The future energy landscape

Global trends and a closer look at the

Netherlands

June 2017
Presentation to Dutch Financial sector, Rotterdam

Occo Roelofsen

CONFIDENTIAL AND PROPRIETARY

Any use of this material without specific permission of McKinsey & Company
is strictly prohibited
PV auctions ~50% price drop
LCOE, USD/MWh

58.4 -50%
Lowest
winning
48.0
solar
PV bids
35.4
29.9 29.1

Jan 2015: Feb 2015: Enel Mar 2016: Enel May 2016: Aug 2016:
ACWA Masdar/FRV Solarpack
200 144 427 800 120
MW MW MW MW MW

McKinsey & Company 2

Onshore wind -45%
LCOE, USD/MWh

55 -45%
Winning 51
onshore 48
wind bids 44

37

30

2015: Neoen 2015: Various 2016: Various 2016: Various 2016: EGP/GR 2016: Various
bidders bidders, incl. bidders, Paino/ bidders
WPD incl. Enel GR Taruca
100 90 986 620 162 850
MW MW MW MW MW MW

McKinsey & Company 3

… and offshore wind tenders have dropped by over 60%
LCOE, EUR/MWh

~ 135 >60%
Offshore
wind
tenders
103
have
dropped
~60%
73
64
54
50

East Anglia Horns Rev 3 Borssele DNS Borssele Danish Kriegers

One/Neart na (Feb’15) 1+2 (Jul’16) Vesterhav 3+4 Flak (Nov ’16)
Gaoithe (Feb’15) Nord/Syd (Dec’16)
(Sep’16)

McKinsey & Company 4

And Battery costs continue to fall, faster than expected

2010 outlook 2015/2016 outlook McKinsey Base case McKinsey Breakthrough

Source of insight , Unit: $/kWh (Pack cost)

Battery price
USD/kWh 2020 estimates 2025 estimates

800 190 135

170 125-140
700
150 N/A

120 100
600
100-120 70-85

500

400

300 269

200 190
135
93
100 112

53
0
2010 15 20 25 2030
SOURCE: Expert interview, SNE research, Navigant, Avicenne Energy, Berstein McKinsey & Company 5
Investments in the energy system are shifting

Other

Oil & Gas

06-15 16-35

McKinsey & Company 6

Are we going back to the ‘normal’ levels for resource cost?
Resource expenditures as share of global GDP, Percent
Crude oil Thermal coal Copper
Natural gas Iron ore

0
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 ‘10 ‘15
McKinsey & Company 7
Economic profits in Upstream oil and gas

Economic profit per year, 1995-2015 Economic profit evolution of upstream

$Bn, per annum O&G, 1995-2015, % per annum

Quintiles 25
100

20
80

60 15

Upstream
40 Oil and 11
Gas 10

20
5
0

0
High Tech
-20 Power
Airlines Pharmaceuticals 1995 2000 05 10 2015

McKinsey & Company 8

After 4 years of bleeding cash, consensus is that the Majors will have cash
available for discretionary spending in 2017
“Committed” cash flow for Majors1,2, USD billion

Operating 190 170 179 168

138 156
117
cash flow 80

147 167 149

Capex 126 91 89 92 95

Dividends
36 38 42 39 38 39 41 43

Discretionary
6 9 22 29
spending
-36 -13 -48 -49
2012 13 14 15 16 17E 18F 2019F
1 Including Exxon, Shell, Chevron, Total and BP; 2 Cash flow from operations split in uses - capex and dividend payments which are defined as committed usages; cash flow source/ usage
excludes Acquisition/ sale, change in debt balance, equity issuance, share repurchases, other investing/ financing and forex activities; 3 Cash flow from operations, capex based on analyst
consensus, dividends are grown at 5% each year from 2016 levels
SOURCE: CapitalIQ, team analysis McKinsey & Company 9
2 SOURCES OF VALUATION GAP

However, fundamental upstream performance remains weak UPSTREAM

Breakdown of upstream returns on invested capital 2010-2016

NOPLAT margin2 Invested capital/Reserves3

$/boe $/boe

18 11.7 12.2
16 10.8
14 14 14 9.4 10.1
7.9
6.9

Post-tax ROIC1
Percent 2
1
18
17 2010 11 12 13 14 15 2016 2010 11 12 13 14 15 2016
13
11
9

