Thursday, October 20, 2016

Oil Groups ‘Threatened’ by Electric Cars
Fitch says investors could sell out of energy companies

by Pilita Clark, Andrew Ward and Neil Hume in London
Financial Times

Oil companies face a “resoundingly negative” threat from a sharp growth of electric cars, one of the leading credit rating agencies has warned.

“Widespread adoption of battery-powered vehicles is a serious threat to the oil industry,” says a report from Fitch Ratings that urges energy companies to plan for “radical change” spurred by new technologies that could arrive faster than expected.

Countries like Nigeria, Angola, Equatorial Guinea and others need to diversify generating revenue streams of their economies.

“If they stick their heads in the sand and try and pretend it will all go away, we think they will ultimately have issues,” the report’s lead author, Alex Griffiths, a Fitch managing director, told the Financial Times. “They need to have a plan.”

Although the report accepts it could take a long time for electric cars to become a disruptive force through mass adoption, Fitch outlines a grim scenario for global oil companies, such as Chevron, ExxonMobil and Royal Dutch Shell.

The agency says that the threat of electric cars could create an “investor death spiral” as nervous asset holders sell out of oil companies, making debt and equity more expensive.

Electric cars could make up a quarter of the world’s automobiles by 2040. How will it affect oil demand?

In the first of a series of studies on the potential consequences of a sharp acceleration of disruptive technologies, the rating agency finds that batteries could upset industries accounting for just under a quarter of the $14.7tn in corporate bonds outstanding globally.

The oil sector would not be the only industry affected. Big electricity utilities burning fossil fuels such as gas or coal face the risk of batteries solving the intermittency problem of wind or solar plants that cannot generate on windless days or at night.

Utilities with a lot of gas “peaker” plants that deliver power quickly at times of peak demand, when prices are generally high, could be more at risk. If batteries start supplying this peaking power, prices could eventually fall to the point where “traditional peakers can no longer compete”, says Fitch.

But the impact of batteries on the oil industry may be profound, adds the agency, noting that transportation accounted for 55 per cent of total oil use in 2014.

“An acceleration of the electrification of transport infrastructure would be resoundingly negative for the oil sector’s credit profile,” says the Fitch report.

“In an extreme scenario where electric cars gained a 50 per cent market share over 10 years about a quarter of European gasoline demand could disappear.

That threat seems distant now, not least because the high cost of batteries has made electric cars more expensive than conventional vehicles burning petrol or diesel.

There are only about 1.2m cars with a plug on the road today, in a global fleet of about 1bn, and annual electric vehicle sales are still less than 1 per cent of the total.

But battery costs have fallen by 73 per cent since 2008 to $268 per kilowatt hour, says Fitch, and $100/kWh is generally considered the point at which electric cars become cost competitive: a figure some automobile makers think is achievable by the early 2020s.

The Fitch report says there is a “compelling” argument that any disruption from electric vehicles will be a “long, drawn-out process”, especially since cars, unlike smartphones, do not get renewed every year.

After the VW scandal, manufacturers are racing to develop mass market zero emission vehicles

But Mr Griffiths said there could be surprises that upset such expectations, especially in big emerging markets.

“One of the most difficult things for oil companies there would be if China decide ‘Actually we don’t want petrol cars in five years’ time’.”

Some oil companies appear to be addressing the potential for disruption. France’s Total bought the Saft battery group earlier this year and BP is looking at making its first big renewables investment for five years as it weighs a move to expand its US wind-power business.

Fatih Birol, executive director of the International Energy Agency, the energy think-tank backed by industrialised countries, said there was “no escaping” the impact of climate change policies and green technologies for oil and gas companies.

However, speaking at the Oil & Money energy conference in London on Tuesday, he added that uptake of electric vehicles would not cause a sudden shock because less than 10 per cent of growth in oil demand comes from cars.

Electric cars threaten oil groups

“Last year was a record for electric cars with 500,000 sold,” said Mr Birol. “When you put that in context it is less than one car out of every 100 sold. Even if you assumed that, as of tomorrow, every second car sold was electric, global oil demand would still increase.”

One director at a state-controlled oil company who declined to be identified said unless there was a breakthrough in the pricing of electric cars that made them affordable in developing countries, such vehicles were not likely to have a big impact on demand for crude. He added a bigger threat to demand was the improving fuel efficiency of conventional cars.

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