An Exciting Energy Future:

Innovation, Access, and Sustainability

March 2018

CONFIDENTIAL AND PROPRIETARY

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Key take-aways for today
Structural deceleration in energy demand growth as
1 population ages; Non-OECD countries drive all the growth

Electrification continues to expand as renewables, storage,

2 and demand side measures start to outcompete coal and gas

Peak oil demand may be in sight with energy efficiency,

3 sharing, and electrification even as supply growth accelerates
Despite renewables growth and transportation
4 electrification, the world is not on pace to achieve emission
reduction targets
Significant opportunities for innovation driven productivity
5 gains ahead—defining the new basis for competition
2
 Primary energy demand
Index, 2014 = 100
CAGR
2014-2040

155 1.4 BP 2016

150 1.2 BP 2017

145 1.1 IEA NPS 2014

1.0 IEA NPS 2016

140
1.0 ExxonMobil 2015
135
0.9 ExxonMobil 2017
130
McKinsey GEP
125 0.8 BaU 2016/17
120

115

110 0.3 IEA 450

Climate
105 protection
Greenpeace scenarios
100 -0.1 Revolution

95
2010 2020 2030 2040

SOURCE: McKinsey Energy Insights’ Global Energy Perspective, July 2017 3 5

All energy demand growth comes from non-OECD markets, x% Share of total energy
demand growth

OECD demand declines

Primary energy demand
Million terajoules

2014 566 2035 683

North America -3 North America 2

Europe -4 Europe -2

Other OECD 0 Other OECD 0

Non-OECD 125 Non-OECD 67

India 37 India 21

China 23 China 4

Africa 23 107% Africa 18 100%

Middle East 6 Middle East 3

Other 35 Other 21

2035 683 2050 749

SOURCE: McKinsey Energy Insights’ Global Energy Perspective, July 2017 4

Global demand for electric power will almost double by 2050 as
electrification continues to spread
Final energy demand CAGR Electricity demand
Million terajoules 2014-50 Million terajoules
543
18 141

487 17 14% India

402 0.6% 34
24% China
397 377
72 8% Africa
5%
Other 325
24%
3%
141 ROW
111 1.9%
Electricity 72

2014 2035 2050

Electricity in 2014 Buildings Industry Transport 2050
final energy 18% 26%
demand

SOURCE: McKinsey Energy Insights’ Global Energy Perspective, July 2017 5

A cleaner, more diverse power mix evolves in the longer-term as a result of
increasing renewables penetration
CAGR2
Global electric power generation1 by source 2014- Share
Thousand TWh 50 2013 2050
48
Total 2.1%
44 Other3 3.8% 2% 4%
39 Solar 9.7% 1% 16%
35
32 Wind 6.1% 4% 16%

28
25
23 Hydro 1.8% 16% 14%

Nuclear 1.4% 12% 9%

Coal4 0.3% 40% 21%

Gas 1.6% 24% 20%

2013 20 25 30 35 40 45 2050

1 Power generation is projected on the basis of policy plans, expert views and third-party sources. It is not driven by explicit assumptions about the economics of different sources 2
Compound annual growth rate (average) 3 Includes oil, bioenergy, geothermal and marine 4 Assumes no breakthrough in carbon capture and storage
SOURCE: Generated by McKinsey Energy Insights’ Global Energy Perspectives Model for CPPIB, September 2017 6
DECARBONIZATION OF POWER

Integration of increasing renewables will present an additional cost; flexibility

solutions are needed
Simulation for Germany 2050, in GW RES production Load

Curtailed periods of oversupply

200
Periods of deficits

150

100

50

0
Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar

Load demand in winter is higher while RES production is lower

Source: EC 2050 scenario, McKinsey analysis 7
DECARBONIZATION OF POWER

Local aggregation of distributed resources can provide additional value

Distributed vs. Value to the system
aggregated resources
System-view value of distributed resources
$k
Distributed
857 303
1,654
Increased value from
-494
aggregation:
Avoided Avoided Ancillary Deferral Annual System ▪ Ability to match
system peaks
vs gen capacity services oppty system benefit2
▪ Ability to participate
10 MW solar revenue costs
PV + 1MW / in additional markets
2MWh of System-view value of aggregated resources1 ▪ Economies of scale
Aggregated stationary $k providing lower
storage upfront costs
216
857 97
328 1,120

