialisation  Project Delivery  Operational Excellence Cash Engines Future Opportunities Growth Priorities Leader: value + influence Reducing our carbon intensity Shared value with society World-class investment case
  10. 10. Royal Dutch Shell September 8, 2017 Using scenarios Recognising a range of uncertain outcomes *This is an example diagram of graphic representations that are considered by the Board. Not based on Shell’s actual portfolio.  Consider a range of plausible futures  Explore social, political + economic factors  Determine context for business environment  Model the Future World’s energy systems Future worlds  Consider existing and new energy value chains  Elements within the value chain  Assess investment attractiveness over time  Consider the Future Worlds Value chain assessment*  Explore potential future worlds  Understand potential value chain impacts Pace of demand growth Paceofnewtechnology 1 2 3 4 5 Value Chains FutureWorld 10
  11. 11. Royal Dutch Shell September 8, 2017 11 Framework for decision making in uncertainty  Build from ‘Future Worlds’ + value chain analysis  Consider “minimise maximum regret”  Make investment and portfolio decisions Strategy and aspired future Consider multiple futures in decision-focused scenarios Business environment/ value chain understanding Apply lenses to support the ‘hard’ input to decisions From individual decisions to shaping the aspired portfolio Clarity of objectives Analytic tools External environment and disruptors Decisions based on ‘hard’ and ‘soft’ inputs Multiple lenses Current portfolio Aspired portfolio Energy transition
  12. 12. Royal Dutch Shell September 8, 2017 Wim Thomas Chief Energy Adviser Royal Dutch Shell
  13. 13. Royal Dutch Shell September 8, 2017 13 Introduction How scenarios inform modelling  Scenarios explore “how the world will work” in the future, and is an essential front-end input in modelling  Different parts of the world will develop in their own ways and at different paces  Technology innovation enables new options  Resource availability can be a constraint  Deal with disruptions and non-linear relationships  Modelling helps to demonstrate the plausibility of the scenarios The future is not an extrapolation of the past Mountains/Oceans Demand Supply Resources Translating the societal- political-economic scenarios in the “So what for energy?”
  14. 14. Royal Dutch Shell September 8, 2017 14 Shell models Models underpin scenarios and strategic analysis
  15. 15. Royal Dutch Shell September 8, 2017 15 World Energy Model (WEM): Estimates global energy demand dynamically ▪ Estimates energy demand holistically ▪ Underpinned by demand, choice and supply modules ▪ Uses resource constraints, build rates and prices to balance supply and demand ▪ Covers other elements such as efficiency and learning curves, and outcomes like CO2 emissions from energy use Balances demand choices with supply 100 Years 100 Countries & Regions (Incl. 82 countries individually) 18 Energy Sources 14 Sectors 10 Energy Carriers
  16. 16. Royal Dutch Shell September 8, 2017 16 WEM: Key drivers for demand 75 specific scenario-based inputs, considered by:  Sector  Carrier  Energy source  Geography Population Economic growth Environmental pressures Technology Resource availability People’s choices
  17. 17. Royal Dutch Shell September 8, 2017 17 WEM: Energy Ladders Estimate energy service needs ▪ Different development curves by country, by sector ▪ Developing nations tend to use less energy due to more efficient technologies available now than in the past for developed nations ▪ Non-linear relationship between GDP growth and energy use ▪ Energy demand accelerates once industrialisation starts ▪ Demand growth eases as some uses approach saturation and the economy diversifies from industrial to service sector activity *UK and USA 1870 – 2016; Japan 1953 – 2016; Non-OECD1971-2016 **Logarithmic scale ▪ Looks at what energy service is needed ▪ For example heating or cooling degree days, passenger road km Primary energy/ (GJ/capita/year) GDP (PPP) capita (2010 USD)** 1,000 10,000 100,000 0 100 200 300 400 CAN USA AUSSWE KOR FRA DEU GBR JPN MYS ITA ESP BRA IND CHN The Energy Ladder 1960 – 2016* The relationship between income and energy use
  18. 18. Royal Dutch Shell September 8, 2017 18 WEM: Choice module Determining the energy mix  Acknowledges different user preferences for technologies and solutions  Choices change in response to prices, taxes, subsidies, availability, convenience, values and energy security or policy considerations  Not all choices will be based on lowest cost options  Different energy choices are not perfect substitutes  Consumers choose which energy carrier to deliver their service needs  Producers decide which primary energy sources to use to satisfy consumer demand 10 Carriers14 Sectors Industry& services Residential Freight Transport Passenger transport 14 Sectors 10 Carriers 18 Energy Sources Ship Rail Road Air Ship Rail Road Air Heating & Cooking Lighting & Appliances Heavy Other Services Non-energy ENDUSERCHOICES PRODUCERCHOICES Electricity (Centralised / Distributed Liquid Fuels Heat (Centralised/ Distributed) Gaseous Fuels Solid Fuels Biomass (Traditional/C ommercial) Hydrogen Oil Natural Gas Coal Hydro-electricity Biofuels – 1st Gen Biofuels – 2nd Gen Biofuels – Marine Biofuels – Traditional Biofuels – Commercial Waste Geothermal – Hydrothermal Geothermal – Engineered Solar – Photovoltaic Solar – Thermal Wind Tidal Wave Nuclear
