Oil prices in a 1.

5-degree world

September 2022

Trusted Intelligence woodmac.com

 Oil prices in– aAET-1.5
Introduction 1.5-degree world
scenario woodmac.com

Wood Mackenzie’s Accelerated Energy Transition 1.5-Degree scenario

Aligned with the most ambitious goal of the Paris Agreement

Global energy-related CO₂ emissions

35 Scenario Trajectory Policy Enablers

30
Energy
Consistent with Steady advancement of
Transition Evolution of
25 2.5 to 2.7 ˚C current and nascent
Outlook current policies
global warming technologies
20 (WM ETO)
Bt CO2-e

15

10 Current pledges

0
Consistent with
Aligned with Early peak energy; rapid
1.5 °C 1.5 ˚C warming
-5 most ambitious hydrogen and carbon
2000 2010 2020 2030 2040 2050
Scenario (Global net zero
goal of Paris removal deployment;
(WM AET-1.5) emissions by
Agreement consumer shift
ETO (base case) AET-1.5 (scenario) 2050)

Source: Wood Mackenzie Global Energy Transition Service 1

 Oil prices in– aAET-1.5
Introduction 1.5-degree world
scenario woodmac.com
woodmac.com

What it takes to deliver global net zero by 2050

Policy and technology scale up rapidly to deliver a net zero economy

Electricity dominates, providing 48% of the world’s energy consumption – deployment of wind and solar scales rapidly to account for 61% of a
significantly larger power market

Low-carbon hydrogen production reaches 650 Mtpa, leading to a US$475 billion per annum international traded market

CO₂
12 Bt of carbon removal capacity is in place by 2050, supported by a global carbon price of US$175/tonne. Abundant opportunities to integrate
international credits and offsets and manage price risk

The AET-1.5 scenario represents a US$60 trillion investment opportunity

Source: Wood Mackenzie Global Energy Transition Service 2

Oil prices in a 1.5-degree world woodmac.com

In AET-1.5, hydrocarbon demand declines rapidly – but emissions decline faster

Carbon capture, blue hydrogen, and chemical feedstock demand sustain hydrocarbons in a 1.5 °C world

Oil Gas Coal

-66% -26% -69%

96 94 33 3,900 4,400 2,900 6,100 3,700 1,900

Mb/d Mb/d bcm Mtce
Mb/d bcm bcm Mtce Mtce

Demand 2021 2050 2050 2021 2050 2050 2021 2050 2050
ETO AET-1.5 ETO AET-1.5 ETO AET-1.5

-77% -74% -97%

CO₂ 11.2 9.7 2.6 7.3 8.6 1.9 13.6 8.8 0.4
Bt
Bt Bt Bt Bt Bt Bt Bt Bt

Emissions 2021 2050 2050 2021 2050 2050 2021 2050 2050
ETO AET-1.5 ETO AET-1.5 ETO AET-1.5

Source: Wood Mackenzie Global Energy Transition Service Emissions shown are net emissions (incorporating CCS) 3
Oil prices in a 1.5-degree world woodmac.com

End-use demand for energy peaks by 2028, and electricity dominates the mix
Gas paired with CCS plays a role in the electricity production as a source of flexibility and dispatchable
generation – this supports global demand for gas relative to oil
Total final consumption (end-use Share of total final consumption by fuel Share of fuel inputs in electricity
demand)
14,000 100%
100%
90%

Low carbon fuels

90%
12,000

Share in electricity production

80% 80%
70% 70%
10,000

Share of TFC
60% 60%
8,000 Rapid electrification of 50% 50%
Mtoe

transport and buildings

improves efficiency vs fossil- 40% 40%
6,000 fuel incumbents
30% 30%
Building stock investment and
4,000 refurbishment lowers heating 20% 20%
and cooling requirements
10% 10%
2,000 Removal of end-user subsidies
and higher cost of carbon help
0%
0%
shift consumer behaviour 2021 2050 2050
2021 ETO (base AET-1.5
0 case), 2050 (scenario), ETO AET-1.5
2000
2005
2010
2015
2020
2025
2030
2035
2040
2045
2050