Invested capital/Production2 Reserves/Production (R/P)4

2 $/boe Ratio
1

2010 11 12 13 14 15 2016 146 145 145 13.6 13.9 12.9

122
133 12.4 13.0 13.1 12.3
101
84

2010 11 12 13 14 15 2016 2010 11 12 13 14 15 2016

1 ROIC based on year end IC; based on SEC O&G reporting; Invested capital based on reported capitalised costs 2 Based on net production
3 Based on reported proved reserves 4 Based on year end reserve by production ratio
Source: Company filings; Team analysis McKinsey & Company 10
The 3 trends shaping the energy
company of the future

‘The shifting energy landscape’

1
Lower for longer for oil, gas,
2 power prices as a base case?

3 A closer look at the Netherlands

McKinsey & Company 11

Our latest outlook is lower than “base case”-like views

Primary energy demand CAGR

Index, 2014 = 100 2014-2040 Scenario

1.5 Shell Oceans

1.5 Greenpeace Reference

1.4 Shell Mountains

1.4 IEA Current Policies

1.0 IEA New Policies

1.0 ExxonMobil

0.8 McK BaU (Q4 ’16)

0.3 IEA 450

-0.1 Greenpeace Revolution

SOURCE: IEA World Energy Outlook 2015; Shell New Lens Scenarios 2013; Greenpeace Energy Outlook 2015, ExxonMobil Energy Outlook 2015 McKinsey & Company 12
We see structural shifts in fundamental energy demand drivers

Structure of GDP shifts towards The growth is becoming

Overall GDP growth is depressed services increasingly energy-efficient
G19 and Nigeria GDP CAGR; % Services as % of GDP Liters/kilometer for passenger cars

McKinsey & Company 13

BAU SCENARIO

The energy mix remains reliant on fossil fuels despite the rapid growth of
non-fossil sources
Primary energy demand by energy source Share
Million terajoules 2014 2050

17% 22%

1% 5%

82% 73%

SOURCE: McKinsey Energy Insights’ Energy Demand Intelligence, Business As Usual Scenario, 1Q2017 McKinsey & Company 14
BAU SCENARIO

Among fossil fuels, gas is a relative winner and oil demand remains resilient,
however coal use peaks around 2025
Primary energy demand by energy source CAGR
Million terajoules 2014-50

0.8%

1.9%

1.1%

Peak in global
coal use -0.2%

0.4%

SOURCE: McKinsey Energy Insights’ Energy Demand Intelligence, Business As Usual Scenario, 1Q2017 McKinsey & Company 15
BAU SCENARIO

Chemicals drive almost 60% of liquids demand growth through 2035, while
light vehicles and power demand declines
Primary liquids demand 2014 Δ > 1 mb/d Δ 0.05-0.5 mb/d Δ-0.05 - -0.1 mb/d
2035
Million barrels per day Δ 0.5 - 1 mb/d -0.05<Δ<0.05 mb/d Δ< -0.1 mb/d

Other
Middle Asia & Latin Russia North 2014-2035
China India East Africa Oceania America & CIS Europe America Total Δ
12.2
Chemicals 7.2
19.4
Other 14.7
0.6
industry 15.3
Light 25.6
-0.6
vehicles 24.9
Heavy 15.5
3.1
vehicles 18.6
5.7
Aviation 2.9
8.6
Other 5.5
0.6
transport 6.1
Residential/ 8.1
0.8
Commercial 8.9
6.1
Power -1.8
4.3
11.0 3.8 8.6 3.7 15.9 9.2 4.6 14.6 21.7 93.2
Total
16.6 8.5 9.5 5.3 17.6 10.9 5.1 12.8 19.9 105.8
2014-2035 5.6 4.6 0.9 1.6 1.6 1.7 0.5 -1.8 -1.8 12.9
Δ

SOURCE: McKinsey Energy Insights’ Energy Demand Intelligence, Business As Usual Scenario, 1Q2017 McKinsey & Company 16
BAU SCENARIO

Could peak crude demand be in sight?

Liquids demand by product
Million barrels per day

SOURCE: McKinsey Energy Insights’ Energy Demand Intelligence, Business As Usual Scenario, 1Q2017 McKinsey & Company 17
TECH DISRUPTION

The Thought experiment: technology disruption

Mobility electrifies and Energy use is optimized by The power sector is

becomes more efficient IOT and smart devices transformed by renewables

McKinsey & Company 18

TECH DISRUPTION

The assumptions in the Tech Scenario

Thought experiment assumptions

Global average efficiency improvement by Global power generation by source
Global mobility sector in 2035 % savings relative to 2014 % of total

EV adoption in 2035,
% new car sales Industry

Car-sharing in 2035, Residential

% total car fleet buildings

L4 AVs in 2035,
% new car sales

Trucks fuel
economy gain,
2014-35, % p.a.