  19. 19. Royal Dutch Shell September 8, 2017 19 WEM: Example outputs A myriad of different “slices” through the output data set possible These are not forecasts, but example outputs of scenarios that have been modelled Source: Shell New Lens Scenarios EJ/year (energy carrier) World: Total Final Consumption by sector: Mountains EJ/year (energy source) World: Total Primary Energy by source: Mountains EJ/year (energy source) World: Total Primary Energy: Oceans EJ/year (energy carrier) China: Total Final Consumption by source Electricity: Oceans ▪ The WEM considers the global energy system as one ▪ What happens in China reverberates throughout the rest of the world
  20. 20. Royal Dutch Shell September 8, 2017 20 WEM: Example outputs Comparing two scenarios for consumer choices of what type of energy they want to use These are not forecasts, but example outputs of scenarios that have been modelled EJ/year (energy carrier) World: Total Final Consumption – by carrier Decarbonisation and efficiency go hand-in-hand with electrification of the energy system  Mountains explores the widespread success of shale gas and strong government policy to reduce oil use in Transport and use of CCS to reduce CO2 emissions  Oceans explores a highly economically efficient world and strong uptake of Renewables to reduce CO2 emissions
  21. 21. Royal Dutch Shell September 8, 2017 21 WEM: Example outputs Comparing two scenarios for primary energy mix as a result of different policy, GDP, resources and innovation assumptions These are not forecasts, but example outputs of scenarios that have been modelled EJ/year (energy carrier) World: Total Primary Energy Of the New Lens Scenarios, Mountains’ drivers result in ‘earliest’ peak oil demand; Oceans’ drivers result in ‘latest’ peak oil supply  Mountains explores the widespread success of shale gas and strong government policy to reduce oil use in Transport and use of CCS to reduce CO2 emissions  Oceans explores a highly economically efficient world and strong uptake of Renewables to reduce CO2 emissions
  22. 22. Royal Dutch Shell September 8, 2017 22 Global Energy Resources database Essential for projecting the future energy mix  Assessment as at 2015  Oil, gas and coal expected remaining resources  Renewables annual production potential  Used for Shell scenarios  Data will be available for download Note: Figures for fossil energy and renewables are not directly comparable. The figures for fossil energy are for the stock of resources in place, whereas the renewable figures represent an annual rate of production. Sources: Oil & Gas: Wood Mackenzie, Rystad Energy, IHS, International Energy Agency, US Energy Information Administration, Canadian National Energy Board, US Geological Survey and Shell analysis; Coal: Bundesanstalt für Geowissenschaften und Rohstoffe (BGR) and Shell analysis; Renewables: Ecofys studies commissioned by Shell Comprehensive overview of all available primary and renewable energy resources per country Insights:  Sufficient renewable resources, but unequal distribution  Sufficient fossil resources for a decarbonised and efficient world, but potential for stresses otherwise
  23. 23. Royal Dutch Shell September 8, 2017 23 Global Supply Model (GSM) Estimates oil and gas production  Estimates production at resource category and country level until 2100  Each resource category develops through its own resource maturation chain  Cost of supply curves control how much resource is economic to mature at a given price  Includes an environmental footprint module Includes: ▪ Top down analysis for yet- to-find resources ▪ Bottom-up analysis for undeveloped and developed resources ▪ Depletion of existing production and ▪ Reserves growth due to technology Yet-to-finds Discovered Volumes Developed Reserves Production Undeveloped
  24. 24. Royal Dutch Shell September 8, 2017 24 GSM: Example outputs Projecting oil and gas supply by type, region and resource category These are not forecasts, but example outputs of scenarios that have been modelled Bln boe per year World: Total Oil Production (inc LPG/Condensate) Mmb/d North America: Total Oil Production (inc LPG/Condensate) TCF per year World: Total Gas Production – by gas type TCF per year Europe: Total Gas Production – by location Production varies with oil price, technology progress and (geo)political assumptions
  25. 25. Royal Dutch Shell September 8, 2017 25 Example outputs: Modelling disruption potential of Electric vehicles (EV) An aggressive EV scenario This is not a forecast, this is one example scenario Million vehicles/year Key assumptions:  Battery costs continue to decline  Regulation strengthens (e.g. ban internal combustion engine (ICE) vehicles in cities)  OEM vehicle manufacturers assumed to continue to develop ICE efficiencies Global vehicle sales Million vehicles Global vehicle fleet EV share in new sales may grow from 1% today to reach 10% by 2025, displacing less than 0.8 mboe/d Plug-in hybrid EV (PHEV) Battery EV (BEV)Internal combustion engine (ICE)
