Big oil digs in

Oil majors are standing by their core business of providing fuel for the transportation sector, but also aim to play a part in what they see as a long-term transition to alternative vehicle types.

  • Doubling of vehicle fleet underpins strategies
  • EVs seen making small dent in oil demand
  • Engine improvement viewed as more significant
  • Companies back wide variety of technologies
  • Warnings on under-investment in oil

The world’s biggest oil companies are talking about electric vehicles (EVs) as never before. But they remain committed to the internal combustion engine.

Striking a balance between their past, and possibly radical future changes in transportation, will be key to future success.

The companies acknowledge uncertainty about the precise impact of electric and hybrid vehicles, but their forecasts, informed by business operations around the world, broadly align with bodies such as the International Energy Agency in viewing EVs as only slightly denting oil demand.

This leads some in the industry, such as Total chief executive Patrick Pouyanne, to warn that not enough is being invested in oil and gas – the IEA said last year it would be necessary to
double rates of investment in conventional oil and gas to avoid a supply crunch around 2025.

“Many wish for a quick revolutionary role reversal between the oil and gas industry and the renewables and new electric industry, but an overly ideological approach could bring great economic and social damage to 6 billion customers today and 9 billion tomorrow,” Pouyanne told the Oil and Money conference in October 2017.

ExxonMobil — the largest of the publicly listed international companies — still remains particularly attached to oil despite investing in big gas projects in Qatar, Mozambique and Papua New Guinea. Oil accounted for 57% of the company’s production in 2017, compared with 50% for Shell, although gas has gained weight in Exxon’s portfolio in the last decade.

In its latest Outlook for Energy, which charts long-term trends, ExxonMobil raises its estimates of oil use in transportation compared with ve years ago, to 60 million b/d in 2040. With the global “middle class” set to nearly double by 2030, ExxonMobil forecasts that the total miles traveled by cars and light trucks annually will rise by 60% by 2040, to 14 trillion miles. It sees oil use in light vehicles remaining relatively at, largely based on improved engine efficiency, but
overall oil use in transport still rising inexorably, due to continued increases
in the aviation, marine, rail, and above all truck sectors.

Irving, Texas-based ExxonMobil predicts there will be around 160 million plug-in and hybrid vehicles on the world’s roads in 2040 – probably less than 10% of the total – but acknowledges uncertainty given recent government policies supporting electric vehicles. However it still expects the vast majority of energy used in transport to come from oil in 2040 and argues that it is mainly gains in the fuel efficiency of conventional vehicles that will limit energy consumption, rather than electric vehicles.

By contrast S&P Global Platts Analytics’ reference case assumption is for 280 million electric cars in 2040. ExxonMobil estimates that oil demand will be reduced by 1.2 million b/d for every 100 million extra electric vehicles on the roads in 2040.

Electric strategy

ExxonMobil’s view of oil’s longevity is broadly shared across the industry. But big oil companies are preparing to meet growing demand for power in transportation. Shell, along with being a leading LNG provider and targeting power demand in Asia, has made several direct investments in EV recharging, buying vehicle charging company NewMotion, which has charging points in Western Europe, last year.

The Anglo-Dutch major has also signed a collaboration deal with fast- recharging operator IONITY, a joint venture among several European car makers. Even in developed countries fast-recharging could be vital for EVs as they come up against limitations in power infrastructure.

The move comes as Shell’s home country, the Netherlands, plans for all new cars to be emissions-free by 2030. Meanwhile, Shell continues to champion alternatives to EVs, particularly hydrogen vehicles, which it argues have advantages over electric vehicles, particularly speed of refueling and range.

The largest publicly traded producer of lique ed natural gas (LNG) is also matching its upstream commitments by providing LNG fueling facilities for trucking and shipping. Shell argues that governments should penalize emissions, rather than backing or banning, particular technologies.