Aviation fuel
economy gain,
2014-35, % p.a.
2035

SOURCE: McKinsey Energy Insights’ Energy Demand Intelligence McKinsey & Company 19
TECH DISRUPTION

The technology disruptions significantly reduce energy demand

Global primary energy demand by energy Global final energy consumption by end-use Global energy-related emissions
source, Million TJ sector, Million TJ Gt CO2-equivalent

3.6 ⁰C
-9%

2 ⁰C
-8%

-12%

BAU TECH BAU TECH

2013 2025 2035

SOURCE: McKinsey Energy Insights’ Energy Demand Intelligence; IEA World Energy Outlook 2015 McKinsey & Company 20
Such a scenario would accelerate peak oil (not just crude) demand

Million barrels/day

-3,3
2,2 -2,4
97,5 97,3
6,7

94,1

2015 BaU Disruption 2025 BaU Disruption 2035

due to due to
Chemicals Chemicals
and Electric and Electric
Vehicles Vehicles

McKinsey & Company 21

Technology acceleration leads to tipping point around 2025 for oil and gas

Primary
Primary energyenergy demand
demand could peak in 2025 to
as a peak by 2025
result of efficiency …peak oil by 2025…
Oil demand could peak by 2025 under a tech acceleration scenario,
improvements, changes in the transport sector, and the shift to renewables
Total primary energy demand Renewables1 Hydro Nuclear Fossil fuels
although demand would continue to grow with moderate adoption
Oil demand Non-OECD OECD
Million terajoules
Million terajoules
Moderate case scenario2 Tech acceleration scenario2

Last Modified
+0.6% p.a.
Moderate tech scenario Tech acceleration scenario

Last Modified
+1.1% p.a. -0.6% p.a.
680 +0.8% p.a.
661 +11%
640 195 196 198
612 95 600 615 606 190
85 183 184 -2%
561 77 561 577 179 179 179 176
68 19 21 69 76 85
17 33 35
58 16 30 58 16 17 101
28 28 29 18
14 14 30
27 27 18
30 103 111 116 122
91 91 99 105
106 107

Printed
500 516 524 529
488 493

Printed
462 462 473
427

89 87 84 80 89 84
77 79 73 68

2013 2020 2025 2030 2035 2013 2020 2025 2030 2035
2013 2020 2025 2030 2035 2013 2020 2025 2030 2035
1 Includes biomass and geothermal as well as solar and wind.
2 Both scenarios assume annual average global GDP growth of 2.7%.
NOTE: Numbers may not sum due to rounding.
NOTE: Numbers may not sum due to rounding.
SOURCE: Global energy perspective, McKinsey Energy Insights; McKinsey Global Institute analysis McKinsey & Company 6
SOURCE: Global energy perspective, McKinsey Energy Insights; McKinsey Global Institute analysis McKinsey & Company 7

…and even gas demand decline by 2025… …even whilst CO2 targets are not being
Natural gas demand would remain flat vs. 2013 demand under a tech In both our technology adoption scenarios, greenhouse gas emissions will
acceleration scenario, but grow rapidly under the moderate adoption case
met.
not meet international reduction targets
Greenhouse gas emissions by scenario
Global primary natural gas demand Non-OECD OECD
Gigatonnes CO2 equivalent
Million terajoules
Moderate case Tech acceleration case 450 ppm scenario1

Last Modified
Emissions continue to grow until Emissions peak in 2025 Emissions drop resulting in 450 ppm
Moderate tech scenario Tech acceleration scenario
Last Modified

2035 atmospheric CO2 by 2035

167 +39%
158
145
139 134
134 131
120 120 121 +1%
98
92
83 37 37
74 79 34 33 35
72 79 32
63 63 29

Printed
71 28
22
Printed

63 66 68
57 60 57 59 60 55 50
2015 2025 2035 2015 2025 2035 2015 2025 2035

2013 2020 2025 2030 2035 2013 2020 2025 2030 2035 1 This chart has been adapted from IEA data about the levels of CO2 from greenhouse gases required to limit global temperature in 2100 to two degrees
Celsius above pre-industrial levels. We took IEA data for 2020, 2030, and 2040 and interpolated midpoints assuming a linear trajectory.

SOURCE: McKinsey Energy Insights; World energy outlook 2016, IEA; McKinsey Global Institute analysis McKinsey & Company 9
NOTE: Numbers may not sum due to rounding.