  26. 26. Royal Dutch Shell September 8, 2017 26 Example outputs: Oil demand context An aggressive EV scenario Source: Shell WEM Disruption example This is not a forecast, this is one example scenario EJ/year (energy carrier)  Passenger road transport makes up around a third of global oil use Global LHCF consumption by Sector EJ/year (energy carrier) Global LHCF consumption by Country  Oil demand has fallen in OECD since 2005  Non-OECD oil demand growth 2.5 times the impact of OECD demand decline  EV mainly impacts passenger road transport (a third of total oil demand)  ICE efficiency has a much bigger impact over this period  Overall demand continues to grow underpinned by non-OECD growth
  27. 27. Royal Dutch Shell September 8, 2017 Guy Outen EVP Strategy & Portfolio Royal Dutch Shell
  28. 28. Royal Dutch Shell September 8, 2017 28 Summary  ‘Complicated to complex’ context  Understand multiple futures to frame decision-making  Scenario thinking and holistic modelling is key  Use multiple lenses, including ‘minimise maximum regret’  Agile decision-making needed through energy transition
  29. 29. Royal Dutch Shell September 8, 2017 Materials available online www.shell.com/ scenariosenergymodels 29
  30. 30. Royal Dutch Shell September 8, 2017 Questions and Answers Guy Outen EVP Strategy & Portfolio Wim Thomas Chief Energy Adviser
  31. 31. Royal Dutch Shell September 8, 2017 Biographies
  32. 32. Royal Dutch Shell September 8, 2017 32 Guy Outen Executive Vice President Strategy & Portfolio Guy Outen was appointed Executive Vice President, Strategy & Portfolio for Royal Dutch Shell plc in 2014. Guy has worked in various commercial, new business and finance roles across all parts of Shell’s business. From 2009 to 2013 he was the EVP Commercial, New Business & LNG. LNG became part of the separate Integrated Gas business from 2013. Before 2009 Guy was EVP, EP Strategy & New Business and before that he was the Chief Financial Officer for Gas & Power, Shell Group Chief Internal Auditor, the CFO for Shell Development Australia and has also been responsible for Retail operating processes, split off and merged Shell Australia’s chemical operations into the Montell JV, worked in Crude Oil Trading and a Coal JV. Guy has an economics and commerce background, B.Com (Hons), M.Com, and is a Fellow CPA Australia. Guy is married with three sons and enjoys sport, music and motorcycling.
  33. 33. Royal Dutch Shell September 8, 2017 33 Wim Thomas Chief Energy Adviser Wim Thomas is Chief Energy Adviser and leads the Energy Analysis practice in Shell. His team is also responsible for Shell’s long-term global energy scenarios, informing Group Strategy. He has been with the Shell Group for some 33 years, with prior positions in drilling operations, subsurface reservoir management and commercial and regulatory affairs in gas. Wim is chairman of the UK national committee of the World Petroleum Council and is a former chairman of the British Institute of Energy Economics. He holds a postgraduate degree in Maritime Technology from Delft University in The Netherlands. Wim has been in his current role for the past 14 years. He advises Shell companies on a wide range of energy issues, including global supply and demand, regulations, energy policy, markets, pricing and industry structure.
  34. 34. Royal Dutch Shell September 8, 2017 Additional information
  35. 35. Royal Dutch Shell September 8, 2017 EnergyTransition 35 Board and future business environment Diverse input in Board meetings to stretch thinking and inform decision making Beliefs Uncertainties Mega Trends Macroeconomics Market Digitalisation Industry Example:  Sustained era of transition & volatility  Emerging markets drive Global GDP increases Example:  Political tensions & regional instability  Impact of digital technology Example:  Hydrocarbon demand growth + supply required  Renewables contribution increases significantly Example:  Key pricing mechanisms  Energy transitions impact Example:  Technology & scale alone insufficient Example:  Winning business models & capabilities
  36. 36. Royal Dutch Shell September 8, 2017 Shell scenarios Identifying emerging challenges to guide us through change Scenarios stretch our perspectives and help us to make crucial choices in uncertain times ‘13: New Lens Scenarios  ’14: New Lenses on Future Cities  ‘16: A Better Life with a Healthy Planet: Pathways to Net-Zero Emissions Changing sources of influence & decision making power Era of volatile energy transitions Social fragmentation & cohesion dilemmas; re- emergence of State impact ‘01: Energy Needs, Choices and Possibilities: Scenarios to 2050 ‘08: Shell energy scenarios to 2050 ‘92: Global Scenarios ‘92-’20 ‘95: Global Scenarios ‘96-’20 ‘95: Long Term Energy Scenarios ‘98: Global Scenarios ‘98-’20 ‘02: People and Connections Scenarios ‘05: Global Scenario’s to 2025 1965-1980 First scenarios Trends ‘07: Signals & Signposts Globalisation, liberalisation, technology diffusion; environmental pressures; Asian growth ‘11: Signals & Signposts Publications Internal unpublished scenarios focused on specific developments and challenges 36
  37. 37. Royal Dutch Shell September 8, 2017 WEM: Countries modelled South America Europe/Russia Africa Middle East Asia/Pacific North America Darker-coloured countries are modelled individually. Lighter-coloured countries are modelled collectively as ‘Rest of’ regions, such as ‘Rest of West Africa’.
  38. 38. Royal Dutch Shell September 8, 2017 GSM: Countries modelled South America Europe/Russia Africa Middle East Asia/Pacific North America Rest of the world
  39. 39. Royal Dutch Shell September 8, 2017

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