378
Avoided Avoided Ancillary Deferral Annual System
gen capacity services oppty system benefit3
revenue costs

1 Aggregated PV on single-axis trackers (CF increase from 16% to 20%); Economies of scale reduce PV install cost from 1.56/W to $1.10/W, storage BOS from $550/kW to $500/W 2 Utility lost revenue in distributed case = ~$3mn
3 Simple annual return ~25% for aggregated resources
8
SOURCE: MISO, Team analysis
However, electricity demand in the developed world will be nearly flat, driven
by accelerated DG and EE adoption
Example retail sales load forecast, Canada
% of 2015 actual retail sales

1 Electrification of vehicles drives

133.9 3.1 slight increase in demand,
but the increase is offset by the
1 combined effects of EE and
24.3 DG

33.9 2 Energy efficient technologies

such as LED lights, high-
5.6 107.0 efficiency air conditioners,
2 and smart thermostats drive
6.0
100.0 3 a significant decline in
4.3 96.7 electricity demand

3 Distributed generation of
electricity (e.g., solar panels
2015 Economic 2030 EV EE DG 2030 EE DG 2030 for residential use) further
growth (frozen demand uptake uptake uptake uptake decrease daily demand on the
tech) grid
Expected case Aggressive uptake case

Effective CAGR
2.0% 0.2% -0.5%
%, 2015 – 2030

SOURCE: McKinsey PowerIQ electricity demand model 9

 Decreasing costs of solar plus battery storage will soon make load defection
economically sound in many markets Levelized cost of customer-
sited energy
Cost of avoided electricity

Full grid defection1 scenario Partial (90%) grid defection scenario

Cents/kWh Cents/kWh ▪ Partial grid defection
(generating ~90% of own
electricity using solar
35 35
+storage) is already
30 30 beginning to play out in
sunny areas with high
25 25 electricity costs (e.g.
Australia, Hawaii)
20 20
▪ Full grid defection
15 15 (completely disconnecting
from the centralized electric-
10 10
power system) not
5 5 economical today, but at
current rates of cost
0 0 declines, it will make sense
2018 20 22 24 26 28 2030 2018 20 22 24 26 28 2030 sooner than many utilities
expect

1 Grid-defection-economics estimates are based on Arizona residential customer. Full grid defection includes diesel generator backup.
SOURCE: McKinsey DER valuation tool and analysis
10
Liquids demand grows through 2037, driven by chemicals and aviation
Primary liquids demand; Million barrels/day 2016 Δ > 1 mb/d Δ 0.05-0.5 mb/d Δ-0.05 - -0.1 mb/d
2035 Δ 0.5 - 1 mb/d -0.05<Δ<0.05 mb/d Δ< -0.1 mb/d
Other
Middle Asia & Latin Russia North
China India East Africa Oceania America & CIS Europe America Total 2016-35 Δ
12.7
Chemicals 6.7
19.4
14.6
Other industry 0.7
15.3
30.7
Light vehicles 1.7
32.4
12.9
Heavy vehicles 0
12.9
6.0
Aviation 2.7
8.6
5.6
Other transport 0.5
6.1
Residential/ 8.2
0.7
Commercial 8.9
6.0
Power -1.7
4.3
11.6 4.2 8.6 3.9 16.7 9.4 4.7 15.0 22.4 96.6
Total
15.5 7.1 9.8 5.6 17.6 11.1 5.3 13.3 22.3 108.1
2016-35 Δ 3.9 2.9 1.2 1.7 0.9 1.7 0.6 -1.7 -0.1 11.2

SOURCE: McKinsey Energy Insights’ Global Energy Perspective, July 2017 11

Ride sharing and autonomous operations compound with
electrification to accelerate mobility disruptions …will also radically change
Majority of the trends impacting the future of mobility… the oil and gas industry

Autonomous
Autonomous
Infrastructure
driving
driving
 Changes in mobility
behavior

3 2
 Connectivity and
optimization will lower
fuel demand
Vehicle Shared
Electrification 1 mobility  Uptake of electric
vehicles and continuous
improvement of ICE
technology will lower
demand for oil and oil-
1 Increasing shared mobility increases 5 Electric vehicles at scale accelerate related products (e.g.,
utilization, accelerating electrification, battery cost reductions lubricants) from vehicles
6 Self-driving electric vehicles have  New competition and
2 Self-driving functionality accelerates advantaged infrastructure cooperation with new
sharing players entering the
3 Self-driving electric vehicles offer lower 7 Increasing renewable penetration market
TCO generation make electric vehicles
more attractive    Shifting markets and
revenue pools
4 An uptake in shared mobility reduces 8 Self-driving vehicles accelerate the
public transit uptake of IoT applications
SOURCE: McKinsey 12
 At this point global liquid demand is expected to peak, driven by
electrification of the transport sector
Global oil demand, Million barrels per day

0.1% p.a. -0.3% p.a.

