Oil firms, car­mak­ers di­verge in costly de­bate

Kuwait Times - - ANALYSIS -

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 say. ENI SpA Chief Ex­ec­u­tive Clau­dio Descalzi is among those who be­lieve the threat posed to the oil in­dus­try by elec­tric ve­hi­cles is not sig­nif­i­cant. “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 last month.

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 Septem­ber. “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 ve­hi­cles. “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 a mi­nor­ity. 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 cars.

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 gaso­line.

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. 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.

“All 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.

Nor 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. — Reuters

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