SOURCE: Global energy perspective, McKinsey Energy Insights; McKinsey Global Institute analysis McKinsey & Company 8
McKinsey & Company 22
The 3 trends shaping the energy
company of the future

1 ‘The shifting energy landscape’

Lower for longer for oil, gas,

2 power prices as a base case?

3 A closer look at the Netherlands

McKinsey & Company 23

Recent years have been focused on survive

Decline in oil industry revenue

USD Trillion
3.2

Cost (CAPEX + OPEX) 1.0

-53%

1.5
Government take 1.6
0.8 -25%

-64%
0.6
Cash profit 0.6
0.2 -73%

2013 2016

McKinsey & Company 24

SHORT-TERM

Several oil price scenarios – Inventories1 Demand

Price recovery case example Production X Brent oil price,
USD/bbl

Global oil market balance – price recovery scenario

MMb/d What you need to believe

Market switches to
Flattened global economic growth
undersupply by Q3 2017 98.8
leads to slow down in oil demand
98.3
97.8
Lack of upstream investment
97.0 97.2 accelerates legacy declines
96.7 affecting supply stack to 2020

Cost compression of 30-40% is

partially maintained in short term

93.8 LTO production returns to strong

growth by 2020

OPEC plays a role as the

balancing actor

Existing inventories keep the

2014 2015 2016 2017 2018 2019 2020 market well-supplied and put
99 52 43 50-55 55-60 65-70 65-70 downward pressure on prices

SOURCE: Energy Insights by McKinsey McKinsey & Company 25

High drilling activity growth in LTO plays was complemented by increased
drilling and completion efficiency

North America Horizontal Rigs North America LTO Production

# of rigs Mb/d New production from efficiency gains
1,196 New production from rig count increase
951 1,001
Production from existing wells
658 82%
xx p.a. growth, Mb/d

3.94

2011 12 13 14 2.95

New Production per Rig 264%

2.00
Kb/d1 per rig, annual average

2.1 2.2 1.08

1.6
1.2 82%

2011 12 13 14
2011 12 13 2014 0.9 0.95 1.0

1 Rig productivity includes two factors: rig efficiency as number of wells per year per rig, and well productivity as production per well
SOURCE: Baker Hughes, Energy Insights McKinsey & Company 26
Following near term growth, we expect US LTO production to remain
economically competitive, but plateau due to resource constraints
US light tight oil production outlook
MMb/d PRICE RECOVERY

Longer-term plateau in LTO production

Near-term recovery
and growth

Forecast


1 LTO is projected to remain competitive in the global supply curve through 2030…

2 …However, production is likely to plateau post 2021 as Eagle Ford and Bakken resource
becomes constrained

SOURCE: Energy Insights, NavPort McKinsey & Company 27

The 3 trends shaping the energy
company of the future

‘The shifting energy landscape’

1
Lower for longer for oil, gas,
2 power prices as a base case?

3 A closer look at the Netherlands

McKinsey & Company 28

To achieve EU 2050 ambition of GHG emission reduction of 80 percent, the
Netherlands would need to accelerate with factor 3

CO2 equivalent emission, % change as of 1990

110
-16% -20% -40% -60% -80%
100
90 224 0.7%./yr 196
187
80
179
70 134
60
50 87
2%/yr = 3x
40
30
45
20
10 11
0
1990 2000 2010 ‘14‘15 2020 2030 2040 2050

SOURCE: CBS 29
Until now, most of the GHG emission reduction was realized through
reductions in non-CO2 emissions
Emissions from (industrial) processes 2014
Reduction 1990-2014
CO2 equivalent emission, MTon

CH4 14 33 43%

N2O 10 18 56%

HFK/PFK/
8 10 75%
SF6

CO2 149 14 163 9%

Focus today

SOURCE: CBS – Emissieregistratie (1990 – 2014) 30

Our current energy system

CO2 emissions, 2014, CO2e, MTon

Renewables
Power &
Heat

Gas

Oil

Coal
Nuclear
Industrial Residential & Trans- Power sector
energy use commercial port Agri,
Fishing,
& other

37 22 30 9 51 149 Mton

SOURCE: Centraal Bureau voor de Statistiek (2014), “Energiebalans” and “Energieverbruik” databases 31
An investment of ~ EUR 135 billion is required to decrease and decarbonize
the energy demand of the Dutch economy towards 2040
Energy demand by energy Magnitude of investment,
carrier, PJ Scale of measure - assumptions EUR billions