0.7% p.a.
107 108 108 107
105 105
101
97 2.4% p.a. 1.7% p.a.
1.4% p.a.   Chemicals

  Power
  Buildings

  Industry (excl. chemicals)

  Other transport

-0.9% p.a.
0.5% p.a. -2.1% p.a.   Road transport

2016 20 25 30 35 40 45 2050
SOURCE: McKinsey Energy Insights’ Global Energy Perspective, July 2017 13
 Disruption
In oil, several additional disruptors could lead to an even earlier peak Base case
Impact on global liquids demand mb/d Assumption (%, global)
110
Peak in 2037 2016 2035
BAU 25
108 Increased plastics
recycling rate 7
106 9

+
104 Plastics savings through 5
packaging efficiency
102 0
0
Peak in 2027 +
100 Increased share in sales of 66
electric passenger cars
98 1 35

96
+
Increased share in sales of 49
electric trucks and buses
94 0 32
2016 20 25 30 35 2037

SOURCE: McKinsey Energy Insights’ Global Energy Perspective, July 2017 14

In gas, the debate is whether emerging disruptions offset demand growth
by 2030 Gas demand What clients
Bcm believe

2016 3,503 +21%

More aggressive
Power  353 renewables uptake

Industry 244

Buildings 53

Other 69 Disruptive heat

2030 BaU 4,222 electrification

Power 166

Industry 347

Buildings 86
Faster increase in heat
2030 disrupted 3,623 pump penetration

+3%

SOURCE: McKinsey Energy Insights’ Global Energy Perspective, July 2017 15

However, even with the high renewables growth, emissions will miss
current targets by a wide margin Emissions in line
with 2 degree
Greenhouse gas emissions by scenario; Gigatonnes CO2 equivalent
scenario (IEA 450)

Business-as-Usual scenario Tech disruptor case

Emissions continue to grow until 2035 Emissions peak in 2025

38
36 35
34 34

29

2015 25 2035 2015 25 2035

SOURCE: McKinsey Energy Insights; World energy outlook 2016, IEA; McKinsey Global Institute analysis 16
Addressing Greenhouse Gas Emissions Requires Broad Innovation

The 4 basic transition strategies Major Opportunities for Innovation

1 2 1 2

Carbon Capture,
Decarbonization of Decarbonization of Use and Industrial Heat
power Transportation Sequestration
Transition to
Country- low carbon
specific Deploying
transition energy systems Innovation
3 path-ways 4 providing energy 3 4
access for all

Forestry/ Methane
Energy efficiency Building Efficiency
Land Use Management

17
Open question: will cities play a bigger role?
Population living at different levels of pollution X% Percent of urban population
2 million
people
Beijing
Asia North America
Africa South America
Europe Oceania

8% 25% 49% 14% 3% 2%

Delhi

This entire
fraction is the
population
of Delhi

Under WHO Within 2x Within 5x Within 10x Within 15x Over 15x

2x 5x 10x15x
guidelines
(10ug/m3)

NOTE: Africa is underrepresented since only 8 African cities reported emissions in 2014 (population of 42M)
Source: World Bank, 2014, WHO 2014 18
At the end of the day, energy productivity and the share of zero-carbon
energy will define system change
Global primary energy demand, 2012-2050

1 or Well below 2C

~ 2C
more

Increase in
share of zero-
carbon1 energy
% points p.a.

Well above 2C

~ 2C
<1
INDCs: 2013-2030

Historical: 1980-2014

<3 3 or more

Improvement in energy productivity

% p.a.
1 We include here renewables, nuclear, biomass and fossil fuels if and when their use can be decarbonized through carbon capture and use or storage (CCS/CCU). However, if a large share of the increase
is from the latter, a higher share is required since this does not reduce emissions to zero completely
19
SOURCE: Enerdata (2015), Historic actuals
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