cost of carbon 0699PPT A. MURPHY– CLIMATE CHANGE Aidan Murphy Shell International - London Investing in a carbon constrained future. WEC Gold Medal Colloquium

cost of carbon 0699PPT A. MURPHY– CLIMATE CHANGE Why is CC important to Shell? l Group emissions 101 million tonnes (2000) l Reduction of >11% since l Shell Group Capex $62bn over past 5 years. l Carbon Constraints a material business risk: –Operations year lifetime –Markets - Product & supply chain advantage l An influence on our strategic environment A critical issue of public policy for the Group

cost of carbon 0699PPT A. MURPHY– CLIMATE CHANGE Climate Change Action Program A Compass for the Group Cost of Carbon ($) Reduce own emissions Reduce customer’s emissions Emission Trading Better business decisions Measuring Reporting Use market solutions Kyoto Mechanisms C.D.M

cost of carbon 0699PPT A. MURPHY– CLIMATE CHANGE Shell GHG emissions -11% -10% -16% baseline 2000 actual 2002 target 2003 projection million tonnes CO 2 equivalent Emissions without control measures

cost of carbon 0699PPT A. MURPHY– CLIMATE CHANGE Climate Change Action Program A Compass for the Group Cost of Carbon ($) Reduce own emissions Reduce customer’s emissions Emission Trading Better business decisions Measuring Reporting Use market solutions Kyoto Mechanisms C.D.M

cost of carbon 0699PPT A. MURPHY– CLIMATE CHANGE The Business Case l Emerging costs of Carbon l Managing the business risk l Business Preparedness –Credible management of GHG emissions –Sensitising the company to the issues. –Development of competencies (tech, mkt, ops) l Steering the Portfolio SOURCE OF FUTURE COMPETITIVE ADVANTAGE

cost of carbon 0699PPT A. MURPHY– CLIMATE CHANGE Emissions Trading Geelong, Australia NAM Netherlands Stanlow, UK Dear Park Texas Expro, North Sea Moordyk Netherlands Berre, France Norco Louisiana Cressier Switzerland Annex 1 Countries Shell Canada Pernis Netherlands Godorf Germany Harburg Germany Gothenburg Sweden Reichstett, France Fredericia Denmark

cost of carbon 0699PPT A. MURPHY– CLIMATE CHANGE STEPS Emission Abatement Supply Curve and Cumulative Investment Million tonnes CO2 $/tC (indicative) mln $ $/tC mln $ Carbon Index - figures indicative

cost of carbon 0699PPT A. MURPHY– CLIMATE CHANGE Current Range of Carbon Cost Estimates + NPV US $/tonne Carbon New build CCGT, ind. cogen. Selected En.Efficiency NAM in 2008, NAM in 2008, Recent Trades* Recent Trades* Shell Annex 1 (1st est.) UK Carbon Levy NAM today NAM today Add’l US $/ boe Coal to Gas fuel switching (existing capacity) Micro Economic Studies IPCC, World Bank Coal to wind UK Car Levy Current Quality Offsets Current Quality Offsets Macro Economic Studies OECD, API Danish Levy Norway onshore Sweden & Norway offshore Examples

cost of carbon 0699PPT A. MURPHY– CLIMATE CHANGE Specific Policy Scenarios for Carbon 1. $40/t C Constrained Annex 1 trading Limited CDM due to tough additionality tests Effective national policies 2. $20/t C Widespread permit trading CDM/JI offsets successful Clear CO2 price signals 3. $5/t C Governments only squeeze so hard (US$ 2 per barrel in carbon costs) 4. No cost for carbon No US ratification/action Kyoto replaced by patchy nati’l / regional programs US$/tC 40 – 20 – 5 – 2001 COP-6 Kyoto Rules Agreed (IPCC TAR) 2004 Implementation of National Policies 2008 Start of 1st Kyoto Commitment Period –––––––– Uncertain prices Kyoto muddles through Kyoto collapses & nothing follows Abundant low cost abatement

cost of carbon 0699PPT A. MURPHY– CLIMATE CHANGE Base Case Carbon Cost Levels for Modeling *25% lower for investments in non-Annex 1 countries COP-6 (Rules Set) US$/tC st Kyoto Commitment Period 2005 ‘Demonstrable progress’ for Annex 1 countries required EU program in place Standard Minimum levels* Expected national carbon cost levels (if known) ‘The market clears’ - Low hanging fruit gone - First technology switching options 40

cost of carbon 0699PPT A. MURPHY– CLIMATE CHANGE GHG Management Program Summary Cum.Carbon Reduction/Offset Mtpa C Project Design changes US $/tonne Carbon Early mover offset opportunities In project operational measures a,b,c eg. Alternative Energy Offsets (market price) Program Key Facts: GHG reductions: X mtpa/Y% Capex:US$mln Opex:US$mln PVCS*:+US$mln VIR*:+b.p. * Compared to business as usual Yr 0 measures Pre-2005 measures Wait & see or In reserve (if US$40 C) In project retrofits

cost of carbon 0699PPT A. MURPHY– CLIMATE CHANGE l Country risks l Project risks Project Investment Process Investment criteria l NPV l Capital efficiency l Net income l ROACE l IRR l Payback period l Valuation of follow on options l + others Project screening High grading of portfolio Projects sanctioned “Economic” projects not done Risk analysis Projects pass screening Project investment options

cost of carbon 0699PPT A. MURPHY– CLIMATE CHANGE Strategic Implications – Portfolio Effects Capital constraints & financing options: projects sanctioned “Economic” projects not done Impact of cost of carbon at the margin Project screening threshold (ROACE)