2050 Coal Oil Gas

Coal Oil Gas Bio Energy Hydro Hydrogen
ETO (base case) AET-1.5 (scenario) Bioenergy Electricity Hydrogen Nuclear Renewables
Source: Wood Mackenzie Global Energy Transition Service 4
 Oil prices in –a AET-1.5
Methodology 1.5-degree world
scenario woodmac.com

WM’s Accelerated Energy Transition 1.5-Degree scenario - Methodology

WM has developed a collection of world class models designed to be seamlessly integrated. Our
unique position in the market allows for asset level integration to develop robust scenarios.

Refinery
Global Gas Oil Supply
Supply
Model Model
Model

• The OSM allows for fast and easy analysis of
• WM’s Energy analytics environment houses
the oil market under an infinite number of
our industry leading models including oil, gas,
scenarios based on supply/demand/price
refining and coal.
fundamentals. Outputs feed both gas and
refining models.
• The RSM is a dynamic model emulating the
flexibility and interconnectedness of the global
refining system. It evaluates the economic impact
of wide-ranging scenarios quickly and
thoroughly, with full commercial implications. 5
Oil
Oil prices in a 1.5-degree world woodmac.com

AET 1.5 global demand: Drastic fall in transport fuel under a full-blown energy
transition
In this scenario, gasoline and diesel/gasoil falls below our base case by 28 million b/d for 2050
Global oil demand*, AET 1.5 vs. base case Annual demand by product vs. base case
LPG Naphtha
120 AET 1.5 Base Gasoline Jet/kerosene
Diesel/gasoil Fuel Oil
0
100 -1
-2
-3
80 -4
-5
Million b/d

-6

Million b/d
60 -7
-8
-9
40 -10
-11
-12
20 -13
-14
-15
0 -16
2025 2030 2035 2040 2045 2050

Source: History – IEA, National Statistics; Forecast – Wood Mackenzie; *Demand excludes biofuels. Base case is sourced from the latest Macro Oils short-term outlook and Macro Oils Strategic Planning 7
Outlook in March 2022.
Oil prices in a 1.5-degree world woodmac.com

In the AET 1.5 scenario, global oil supply remains steady over the next decade
before declining rapidly as oil demand falls
Global supply turns to a race to the bottom with the cheapest sources of supply dominating market share:
Middle East share is 50% and when combined with North America is 75%
Global liquids supply by region
120 World Russia and the Caspian Oceania
North America Middle East Latin America and the Caribbean
Europe Asia Africa
100
Liquids supply (Million b/d)

80

60

40

20

0
2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 2042 2044 2046 2048 2050

Source: Wood Mackenzie Oil Supply Model 8

Oil prices in a 1.5-degree world woodmac.com

While some investment is still required to satisfy demand, technical reserves and
exploration volumes play a minimal role
Low prices do not incentivise exploration or re-investment in “easy” sources of supply such as reserves growth
Global supply by development status Base Case Global supply by development status AET 1.5

120 120

100 100
Liquids capacity (Million b/d)

Liquids Supply (Million b/d)

80 80

60 60

Yet-To-find Yet-To-Find
40 Other Discoveries 40 Other Discoveries
Reserves Growth Reserves Growth
Probable Development Probable
Under Development Under Development
20 20
Onstream Onstream

0 0
2022 2027 2032 2037 2042 2047 2022 2027 2032 2037 2042 2047

Source: Wood Mackenzie 9

Oil prices in a 1.5-degree world woodmac.com

The AET- 1.5° scenario requires upstream projects to be developed over the next
decade to offset onstream declines, despite declining oil demand
But post-2035 there is very little economic incentive for new supply to be brought online
Global liquids supply by development status
2023 2024 2025 2026 2027 2028
25
2029 2030 2031 2032 2033 2034
2035 2036 2037 2038 2039 2040

