Oil firms and carmakers
diverge in costly debate
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[December 06, 2016]
By Tom Bergin
(Reuters) - Many carmakers are predicting a significant shift to
electric vehicles in the next decade. Advances in battery technology and
the growth of autonomous driving and ride sharing - suited to electric
vehicles - will power this expansion, they reason.
But some oil executives take a different view, predicting electricity
will play only a bit part in transport out to 2040 at least. If they are
on the wrong side of the argument, it could come at a cost to an
industry where new projects often cost billions of dollars to build and
need decades of at least moderate crude prices to pay off.
Over half of all crude oil pumped is used for transport. An overly
pessimistic outlook for electric cars may lead oil companies to adopt an
overly optimistic outlook for oil consumption and price growth, analysts
ENI SpA Chief Executive Claudio Descalzi is among those who believe the
threat posed to the oil industry by electric vehicles is not
"Electric cars, they can grow, but I don’t think that is a problem (for
us)," Descalzi told Reuters on the sidelines of a conference in London
ExxonMobil Corp , the largest western oil producer by market value, and
British rival BP Plc publish oil market outlooks to 2035 and 2040
respectively that guide their investment decisions.
Both predict that in 2035, less than 10 percent of new cars will be
electric vehicles (EVs) or plug-in hybrids – cars with a backup
combustion engine for when the battery runs flat.
"Our central view in the outlook is the penetration of electric vehicles
and electricity more generally is likely to be pretty limited over the
next 20 years," Spencer Dale, BP’s Chief Economist, said in February.
The carmakers don’t produce comparable long-term outlooks for vehicle
production but their nearer term predictions for vehicle roll-outs
envisage a much faster take up of EVs.
Dieter Zetsche, CEO of Mercedes Benz manufacturer Daimler AG, said in
September his goal was to have EVs make up between 15 and 25 percent of
group global sales by 2025.
BMW AG has said it could do the same. Ford CEO Mark Fields said in April
that by 2020, 40 percent of models would be electrified.
"For over 100 years the internal combustion engine has been a basic
design assumption for our business, for our industry," Hau Thai-Tang,
Ford vice President for Purchasing told analysts at an investor day in
"This shift to electrification is game changing," he added.
For the oil companies, a lot is riding on the accuracy of their demand
forecasts, said Alex Griffiths, Group Credit Officer for corporates at
credit rating agency Fitch, who produced a report about electric
"Without that (oil) demand increase, you potentially find that the
market gets out of kilter… which is not a good place for the oil
industry to be in," he said.
To be sure, some in the oil industry are predicting a rapid expansion of
EVs and some carmakers are conservative on EV prospects, but they are in
Norway's Statoil, for instance, says electric motors could roll out
widely in the next two decades. And Fiat Chrysler Automobiles NV CEO
Sergio Marchionne has expressed caution about the uptake of electric
ADVANCES IN TECHNOLOGY
Where there is a variance in outlook between the oil and auto
industries, it is usually down to different expectations around
technological developments and what happens in emerging markets.
Carmakers expect batteries to become cheaper and be able to support
greater vehicle range than some oil companies have predicted.
Oil companies have said regulated caps on vehicle emissions can be most
efficiently achieved by improvements in combustion engine efficiency.
But carmakers say it is becoming increasingly expensive to hit emissions
targets with combustion technology. BMW Chairman Harald Krueger told
investors last year that electric motors were the only way to meet CO2
emissions regulations coming into force in Europe and elsewhere.
But an even bigger reason why many in the auto industry believe the
future for cars is electric is because of developments in car ride
sharing and autonomous vehicles.
Thanks largely to the involvement of Silicon Valley companies like
Google owner Alphabet Inc., driverless cars have gone in a few years
from the stuff of science fiction to a reality.
Many of the big carmakers are developing models and predicting
large-scale roll-outs in the 2020s. Indeed, they predict the technology
could change their business model from selling vehicles to providing
transport as a service.