But ultimately Shell also remains convinced of the need for oil. In comments last July, its chief executive Ben Van Beurden — who plays up his EV-driving credentials
— played down the idea of oil demand peaking in the late-2020s. Van Beurden argued that investment in oil would still be needed even in the unlikely event of a complete switch to EVs in developed countries.

We still have less advanced economies that cannot simply make that switch, that do not have the electrical infrastructure to do so, do not have the wealth to do so, and therefore they will go slower,” he said.

Banning conventional vehicles in advanced economies could also end up sti ing innovation in engine design, to the detriment of standards in less advanced car-producing countries, Shell’s chief energy adviser and head of its energy ‘Scenarios,’ Wim Thomas, has warned. “You could make a scenario whereby if you have a very high uptake of electric vehicles, you have less efficiency improvement to the internal combustion engine,” Thomas told journalists in September.

Motoring expansion

BP is especially cautious on electric vehicles, although it made a $5 million investment in a manufacturer of mobile fast recharging systems, FreeWire, in January. BP’s 2017 Energy Outlook predicts there will be 1.8 billion cars on the world’s roads by 2035, thanks both to rising prosperity and better infrastructure. On the take-up of electric vehicles it acknowledges that uncertainties include the role of governments in tightening vehicle standards and banning conventional vehicles, falls in battery costs and the prospects for autonomous vehicles.

The British oil major’s conclusion is that switching to EVs is likely to impact liquids demand by just 1.2 million b/d in 2035, compared with a 17 million b/d reduction achieved through improvements in engines. Overall, the company expects oil demand for cars to rise by 4 million b/d in 2015-35, to 23 million b/d.

Away from their long-term economic forecasts, oil companies are in some cases funding of well-publicized alternative energy projects. But their commitment to these schemes is mixed.. European re ner OMV also highlights the gap between ideals and the real world.

At last November’s ADIPEC conference in Abu Dhabi, OMV chief executive Rainer Seele noted that European diesel consumption had been buoyant despite the backlash against diesel cars after the VW emissions scandal. His comments partly re ected OMV’s customer base in some poorer parts of Europe, where aging cars predominate and regulation is less stringent.

Seele argued that oil prices uctuations had also played their part, noting that diesel consumption had increased as more goods were sent by truck, and rail freight struggled to compete.

Seele predicted European consumers, worried by the limitations of pure electric cars, would continue to hedge their bets and favor hybrid vehicles. EVs may be popular “in the political class, but nobody is really raising the big challenges waiting for the industry,” he said.

Climate change

EVs and climate concerns are inextricably linked in the public’s perception. The connection is also changing the behavior of Big Oil.

All the major oil companies are putting some money into renewable energy. Shell — with one of the highest research and development budgets in the industry — recently backed a project that involves using waste coffee granules as a biofuel in London buses. Total invested over $1 billion buying industrial and vehicle battery manufacturer Saft in 2016. Likewise, BP boasts its involvement in wind and biofuels projects. The company recently backed a scheme to make low-carbon jet fuel from municipal waste.

Despite these moves, the companies are making only limited changes to their overall strategies in response to climate change – including government bans on conventional vehicles. And their energy forecasts for the most part are skeptical about electric vehicles, stressing that improvements in the efficiency of the internal combustion engine will be more signi cant in reducing oil consumption.

And while many companies are devoting a bigger share of investment to gas and LNG — BP has a swathe of gas projects underway for example — this is probably not a re ection of fundamental doubts about oil. Instead it re ects expectations that gas demand will grow at roughly twice the rate of oil demand in the coming decades, and the less mature LNG market has particular potential.

Pointing to an array of measures aimed at curbing emissions, BP chief executive Bob Dudley told the Oil and Money conference in October: “We’re making smarter, and in many cases, smaller bets, and making more of them across a wider range of technologies and business models. We think that’s the way to go given how tough it is to pick winners in this rapidly evolving space.”

Total’s Pouyanne was blunter: “Today we are considered an industry of the past by some people, but it’s not an industry of the past at all. We today provide 60% of the world’s energy requirement and I’m convinced we need to be more vocal about it.”

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