20 2041 2042 2043 2044 2045 2046

Liquids Supply (Million b/d)

2047 2048 2049 2050

15

10

0
2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 2042 2044 2046 2048 2050

Source: Wood Mackenzie Oil Supply Model 10

Oil prices in a 1.5-degree world woodmac.com

Low-cost onshore projects show the most resilience to weakening demand

Reduced US Lower 48 drilling has a significant impact post-2026

Conventional crude by development status US L48 crude production by basin

80 Onshore Shallow Water Deepwater 12 Delaware Midland

Williston Gulf Coast
70 Denver-Julesburg Anadarko
10 Powder River Appalachian
Liquids Supply (MIllion b/d)

60 San Joaquin Uinta

Others

Crude (Million b/d)

8
50

40 6

30
4
20
2
10

0 0

Source: Wood Mackenzie 11

Oil prices in a 1.5-degree world woodmac.com

Post-2030, declining oil demand and prices leads to limited further investment, with
declines accelerating in high-cost locations
Lack of investment post-2030 hastens onstream declines and early cessation becomes a major factor post-
2040 as prices drop even lower
Global liquids supply by region

2
Liquids Supply Change (Million b/d)

-2

-4

-6

-8

2022-2030 2030-2050
-10
Source: Wood Mackenzie Oil Supply Model 12
Oil prices in a 1.5-degree world woodmac.com

Brent price outlook and implications

Oil prices weaken with demand, but cost of supply prevents free-fall along with fiscal budget requirements and
cost of carbon regulations
Brent price annual average in real terms Key points and implications
$120 • We used Wood Mackenzie’s Oil Supply Model to develop the price
view. Using our detailed oil supply tool, the forecast is linked to the
$100
breakeven prices of future development including reserves growth.
• On that basis, Brent averages $27/bbl for 2050 despite global oil
demand falling to 34 million b/d in 2050 from 96 million b/d in
$80 2021.
US$ per barrel

• Declines in mature basins need to be offset in a declining price

$60 environment, putting low cost onshore producers at a sustained
advantage. By 2050, the Middle East accounts for half of global
supply. Adding North America, the two regions provide a 75%
$40
share.
Base case H1 2022 • These low cost producers have a key role in maintaining supply
$20 even in an AET-1.5 scenario. OPEC producers can not set a price
2022 AET 1.5
floor for more than 1-2 years due to the steep year-on-year
declines in demand. Middle East NOCs need to continue
$0
producing oil, even as they develop alternative energy sources as
part of the energy transition.

Source: Wood Mackenzie; base case: Macro Oils Service March 2022 Strategic Planning Outlook 13
Refining
Oil prices in a 1.5-degree world woodmac.com

AET-1.5 oil demand declines by over 2 million b/d year-on-year post-2030 and almost
3 million b/d year-on-year post-2040, significantly reducing the call on refining
The composition of the demand barrel shifts from gasoline to distillates and petrochemical feedstocks
AET-1.5 demand profile for major product grades AET-1.5 demand composition by major product grades
90 100%

80 90%

70 80%

70%
60

% of total demand
60%
Million b/d

50
50%
40
40%
30
30%
20
20%
10 10%

0 0%
2020 2030 2040 2050 2020 2030 2040 2050
Fuel oil Middle distillates Gasoline LPG/naphtha Fuel oil Middle distillates Gasoline LPG/naphtha

Source: Wood Mackenzie 15

Oil prices in a 1.5-degree world woodmac.com

In AET-1.5, light crudes, condensates and NGLs become the majority of supply, with
refining runs in all regions falling sharply in this scenario
The Middle East outperforms other regions in terms of crude throughput as it remains a key crude oil producer
AET-1.5 crude supply by quality (million b/d) AET-1.5 crude throughputs by region (million b/d)