438
Light duty vehicles
Hydrogen -40% ▪ By 2040, 50% of the vehicle fleet reaches zero CO2
Electricity emissions
260
Transport
Biofuel ▪ Conventional ICE vehicles are replaced at end of life 30
LPG ▪ All vehicles will be BEV except trucks, which will
switch to hydrogen
Liquids
▪ Efficiency improvements of ~1% p.a.1
Busses Trucks Ships
Current 2040

688 ▪ All houses and services buildings are insulated

-35% to at least Label B Insulation
Other
Biogas ▪ Half of the current building stock and all of new built
Electricity 455
Residential Heat switches to a low carbon energy source
&
pumps ▪ Electricity becomes the principle heating source 85
Geo- (54%), followed by (geothermal) district heating
Commercial Gas thermal/DH (28%), and biogas (18%)
▪ Cooking becomes electric for 82% of the houses that
switch heating source Fuel switch
Current 2040 ▪ Efficiency improvements of ~1% p.a.1
RES
840 -20%
Other
Electricity 675 ▪ 50% of gas furnaces and boilers replaced by electric
furnaces and boilers
Gas
Industry ▪ 50% of steel production capacity (one Blast Furnace) 20
Oil decarbonized
Coal ▪ Efficiency improvements of ~1% p.a.1

Current 2040

1 Efficiency improvements only affect share of energy use (and thus CO 2 emissions) that are not impacted by other measures
Power sector: “80% renewable power supply” by 2040 would be needed
illustrative scenario, other choices also possible

Wind ~11 thousand turbines1

62% of ▪ 6% of Dutch North Sea
production

Solar ~63 million solar panels2

12% of ▪ Third of current roof area
production

Biomass 8,500 kton dry biomass3

8% ▪ Conversion of existing coal
plants to biomass

Flexibility
▪ As illustration, 5 GW of
(seasonal) storage
measures

Other choices would also be

possible, e.g. with larger role
for (coal/gas) CCS, imports
1 45% capacity factor, turbines of 3 GW 2 1.65 m2 per solar panel, 235 kW 3 17 MJ/kg biomass, 2 ktons/km2 33
In 2014 the energy system is largely dependent on fossil fuels

Netherlands energy demand in 2014; flow between energy sources and sectors, PJ
Energy sources Sectors

Natural gas Transport

1,114 438

Oil Residential
709 373

Coal Commercial
377 315

Renew- Industry
ables1 840
136
Other Agriculture,
77 fishing & other
160
Electricity
(net import)
53 Power sector2
343 (net)

1 Includes: hydro, geothermal, solar, wind, and biomass

2 Only includes net use for central power production (320 PJ) and transmission and distribution losses (23 PJ); energy sector own use (e.g., oil consumption in refining is included in industry)
Source: Centraal Bureau voor de Statistiek (2014), “Energiebalans” and “Energieverbruik” databases 34
In 2040,the energy system would look and function very differently

Netherlands energy demand in 2040; flow between energy sources and sectors, PJ
Energy sources Sectors

Natural gas Transport

Oil Residential

Coal Commercial

Renew- Industry
ables1

Other Agriculture,
fishing & other
Electricity
(net import)
Power sector2

1 Includes: hydro, geothermal, solar, wind, biomass, and hydrogen

2 Includes net biomass use (94 PJ), gas use (111 PJ) and own use and transmission and distribution losses
Source: Centraal Bureau voor de Statistiek (2014), “Energiebalans” and “Energieverbruik” databases 35
An annual investment of ~EUR 10 billion would be needed to move towards
a 60% CO2 reduction by 2040
Indicative net investment need, EUR billions, 2020 to 2040

~10 EUR billion/

20 200 year or ~3%
of annual
45 budget

20 135

85

30

Transport Residential Industry Estimate RES build Network Total

and investment out (excluding and additional
Commercial need to adjust grid) connection investment
demand costs

Demand System and Generation

McKinsey & Company 36

What could be new economic ‘sectors’ for the Netherlands?

‘New’ transport – Novel solutions to improve urban transport

Sustainable building heating – Climate control systems and

residential energy management

Heavy industry transformation and CCS/U – Alternative feedstock

configurations with innovative processes and technologies

Offshore wind – programmatic wind build out capturing benefits

of scale

Integrating renewables with the energy system- Integrating

renewables (conversion – storage – transport)

37
Potential job creation: the long-term impact comes from new sectors

“Realization of new
sectors”

Operations
and maintenance
>20,000 jobs2

Installation
>45,000 jobs1

2020 >2050

McKinsey & Company 38