Oil firms and carmakers diverge in costly debate

Published Dec 6, 2016

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London -  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 CEO 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, 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, said in September his goal was to have EVs make up

between 15 and 25 percent of group global sales by 2025.

BMW 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

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.

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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.

Read also:  Apple exploring charging stations for electric cars?

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, Chevron, ConocoPhillips and

France's Total - 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.

Read also:  Electric cars will rule the future

"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 2020.

The 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.

REUTERS

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