80
100

90 70

80 60
70
50

Million b/d
Million b/d

60

50 40

40 30
30
20
20
10
10

0 0
2022 2026 2030 2034 2038 2042 2046 2050 2025 2030 2035 2040 2045 2050
Heavy/Extra Heavy Medium Light/Extra Light NGL/condensate Asia Pacific Greater Europe Middle East North America

Source: Wood Mackenzie Oil Supply and Refinery Supply Models 16

Oil prices in a 1.5-degree world woodmac.com

FCC complex refineries are the worst performing “capacity type”. Hydrocracking
configurations perform best, reflecting the demand profile of the different fuels
AET-1.5 refining margins are all weaker, but FCC refiners are particularly challenged by falling gasoline demand
AET-1.5 throughput by capacity type Indicator refining margins by capacity type
(indexed to base case outlook)
$6
1.2

$5
Thgouhtput index (of base case)

1.0

$4
0.8

US$ per bbl

0.6 $3

0.4 $2

0.2 Residue upgrading FCC $1

FCC_HCK HCK
HSKIM
0.0 $0
2025 2030 2035 2040 2045 2050
DeepConversion FCC FCC_HCK HCK HSKIM

Source: Wood Mackenzie Refinery Supply Model 17

Oil prices in a 1.5-degree world woodmac.com

Heavy crude and light ends gain in value as refinery supply reduces, spare capacity
grows, and petrochemical share of demand rises
Gasoline hit hardest but demand destruction drags diesel prices down with it
Brent-Dubai differential in base and AET 1.5 AET 1.5 refined product cracks

$0.0 $10.0

-$0.5
$5.0
-$1.0

-$1.5 $0.0

US$ per bbl

US$ per bbl

-$2.0
-$5.0
-$2.5

-$3.0 -$10.0 Demand for transport fuels

As demand drops, simple refineries shut
-$3.5 down and complex share of overall
capacity gains, increasing demand for
-$4.0 heavy crude to fill now spare upgrading
units
plummets, while demand for
petrochemicals rises, lifting value
-$15.0 of feedstocks like LPG and Naphtha

-$4.5 -$20.0

AET 1.5 Base Diesel Gasoline LPG Naphtha

Source: Wood Mackenzie 18

Oil prices in a 1.5-degree world woodmac.com

AET-1.5 scenario reduces the volume of crude processed and increased competition
for ever shrinking demand flattens the slope of the margin profile chart
The “average” margin for operational sites declines by US$1/bbl for each decade post 2030 as throughputs fall
and refining capacity undergoes rationalisation (at around one to two sites each and every year)
Illustrative AET-1.5 cumulative throughput vs margin profile chart (million b/d vs gross margin)
$25

$20 2021 2030 2040 2050

$15

$10
US$ per bbl

$5

$0

-$5

-$10

-$15

-$20
0 10 20 30 40 50 60 70 80
Million b/d throughput

Source: Wood Mackenzie Refinery Supply Model 19

Oil prices in a 1.5-degree world woodmac.com

The AET-1.5 scenario is an existential threat to the global refining sector

Refiners need to transform their business model to thrive in a net zero world

• Structural declines in refined product demand results in sustained refinery rationalisation on

a global basis
• The liquid nature of crude and product trade flows mean no region is immune to the threat
of rationalisation, with FCC refiners being most at threat as gasoline is hit hardest in an
accelerated energy transition
• The value of complexity falls, as weaker, less competitive assets are rationalised and
increasingly competitive assets supply a shrinking market
• Refineries that outperform in this challenging environment are Middle East NOC operations,
as they continue to enjoy advantaged access to crude oil supplies
• Highly integrated refinery/petrochemical coastal sites and those involved in the circular
economy (such as waste/residue conversion to low carbon liquid fuels) are better placed to
adapt in this accelerated energy transition.
20
Oil prices in a 1.5-degree world woodmac.com

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