That would be a big boost for electric engines. Electric cars are
expected to remain more expensive than combustion engine vehicles for
the foreseeable future but their operating costs are much lower than
That extra cost can be quickly recouped if the vehicle is part of an
autonomous fleet with a high utilization rate – as ride hailers like
Uber Technologies envisage emerging in the next decade.
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A driver fills his car with petrol at a gas station as blockades of
several oil depots by protesters opposed to the governments proposed
labor law reforms continues, in Paris, France, May 26, 2016.
Also, with fewer moving parts, electric cars are cheaper to maintain –
another incentive for fleet owners. And perhaps most crucially,
driverless technology integrates better with an electric engine than a
combustion engine because such technology needs electricity to operate,
auto experts say.
those sensors and that computer platform, the beauty is on board we've got a lot
of capability to power all those systems," Pam Fletcher, General Motors Chief
Engineer said at a conference in September.
There is no evidence oil companies have factored this change into their
calculations. Neither BP nor Exxon’s outlooks mentioned autonomous vehicles,
although a policy document issued by BP on Monday said driverless cars would be
considered in its next outlook due out in early 2017.
were autonomous vehicles mentioned in the transcripts of 44 analyst
presentations given in the past year by the seven biggest Western oil companies
– Exxon, BP, ENI, Royal Dutch Shell Plc, Chevron , ConocoPhillips and France’s
Total SA - reviewed by Reuters.
The companies said they had not modeled the impact of autonomous vehicles, or
they declined to comment.
A spokesman for the International Energy Agency, which advises developed nations
and their oil companies on energy policies, said it had not yet studied the
potential impact of driverless cars on oil demand.
CHINA MAY BE KEY
Oil executives’ outlook for oil is also supported by an expectation that
increased car ownership in emerging markets can more than make up for any
increase in EV penetration.
"When we talk of electric cars, we are talking about the OECD," ENI's Descalzi
said, referring to the group of 35 largely rich industrialized nations. "More
than 1.3 billion (people) have no electricity," he added.
But Simon Redmond, Director, Oil & Gas Corporate Ratings at credit rating agency
Standard & Poors said there was a risk that developing countries' adoption of
the automobile echoed their experience with telecoms. In that case, consumers
largely skipped use of the established technology - fixed land lines - and went
straight to the latest technology – mobile phones.
Indeed, some in the auto industry think emerging markets could well outpace some
rich countries in adopting EVs.
"We believe that China is going to lead in the penetration of electric vehicles
into the market," Mary Barra, General Motors CEO, said in October.
Exxon predicts that by 2040, car ownership in China will triple to about 30
vehicles per 1,000 people. BP predicts such growth, and an increase in miles
driven per vehicle over the next 20 years, will help China overtake the United
States to become the world’s largest liquids consumer in 2032.
Yet, China is already the largest market for electric vehicles in the world,
helped by government subsidies worth up to $10,000 per car and exemptions from
traffic restrictions in cities such as Beijing and Shanghai.
Between January-October, sales of all-electric and plug-in hybrid models totaled
337,000 and the country is targeting 5 million such vehicles on its roads by
government also offers incentives to manufacture electric vehicles in China,
including more relaxed restrictions on foreign ownership of carmakers, and plans
to set quotas that would require a certain proportion of cars built in China to
be zero-emission vehicles.
Analysts say the risk for oil companies is that, with growth in crude demand
baked into market analysts’ forecasts, anything which suggests the shift to
electric vehicles will be quicker than expected can impact oil prices years
before the shift occurs.
"The key risk for the industry is the rate of change,” said Redmond. “It does
bring into question some of the economics of the different type of projects that
the (oil) majors may want to look at," he added.
For a Graphic on BP's projections on the use of different energy sources in
transport click, http://fingfx.thomsonreuters.com/gfx/rngs/OIL-ELECTRICCARS/010030T81RN/OIL-ELECTRICCARS.jpg
(Additional reporting by Alissa De Carbonnel in Brussels; editing by Janet
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